RBB Bancorp Q2 2024 Earnings Call Transcript

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July 23, 2024

There are 8 speakers on the call.

Operator

Kathryn Wei. Please go ahead.

Speaker 1

Thank you. Good day, everyone, and thank you for joining us to discuss RBV Bancorp's results for the Q2 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 Administrative Officer, Gary Fan and Chief Risk Officer, Vincent Liu. David and Lynn will briefly summarize their 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 RVV's Chief Executive Officer, David Morris. David?

Speaker 2

Thank you, Catherine. Good day, everyone, and thank you for joining us today. RBB reported 2nd quarter net income of $7,200,000 or $0.39 per share as we saw further signs of stabilization with modest loan growth and no change in funding costs. Net interest margin declined 2 basis points. But as Lynn will explain, we are cautiously optimistic that it will begin to expand in the 3rd and 4th quarters.

Speaker 2

What really is going to drive our results is deposit funded loan growth. Loans increased by $20,000,000 in the 2nd quarter, supported by approximately $115,000,000 of loan production at a weighted average rate of 7.4%. However, and more importantly, we are seeing increased loan activity and our loan pipeline is expanding, which we expect will support further net loan growth during going forward. Interest expenses declined from the Q1 as we continue to reduce our reliance on wholesale funding to 4% of total deposits. This is down from about 16% of deposits a year ago and 7% at the end of last quarter.

Speaker 2

We did see an increase in non performing loans in the Q2, primarily due to 3 loans migrating to non accrual, but we believe we are appropriately reserved based on updated appraisals we've obtained during the Q2. These three loans totaled $22,000,000 and consist of a $10,000,000 C and D loan, a $7,300,000 CRE loan and a $4,700,000 C and I loan secured by a personal residence. We are very focused on reducing the levels of NPLs. And by way of example, we expect to settle through trustee sales 2 SFR non accrual loans totaling 8 point $1,000,000 with loan to values less than 50% in the 3rd quarter. While we recognize that in this environment or any environment for that matter, a 48% increase in non performing assets could be a cause for concern.

Speaker 2

We are comfortable with the underlying collateral of our troubled loans and expect we will be able to resolve them without material loss. With that, I'll hand it over to Lynn, who can go into some more details about the quarter. Lynn?

Speaker 3

Thank you, David. Please feel free to refer to the investor presentation we have provided as I share my comments on the company's Q2 of 2024 financial performance. Slide 3 of our investor presentation has a summary of 2nd quarter results. As David mentioned, net income was 7,200,000 dollars or $0.39 per diluted share, a decline of $0.04 from last quarter's $0.43 per share. Net interest margin decreased 2 basis points due primarily to the impact of the $22,500,000 in loans that migrated to non accrual, which reduced interest income by $710,000 and net interest margin by 8 basis points.

Speaker 3

Net interest income decreased by $912,000 to $24,000,000 with $520,000 of that decrease coming from the impact of the non accrual loans. Interest income decreased $1,900,000 due to a $1,700,000 decrease in interest income on average cash balances and the aforementioned $520,000 reduction, offset by a net increase in loan interest income of about $300,000 Average cash balances decreased $109,000,000 quarter over quarter. Trimming our cash balances allowed us to reduce our reliance on wholesale funding and reduce our expenses or interest expenses by $1,000,000 in the second quarter. Decreasing our wholesale funding also helped us maintain a stable cost of funds compared to the last quarter. Non interest income increased slightly to $3,500,000 and benefited from $359,000 of distributions on an equity investment made for CRA purposes and higher gain on sale of loans.

Speaker 3

While we recognized $292,000 in gain on REO, This was less than the $724,000 in gain on REO we recognized last quarter. Non interest expenses were relatively stable at $17,100,000 and we expect them to remain at close to this level for the 3rd 4th quarters. Commercial real estate loans and construction loan development loans were stable at 39% 7% of our total loans Slide 6 has additional details about our exposure in those portfolios. 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 an average LTV of 61%. Starting on Slide 9, we added a couple of asset quality slides to the presentation that we hope will help investors understand our nonperforming loans in light of the increase we reported this quarter.

Speaker 3

On Slide 12, you will see our allowance for loan losses remained stable at 1.37 percent of total loans held for investment. However, due to the increase of non performing loans, our allowance to non performing loans ratio decreased to 76%. We expect this ratio to recover in future quarters as we resolve the non performing loans. Slide 13 has details about our deposit franchise. Total deposits were stable from the Q1 at $3,000,000,000 as wholesale funding was successfully replaced with retail deposits.

Speaker 3

In addition, non interest bearing deposits remained relatively flat for the Q2 in a row. Our average all in cost of deposits for the 2nd quarter was unchanged at 3.59% from the Q1. Tangible book value per share increased to $24.06 due to earnings and accretive share repurchases offset by our shareholder dividends of $3,000,000 We repurchased about 448,000 shares at an average price per share of $18.01 in the 2nd quarter. Our capital levels remain strong with all capital ratios above regulatory well capitalized levels. With that, we are happy to take your questions.

Speaker 3

Operator, please open up the call.

Operator

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

Speaker 4

Hey folks, hope you're doing well.

Speaker 3

Good. Thank you.

Speaker 4

Just to start off here, you certainly struck a bullish tone on both loan growth and the margin for the back half of the year. I was hoping you could help us size up the opportunities on both these areas over the next two quarters.

Speaker 2

Okay. Lynn will start.

Speaker 3

Let me start and then we can turn it over to a few people with details. So I think relative to the first half of the year, I think we're cautiously optimistic. We had reported net no growth in the Q1 and $20,000,000 net growth in the 2nd quarter. So I think relative to those two quarters, I think we're expecting increased growth. Can definitely appreciate that the current environment is still kind of leaning towards low percent digit growth.

Speaker 3

So I think I don't know if that helps with the bullish tone and we can go into other details on pipelines. And then on the net interest margin, we had to report the impact of the placing or the migration of a couple of non accrual loans, which impacts our net interest margin 8 basis points. So I think with ongoing loan growth, optimistic that we wouldn't have any additional large non accruals to report in the absence of those. I think that's where we would like to see our net interest margin stabilize and possibly come off of the floor we're at now.

Speaker 4

Yes, that's helpful. Thank you. Maybe one more for me. Just on the migration you saw in non accruals, I mean, how would you folks characterize the migration for these 3 credits or maybe talk about the drivers? And given that it's in 3 different portfolios, it feels like it's tough to say these are kind of one offs, but I'm kind of just curious if there is any common driver in that migration?

Speaker 2

I don't think there is a common driver in the migration of the loans that you saw with the increase here at all.

Speaker 3

So I would agree. I don't think we're seeing any trends that we're concerned about based on those moving to non accrual. Obviously, every time you have somebody move to non accrual, you have to take a hard look at the rest of your portfolio and determine if there's anything else that looks similar that could have exposure. And at this point, I don't think we've identified anything or have anything to report. 2 of the loans we did indicate are within one relationship.

Speaker 3

So they happen to be in different portfolios, but I think that would be the only item, I guess, that had a common denominator.

Speaker 4

Yes, yes. That's helpful. Okay. Thank you for taking the questions.

Operator

Yes. Thank you. Your next question is coming from Kelly Motta with KBW. Please proceed with your question. Your line is live.

Speaker 5

Hey, thanks It looks like your loan sales picked up again this quarter. Wondering if you could provide any color as to, if that was residential or SBA as well as your pipeline for loan sales as we look towards the back half of this year?

Speaker 2

Okay. Hi, Kelly. How are you?

Speaker 5

Great.

Speaker 2

We have seen a pickup in our SBA. So most of this is SBA, but we still are gaining also a little bit of traction in our mortgage portfolio also. Okay. So Lynn has the exact can fill you in any more details if you need it.

Speaker 3

Actually, I don't have those right at my fingertips. I think that on SBA, we're seeing wide spreads. So those parts have been successful. And then I think with the interest rate environment, we've seen a little bit more on the mortgage, but the majority is SBA.

Speaker 5

Got it. That's helpful. And then maybe a question for you, Lynn. It looks like the securities yields ticked up slightly. Just wondering if you are reinvesting any of the cash flows into the securities book or the driver of that as we think about that side of the margin?

Speaker 3

Sure. I think what we're seeing for the yield itself in the securities portfolio is probably a higher percentage that was in short term commercial paper given the inversion in the yield curve. So I think that probably had the most impact as, at a higher percent of our earning assets and average loans, when I look at the whole earning assets. So I think that was the main driver of the securities yield increase.

Speaker 5

Got it. And I know you guys have been working through and making solid progress towards remediation of several items. I think there's any additional expenses or if you continue to expect that those are all currently in the expense run rate?

Speaker 2

I believe they're currently in the expense run right now.

Speaker 5

Great. I'll step back. Thank you.

Operator

Your next question is coming from Matthew Clark with Piper Sandler. Please proceed your question. Your line is live.

Speaker 6

Hey, good morning everyone.

Operator

Good morning.

Speaker 6

Maybe first on the margin. Lynn, do you have the average margin in the month of June on an adjusted basis excluding that 8 basis points of interest income reversals and then maybe the spot rate on deposits at the end of June?

Speaker 3

Good question, Matthew. So I think my comments on how the net interest margin is trending, I think is your question kind of April, May, June. Yes, I think we're seeing it stabilize based on all of the information we shared. And then the spot rates, I meant I had good intentions of including it in the investor deck, and I apologize for not getting that in there. Just bear with me one moment, while I pull that up.

Speaker 3

Do you have another question, Matthew, in the meantime?

Speaker 6

Sure. Yes, I was going to get to CDs in the roll rates there. Just remind us what's maturing in the 3rd Q4, at what rate and what you expect them to renew at?

Speaker 3

Okay. So I think 95% of our CDs mature over 12 months. I think there's a good portion and it's kind of evenly distributed. I think that interest rates have started to or the cost of deposits have actually kind of eased just over the last week or 2. So if you'd asked the question a month ago, I think my answer would have been different.

Speaker 3

Because I think what we were seeing is funding rates come in pretty similar to how they were rolling off because of the higher for longer mantra. However, I think we are seeing a little bit of softening. I don't think it's a lot of basis points or as much as we would like to see. But I think there's probably opportunity for them to reprice a little bit lower. It'd be my general comment.

Speaker 3

I don't know if I could give you the exact basis points.

Speaker 2

Okay.

Speaker 3

Anything else you would add, David?

Speaker 2

No. I mean, I think you said everything. Our portfolio is pretty evenly dispersed over the months.

Speaker 6

Got it. Okay. And then just on the $150,000,000 of FHLB that's maturing in the Q1, $1.18 What are your updated plans for that those borrowings?

Speaker 3

Sure. So obviously, with our loan to deposit ratio at the higher end and I think a desire to keep a good amount of on balance sheet liquidity. There's a likelihood that we would in the absence of just other loan growth, look at the wholesale market and determine the best options at that point, whether it's FHLB advances or tapping a different wholesale source. And we'll have to work with the interest rate environment as it is in the Q1 of next year. So I don't know that those are necessarily getting prefunded, given the we expect interest rates to decrease.

Speaker 3

So unfortunately, I think we're probably looking at some source repricing higher in the Q1 of next year.

Speaker 6

Okay, great.

Speaker 7

Thank you.

Speaker 3

And with respect to spot rates, I'm going to say it's pretty similar to the rate that was the average for the quarter.

Operator

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

Speaker 7

Hey, good morning. Hi, Ann.

Speaker 3

Hi, Andrew.

Speaker 7

Hey. I just think a couple of quick ones for me. Most of mine were asked already. On the loan growth, just to clarify, Lynn, I think you said still kind of expectations for low single digits for the year. I think last quarter we were talking about low to mid single digits.

Speaker 7

I guess any overall change to the loan growth message?

Speaker 3

I don't think so. If it's low to mid, I mean, as the year has moved on, I mean, if you're looking kind of for the rest of this year, again, relative to the first half, I think looking at something more. I don't know if you want to add a couple of comments on pipeline or family mortgage.

Speaker 2

Our pipelines right now, Andrew, are very, very strong. But we also have payoffs and those type of things that are also need to be calculated into this. We're also in a very trying environment. It's a very trying environment right now to try to get loans. And we are competing as best as we can.

Speaker 2

But we do expect relative to the first half of the year, the second half of the year will be better.

Speaker 7

Yes, understood. Okay. And any as you think about just like the composition of the pipeline as it sits today, any change mix wise versus 3, 6 months ago? Is it maybe slightly more optimism driven by the pickup in C and I, CRE, single family, any specific color there?

Speaker 2

Okay. I don't think so. I think it's fifty-fifty basically commercial resi, okay?

Speaker 6

Okay.

Speaker 7

Have you brought spreads in on new loans at all? I think last quarter we talked about 8.3% new origination yield. I think you mentioned 7.4 percent for production yields this quarter. It's quite a lot of compression sequentially. Maybe it's just a mix, a functional mix, but have you guys actively lowered spreads?

Speaker 3

Before you I'm going to turn it over to just about current rate. But I think the 8.3% last quarter came from like maybe some examples of maybe C and I versus part of our production that relates to our single family portfolio, which has a lower commoditized rate. And I think that's how we ended up with the blend of the 7.4% that we reported as our average production yield. So I think we're I think if you were to talk by product, there's probably kind of 2 ends of that. And then I think just a comment on where we're seeing the trend on spreads.

Speaker 3

I'll turn that over to you, David.

Speaker 2

Yes. So our rates are in the for mortgage are about 7.25%. That's the start rate about. For commercial, they go anywhere from 6.75 to $10,000,000 Okay. Depending on the product.

Speaker 7

Yes. Okay. Perfect. Thank you for taking the questions.

Speaker 3

Thanks, Andrew.

Speaker 2

Now we have You

Operator

have a follow-up question coming from Brendan Nosal with Hovde Group. Please proceed with your question. Your line is live. Brendan, your line is live.

Speaker 4

Sorry, apologies. I was on mute. Just wanted to hit on the buyback before the call wrapped up. You guys were quite active this quarter repurchasing shares, but the price is up quite a bit from that average price throughout the Q2. Just kind of curious what your appetite is to continue making use of that authorization over the next few quarters?

Speaker 3

Sure. I think we have still a pretty strong appetite since our stock price is still below our tangible book. But to your point, the stock price has moved up nicely and I think we'll consider looking at all aspects of it. Maybe it could moderate, but we still have 500,000 shares under our authorization there.

Speaker 4

All right, perfect. Thanks for taking the follow-up.

Speaker 3

Yes, thanks.

Speaker 2

Kelly? We

Operator

have an additional follow-up question with Kelly Motta from KBW. Please close your line. Your line is

Speaker 5

live. Sorry, I was muted. Thanks for letting me jump back in. I was hoping to get a bit more color on the NPAs. I appreciate the commentary about I believe Lynn, you had said 2 of them may have been the same borrower.

Speaker 5

But I know you guys took down specific reserves this quarter. Just wondering if you could provide a bit more commentary on what gives you confidence on your ability to recoup those without losses. And just with the uptick we saw this quarter as well, was there was this as part of a specific review or anything like that? And is there anything on the horizon that you could you think could migrate inwards to kind keep the NPAs at this higher level?

Speaker 2

Okay, Kelly. I'll start, then we'll pass it off to Lynn for further details. No, this was not a result of any review or examination or audit. This was just normal banking operations, I guess, you could say, and all. They really when you look about it, there's really 2 loans.

Speaker 2

There's 2 borrowers, I guess, you can say. They both have very distinct and separate circumstances that brought them this way and so forth. We went out and we did what you're supposed to do. We got new appraisals. Those appraisals came back and we do a discount to those appraisals.

Speaker 2

And that's how we calculate if there's impairment or any of those type of things on these loans. We do believe that on the one loan that we've been very proactive and we're going to be doing we're going to we expect to accept a deed in lieu of foreclosure in the one loan, so we can expedite the selling of the property in a very calm, normal way to get the most value out of that property. Lynn, I'll let you go from there.

Speaker 3

Sure. So Kelly, all of the loans that are nonperforming, kind of talking to your comment about specific reserves. So going through comprehensive CECL process, we can run a lot of models. But once something is impaired, obviously, it has to go through a detailed individual review. So in some respects, you might take comfort that this group of loans has been specifically looked at and measured.

Speaker 3

To the extent that it's collateral dependent, we do charge off, which is some charge off level that you saw in the quarter. And then there's limited specific reserves on our nonperforming loans. So I don't know if that answers your question on the specific reserves. And I agree with David's comments as I as we looked at we put in Page 10 of the deck so that to facilitate the conversation given the uptick and how we specifically looked at many of our non accrual loans. Unfortunately, as we all know, it takes some time to work through them.

Speaker 3

I think we're going to be urgent about it, but we obviously have a lot of things we have to comply with. We'll work through it in the 3rd Q4 of this year.

Speaker 5

Got it. That's super helpful. Thanks for letting me jump back in.

Speaker 2

Yes. Thanks, Kelly. Anybody else?

Operator

You do have a follow-up question from Matthew Clark with Piper Sandler. Please post your question. Your line is live.

Speaker 6

Hey, thanks. And I apologize if I missed it, but any commentary on the expense run rate, the non interest expense run rate going forward after a seasonal decline in comp?

Speaker 3

Sure. It was a quick one. I think we believe our expense run rate will be approximately at the same or similar level that we have in the second quarter.

Speaker 6

Great. That's all I had. Thank you.

Speaker 5

Thanks, Matthew.

Operator

There appear to be no additional questions in queue at this time. I would now like to turn the floor back over to David Morris for any closing remarks.

Speaker 2

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

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 your participation.

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