RBB Bancorp Q3 2024 Earnings Call Transcript

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October 22, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to the RBB Bancorp Q3 20 24 Earnings Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to Rebecca Ruido. The floor is yours.

Speaker 1

Thank you, Kelly. Good day, everyone, and thank you for joining us to discuss RBV Bank's results for the Q3 of 2024. With me today are Chief Executive Officer, David Morris President, Johnny Lee Chief Financial Officer, Lynn Hopkins Chief Credit Officer, Jeffrey Yeh Chief Operations Officer, Gary Pham and Chief Risk Officer, Vincent Luis. 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 up the call to your questions.

Speaker 1

I would ask that everyone please refer to the disclaimer regarding forward looking statements in the investor presentation and the company's SEC filings. Now I'd like to turn the call over to RBV's Chief Executive Officer, David Morris. David?

Speaker 2

Thank you, Rebecca. Good day, everyone, and thank you for joining us today. We reported 3rd quarter net income of $7,000,000 or $0.39 per share with results including a pretax $2,800,000 recovery on a fully charged off loan and a $3,300,000 credit provision. Net interest margin increased by 1 basis point, which was less than we expected, but we remain optimistic that it will have the opportunity to expand over the next few quarters with the expected decline in short term market interest rates. We began to see some of the deposit funded loan growth we referenced last quarter.

Speaker 2

Loans increased by $44,000,000 in the 3rd quarter, supported by $175,000,000 of loan production at a weighted average rate of 7.26%. Johnny will talk more about our expectations for loan growth over the next few quarters. Deposits increased by $69,000,000 from the last quarter with non interest bearing deposits remaining stable. We continue to focus on attracting and retaining core deposits to fund our loan growth. We did increase wholesale deposits in the 3rd quarter as they were less expensive than retail deposits.

Speaker 2

But at 4.8% of total deposits, we are significantly less reliant on them than a year ago when they were at 13.9 percent of total deposits. Nonperforming loans increased in the Q3 and Johnny will share more information about that. But we continue to work through these loans and believe we will be able to resolve the majority of them by mid next year. We were pleased to announce the resolution and termination of our consent order in August. Our directors and staff worked very hard to address our regulatory concerns and to strengthen our compliance programs.

Speaker 2

With this hard work behind us, we believe we have the opportunity to focus on growth and other value creating opportunities for the bank. With that, I hand it over to Johnny.

Speaker 3

Thank you, David. As David mentioned, loans grew at a 5.8 percent annualized rate in the 3rd quarter. Supporting this growth was a very robust $175,000,000 of loan production, which comes after strong 2nd quarter loan production of $117,000,000 Net loan growth has been tempered by payoffs and paydowns due primarily to borrowers' lack of further needs for the loans or their desire to wait until rates come down further before refinancing. Payoffs also included loans where higher potential credit risks that RBV wanted to exit and loans that were refinanced by other banks that offer aggressive rates and credit terms that we were not willing to match. Absent a change in this dynamic, we expect our loan balances to continue to grow at a moderate pace, which will gradually accelerate as we continue to hire more seasoned commercial lenders.

Speaker 3

We intend to continue growing loans in a prudent matter by focusing on credit quality and relationships that will generate reasonable and sustainable returns for our BB. Starting on Slide 9 of the investor presentation, we provide some additional details on credit. Non performing loans totaled $60,700,000 or 1.52 percent of total assets at the end of the 3rd quarter. The $6,100,000 increase from the 2nd quarter was mainly due to 2 loans, totaling $13,300,000 that migrated to non accrual status, offset by a $6,100,000 in full payoffs and $1,200,000 in partial charge offs. 99% of our long performing loans are in our operating market, so we feel comfortable that we have good handle on them and can work effectively to resolve them.

Speaker 3

However, it will take a little time. Slide 10 has details about our 9 NPLs that are greater than $1,000,000 The 2 new non performing loans are a $10,000,000 C and D loan and a $3,300,000 CRE loan. The C and D loan is on a completed mixed use commercial property that has a pending certificate of occupancy and remains well secured. The CRE loan is well collateralized based on a recent appraisal. However, there's environmental issue and the borrower has stopped making payments as an action plan for remediation efforts is put in place.

Speaker 3

With respect to the increase in special mention in substandard loans, we are closely monitoring our borrowers' performance, including the status of unpaid property taxes to ensure we are capturing and measuring the risk in our loan portfolio. This includes reporting, special asset meetings, external credit review and active engagement with our borrowers. Our special mention loans increased $58,000,000 and totaled $77,500,000 at the end of the 3rd quarter. The increase was primarily due to a $43,600,000 C and D loan for a completed hotel construction project and 5 CRE loans that totaled $25,200,000 All of these loans are current, but they have unpaid property taxes, which triggered the downgrade. We are working with borrowers to resolve their delinquent property taxes.

Speaker 3

In addition, an $11,700,000 C and D loan migrated to substandard. It is on a completed apartment project that is in process of stabilization and transitioning to bridge financing. However, the process has taken longer than anticipated, and there are also delinquent property taxes. Nonetheless, this loan remains current on its payments. Substandard loans totaled $79,800,000 at the end of 3rd quarter.

Speaker 3

The $16,800,000 increase from the 2nd quarter was primarily due to downgrade of 3 loans totaling $25,000,000 an $11,700,000 C and D loan with payments current and as previously described, the $10,000,000 C and D loan and $3,300,000 CLE loan, which migrated to non accrual status. This increase was offset by loan payoffs of $6,700,000 charge offs of $1,200,000 and upgrades and pay downs totaling $884,000 With that, I'll hand it over to Lynn, who can go into some more financial details about the quarter.

Speaker 4

Thanks, Johnny. Please feel free to refer to the investor presentation we have provided as I continue to share comments on the company's Q3 of 2024 financial performance. Slide 3 of our investor presentation has a summary of our Q3 results. As David mentioned, net income was $7,000,000 or $0.39 per diluted share, which matches last quarter's EPS. The 1 basis point increase in net interest margin to 2.68 was less than we had expected, but the loan production combined with stabilizing funding costs should support continued expansion over the next few quarters.

Speaker 4

Interest income increased $1,500,000 with growth in loan interest income making up for a decline in interest earned on securities. Noninterest income increased by $2,300,000 to $5,700,000 due mostly to a $2,800,000 recovery on a fully charged off loan from an acquired bank. Non interest expenses increased by $297,000 to $17,400,000 due to higher salaries and other expenses, which were partially offset by lower insurance, regulatory and legal expenses. Slides 56 have additional details about our loan portfolio and yields. Commercial real estate loans as a percentage of total loans expanded modestly to 41%, while C and D loans decreased to 6%.

Speaker 4

Slide 7 has details about our $1,500,000,000 residential mortgage portfolio, which consists of well secured non QM mortgages primarily in New York and California with average LTV of 56%. Following up on Johnny's comments about credit, Slide 12 walks through our allowance for credit losses, which increased $2,100,000 in the 3rd quarter. The increase was due to a $3,300,000 provision for credit losses, including higher specific reserves of $2,500,000 offset by net charge offs of $1,200,000 Specific reserves increased based on the decrease in the fair value collateral for 2 properties related to one relationship. The charge offs were primarily related to a C and D loan and a CRE loan, which are written down to their estimated fair value and included in our largest nonperforming loan table on Page 10 of the investor deck. The CRE loan had a carrying balance of $1,200,000 at the end of the 3rd quarter and has since been paid off with no further loss in early October.

Speaker 4

The ratio of our allowance for credit losses, or ACL, to total loans increased to 1.41%, inclusive of the specific reserves, while the coverage ratio of our ACL to nonperforming assets decreased to 72% from assets decreased to 72% from 76%. This decrease was due in part to an increase in individually evaluated loans, which did not require an additional allowance for loan losses, offset in part by higher specific reserves. Slide 13 has details about our deposit franchise. Total deposits increased in the Q2 to $3,100,000,000 with growth in all deposit types, while noninterest bearing deposits remained stable. Our average all in cost of deposits increased by 4 basis points from the 2nd quarter to 3.63% in the 3rd quarter, including an estimated quarter end spot rate of 3.53%.

Speaker 4

Tangible book value per share increased to $24.64 due to earnings, accretive share repurchases and a recovery of AOCI, offset by dividends of about $3,000,000 We repurchased about 508,000 shares at an average price per share of $21.53 in the 3rd quarter, which completed the program authorized in February of this year. Our capital levels remain strong with all capital ratios above regulatory well capitalized levels. With that, we are happy to take your questions. Operator, if you could please open up the call.

Operator

Certainly. The floor is now open for Your first question is coming from Brendan Nosal with Hovde Group. Please pose your question. Your line is live.

Speaker 5

Hey, good morning folks. Hope you're doing well.

Speaker 4

Thanks, Brendan. Thanks, Brendan.

Speaker 5

I just want to start off on the margin here a little bit.

Speaker 2

We lost you.

Speaker 4

Did we lose the whole line?

Speaker 3

We see.

Speaker 2

We didn't hear that. Can you say that over again, please?

Speaker 5

Yes. Am I coming through now?

Speaker 2

Yes.

Speaker 5

Okay. Sorry about that. Just want to dig into the margin a little bit more, given your comments for some expansion over the next few quarters. Just kind of curious what sort of magnitude are you thinking as we kind of move into 2025 on those dynamics?

Speaker 4

Sure. I can make a couple of additional comments about our NIM. So we are still positioned as a liability sensitive bank. I think that our spot rate at the end of the quarter being at 3 deposit rates being at 3.53 is an indication that our cost of deposits are going to trend downward. I think the key drivers for any NIM expansion relates to the repricing of our CD portfolio.

Speaker 4

The majority of it reprices over the next 12 months. And over the next quarter, dollars 800,000,000 has the opportunity to reprice, and it has an average rate of just under 5%. I think on the earning asset side, we've indicated that our loan production is coming in higher than our overall average loan rates. Plus, we have a large portion of our loan portfolio that's fixed or variable or hybrids that are sitting on their floors or not eligible to reprice yet. And that's 60% or about twothree of the portfolio.

Speaker 4

So we're in a declining rate environment. I think as far as expansion, I don't know if I can comment exactly the magnitude, but I think the deposit spot cost is probably a good indication of the minimum amount. And then I think we would be cautiously optimistic there would be room for more.

Speaker 5

Okay. That's helpful color. Thank you. Maybe pivoting to gain on sale of loans, just kind of curious if you see any signs of life in the secondary market for that paper that would allow originations and production to increase and flow through fee income?

Speaker 4

Sure. So I'll start and Johnny can ask some additional color. So I think the SBA premiums have been relatively consistent in the Q3 compared to the Q2. Our volume was a little bit lower and he can comment on the premiums. And then on our mortgage banking product, those have been, I think, relatively thin margins and the competition's been there as well.

Speaker 4

So I think Johnny, if you want to add color on that.

Speaker 3

Yes. Well, on SBA side, again, sort of gross premiums have been averaging about 8% to 9% on average. So obviously, that's a segment where we continuously want to drive more businesses and our pipeline actually is still looking relatively healthy at this stage.

Speaker 4

I think on the mortgage side, they've been 101, maybe 102.

Speaker 5

Okay, fantastic. Thank you for taking the questions.

Operator

Your next question is coming from Matt Clark with Piper Sandler. Please post your question. Your line is live.

Speaker 6

Hey, Matt. Hey, good morning, everyone. How are you doing? A few for me. Maybe just rounding out the margin conversation.

Speaker 6

Do you have the average margin in the month of September, Lynn?

Speaker 4

Thought you might ask that question. So we would estimate our margin was moving up during the quarter and ending the last month. I would say that because we placed some loans on non accrual and that occurred in September, kind of normalizing for that, we were probably closer to a

Speaker 6

$275,000,000 Okay. Got it. And then the you mentioned you have $800,000,000 of CDs coming off for just under 5%. What are your new offer rates? Where do you expect that to renew into?

Speaker 4

So I think with the Fed having moved rates down, we look at the 12 month CD, both in the wholesale market and the retail market. I would say the offer rates have been between 50 70 basis points lower than the average that we see coming off.

Speaker 6

Okay. And then what's your expectation for your deposit data through this easing cycle?

Speaker 4

So far, it's we've had the opportunity to move down the full 50 basis points that the short term Fed funds rate has come down, but it takes some time to come through the full deposit, the cost of our funds. So right now, I think it's pretty high beta relative to new deposit products.

Speaker 6

Okay. Okay. And then the securities yields came down, I think, 43 bps to 4.13 and I think the balances are down $19,000,000 or $20,000,000 I guess what went on there?

Speaker 4

Yes. So during the quarter, we had some commercial paper that we allowed for it to mature. We invested some of it in longer duration securities and then a portion moved over the loan portfolio and then a little piece left in cash. So mostly commercial paper that was rolling over and with rates coming down, those returns also came down. So we were pivoting to other opportunities.

Speaker 6

Okay. And then lastly, on the buyback, you just completed it. Any expectation to re up the buyback?

Speaker 4

I think we're looking at it after taking down about $20,000,000 this year so far. So we'll we're seriously looking at it.

Speaker 6

Fair enough. Thank you.

Operator

Your next question is coming from Kelly Motz with KBW. Please proceed with your question. Your line is live.

Speaker 7

Hi, Kelly. How are you? Good morning. Thanks. I am good.

Speaker 7

Thanks for the question. I guess maybe starting with expenses, just a couple of items there. I noticed your insurance and reg assessments was down quite a bit. Wondering if that is a good I think it was about 600 and $50,000 if that's a good run rate or any drivers of that. I'm not sure if that has to do with the resolution of the regulatory order you had intra quarter.

Speaker 4

Sure, Kelly. Thanks for the question. I think for that particular line item, we've reached the place where that might be a good indication of our near term run rate.

Speaker 7

Got it. Helpful. And then the salaries and benefits ticked up. I know you had some greater production. Wondering if you could provide any color as to what drove that, if you've been adding new producers and any thoughts on how that could trend here in the next couple of quarters as you balance profitability and supporting the growth you see?

Speaker 4

Sure. So I think the higher salary and benefits is reflective of the higher loan production. It was mostly associated with incentives as we come down to the last part of the year. I think without commenting necessarily on that single line item, I think overall expenses have been trending between $17,000,000 $17,500,000 So I'd expect kind of going forward given ongoing investment in ourselves including higher production, maybe we would trend at the higher end of the range, but I expect our overhead range to stay there.

Speaker 7

Got it. That's really helpful. All right. And I was hoping I appreciate the color on the call about the credit migration you've had. The release says you're looking you expect resolution of some of this migration to occur kind of by mid next year.

Speaker 7

Can you expand on what you're doing there? NPAs are a little bit higher. They're about 2% of scenario. Just kind of what you're working on there, expectations for charge offs and what does kind of a more normalized range of credit looks like for you?

Speaker 3

Hi, Kelly. This is Johnny. So right now, actually, we're working on the 9 NPLs that exceed $1,000,000 and we are expecting roughly 70% of it to hopefully come off within mid year next year. They're all we have pretty good visibility on the pathway and how those will be coming down through their trustee sales or as investors are prepared to take out or refinance these credits.

Speaker 4

Okay. Got it. And Kelly, I would add to Johnny's comment. You had said any expectations of additional charge offs. I think this visibility on these ones that he was commenting on, currently, we're not seeing charge offs there, but it will take some time.

Speaker 7

Got it. That's helpful. And then it was nice to see some loan production pick up. Your commentary said moderate amount of growth ahead and accelerating kind of thereafter. Where are you still seeing good opportunities?

Speaker 7

And how are you guys thinking about the what's in the pipeline and kind of the outlook for growth as you manage that versus maybe it sounds like still working off some weaker borrowers out of the bank?

Speaker 3

Well, obviously, the weaker borrowers with Kelly, I'm sorry, this is Johnny. Yes, obviously, weaker borrowers, we certainly any opportunity we have, we want to kind of match them out. But as far as the new production is concerned, our pipeline has always been very healthy. Since I was beginning this year, obviously, we kind of picking our battles and where we should be fighting because of the certain areas of market segment of the market is still very competitive. So we're sticking to our credit quality first and making sure all these new process we're looking at meets our credit standards, underwriting standards, also the rate, the pricing.

Speaker 3

Obviously, if you look at Q3, our growth has been predominantly from the CRE MFR space on the commercial side. Obviously, we have some non QN products that we were able to successfully fund during Q3. We do see a lot of the SBA side picking up. We do have a relatively healthy pipeline there. C and I trade finance typically, I mean, we see good traction there, but those typically take a little bit more time, but there's healthy pipelines behind that as well.

Speaker 4

Probably one just additional comment, Kelly. For the Q4, our annualized growth rate was about 6% overall, supported by the $175,000,000 of new production. So I think our comment about modest growth and kind of opportunities that we're seeing in our marketplace, I think it follows that trend. It's I think our general view.

Speaker 7

Got it. Thanks so much for the questions. I'll step back.

Speaker 4

Yes. Thanks, Joe. Thanks, Joe.

Operator

Your next question is coming from Andrew Terrell with Stephens. Please proceed with your question. Your line is live.

Speaker 8

Hey, good morning. Hi,

Speaker 4

Andrew.

Speaker 8

Hey, good. I just wanted to follow-up on some of the margin discussion briefly. And specifically, Lynn, going back to your comment around kind of the actions you've taken post the Fed, I think you mentioned seeing kind of 100% beta or 50 basis points off, maybe some of the interest bearing deposits. Can you just maybe expand upon that a little bit further? I'm just trying to compare that versus the $353,000,000 spot rate disclosure on the total deposits.

Speaker 8

It seems like if most of the interest bearing went down, I guess outside of CDs, went down by 50 basis points following immediately following the Fed, it feels like that spot rate number should be lower. So I'm just trying to compare some of that commentary. So if you could elaborate further, I think it would be helpful.

Speaker 4

Sure. I mean, so the Fed moved in September and we took our measurement on September 30. So remember, 60% of our funding base is CDs. So we do have to wait for the CDs to mature before we can reprice them. So our current offering rates plus the opportunities as they come off are now 50 to 70 basis points lower than the rate that's there at September 30.

Speaker 4

So while we already saw 10 basis points in the spot rate at the end of the quarter, I think there's opportunity for larger change in the Q4. Does that help?

Speaker 8

Yes. Okay. So maybe

Speaker 4

Yes. We wouldn't have seen it reflected as of September 30. And then the non maturity deposits, it's about 20% of our funding base. Those came down modestly, but probably not at 100% beta. I think the CDs is our biggest opportunity.

Speaker 8

Yes. Okay. So I should think about maybe the spot rate as inclusive of the actions you took on like the non maturity deposit side and then you'll get a more material impact from the time deposit repricing and the actions you took there in the Q4?

Speaker 4

Yes. And as rates continue to come down or if we expect them to, we have a CD ladder that matures over the next 12 months. So while I called out the Q4, there's an equal amount maturing kind of in the 1st and second quarters next year. And I would just say in the Q1 next year, the average rate coming off is still in the high 4s. So that has a big opportunity to move as well.

Speaker 8

Yes, yes, for sure. Okay. And then can you just remind us post the I know there was some action taken with the commercial paper in the securities portfolio this quarter. Can you remind us at period end just what was the mix of the securities book that was floating rate in nature?

Speaker 4

For the securities book, the amount of floating rate, I will have to come back to you there. I only had my loan portfolio teed up. So the commercial paper that came off was about $40,000,000 Hold on one second.

Speaker 8

Let me come back. Yes. No worries. No worries. And if I could just ask one more.

Speaker 8

Just some of the commentary around the margin and the kind of positive progression from here. I'm curious if that contemplates any rate cuts during the Q4. And I guess that the balance sheet is liability sensitive, but it does feel like the timing of rate cuts or how quickly rate cuts occur will matter just given the CD heavy nature of the deposit base. And I'm just curious if we were to get to incremental 25 basis point rate cuts during the Q4 just from a timing standpoint, could the margin be stable, even leg down a little bit? Obviously, understanding that give you kind of more of a benefit into 2025?

Speaker 4

Sure. So let me make two comments there. One is you're getting at the magnitude by how much our net interest margin should have the opportunity to expand because we're liability sensitive. And I think that we will be able to take advantage of it because we have a good CD ladder. I think my second comment is we have noticed that the wholesale market understands the interest rate environment and where rates are headed.

Speaker 4

And we've been able to, I think, opportunistically use the wholesale funds to lower our overall cost of funds. And I think that's probably an opportunity that's there. Again, doing it in a modest amount, our reliance on wholesale funds is significantly lower than last year. So I think those are the two places. So despite when the Fed is moving rates, I think everyone can see where they're moving to.

Speaker 4

We're trying to take advantage of that and lower it as much as possible.

Speaker 8

Yes. Okay. That makes sense and I appreciate it. Thank you all for taking the questions.

Speaker 1

Thank you.

Operator

You have a follow-up question coming from Matt Clark with Piper Sandler. Please proceed with your question. Your line is live.

Speaker 6

Hey, thanks. I think you have some debt coming due in the Q1, intra quarter. Can you just update us on the amount and your plans to

Speaker 8

refinance that?

Speaker 4

Sure. Thanks, Matthew. I can start. So we have $150,000,000 of FHLB advances priced around $120,000,000 that are coming due in March of next year. I think for plans to reprice, given we're in a declining rate environment, we should be able to take advantage of that.

Speaker 4

However, at the same time, we did put on $50,000,000 putable advance at the end of September. We were able to price that around $3.40 $3.45 $3.45 and it has a final for 4 years is the structure. There is a onetime call. And again, we would look to something like that to help, I think, refinance the $150,000,000 plus we'll be looking at our own loan growth and opportunities to grow deposits. So as of now, I think we're feeling pretty comfortable with the maturity of the $150,000,000 Advance, obviously, $120,000,000 is a very attractive rate.

Speaker 4

So we'll work hard to get more cost effective funding.

Speaker 6

Great. Thank you.

Operator

That does conclude our Q and A session. At this time, I would now like to turn the floor back over to David Morris for any 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 great day. Thank you again. Bye bye.

Operator

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for

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