RBB Bancorp
NASDAQ:RBB
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RBB Bancorp
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Good day, everyone, and welcome to the RBB Bancorp First Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen only mode. And we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host, Catherine Wei, Investor Relations Officer at RBB Bancorp. Ma'am, the floor is yours.
Thank you. Hello, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the first quarter of 2023. With me today are President and Chief Executive Officer David Morris; Chief Financial Officer Alex Ko; Chief Credit Officer, Jeffrey Yeh; Chief Administrative Officer, Gary Fran; and Chief Risk Officer, Vincent Liu. David and Alex will briefly summarize the results, which can be found in the earnings press release that is available on our Investor Relations website. And then, we'll open up the call to your questions.
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. Forward-looking statements are also subject to known and unknown risks and uncertainties and other factors relating to RBB Bancorp's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company.
For a detailed discussion of these risks and uncertainties, please refer to the documents the company has filed with the SEC. If any of these uncertainties materialize or any of these assumptions prove incorrect, RBB Bancorp's results could differ materially from its expectations as set forth in these statements. The company assumes no obligation to update such forward-looking statements unless required by law.
Now, I'd like to turn the call over to David Morris. David?
Thank you, Catherine. Good day, everyone, and thank you for joining us. Despite the industry challenges of the first quarter, Royal Business Bank continued to make progress on the organizational realignment we began a year ago. Since the start of the year, we brought on Alex Ko as our new Chief Financial Officer. And we recently added Bob Franko and Scott Polakoff to the Board of Directors. We believe these actions taken after many productive discussions with our shareholders will allow us to turn the page on the events of last year and build shareholder value.
In the quarter, which saw multiple bank failures we also increased our deposits. And for that, we have our loyal customers to thank. We work every day to serve this country's vibrant Chinese-American community and it is gratifying to see the strength of those relationships in a time of stress. I'd like to take a moment to discuss our strategic priorities for 2023 before handing it over to Alex.
First, we are focused on resolving all outstanding matters related to the events of last year. I can assure you that management and the Board are focused on putting these events and the related expenses behind us. Second, we are focused on liquidity and intend to reduce our leverage this year. As a precaution following the bank failures in March, we increased our time deposit financing to ensure we had efficient liquidity on hand. We expect we will maintain a higher level liquidity and plan to reduce the loan to deposit ratio to 95% by the end of the year. Given the volatility in the market and the economic uncertainty, we believe this is the best strategy to protect long term shareholder value. Third, we intend to focus on supporting core existing customer relationships. Prioritizing these relationships will allow us to reduce our leverage, while enhancing our deposit franchise.
With that, I am pleased to hand it over to Alex, who will discuss the financial results before we open the call up to questions. Alex?
Thank you, David. Increasing loan yields and a stable loan portfolio balance drove record revenues in the first quarter, but were offset by increasing interest expense, legal expenses and other professional fees, mainly relate to our transition to new external auditor. Due to these expenses, net income for the quarter declined to $11.1 million or $0.58 per share.
Net interest income for the quarter also declined to $34.1 million, mainly due to increased deposit cost. First quarter non-interest income of $2.5 million was stable from the fourth quarter. The increase in loan servicing fee income was partially offset by the decrease in gain on sale of loans. Core non-interest expenses returned to the normalized run rate. However, were impacted by the legal and other professional expenses, which increased by approximately $2 million compared to the prior quarter. We expect the legal and other professional expenses to decrease going forward.
First quarter net interest margin of 3.7% was down 56 basis points from the last quarter, but up from 3.5% a year ago. The decrease from the last quarter was mainly due to deposit cost increase, which outpaced loan yield increase. Net loans held for investment increased by $4 million from the last quarter, the small increase is mainly due to the increase in single family residential mortgage loans, offset by the decreases in other loans. Our yield on average earning assets increased to 5.84% in the first quarter, which was a 9 basis point increase from the last quarter and 184 basis point increase from the first quarter of 2022.
Continued commercial customer activity and rising interest rates drove $159 million decrease in average noninterest bearing deposits and a $327 million increase in time deposits over the quarter. Our average cost of interest bearing deposits for the quarter was 2.75%, which was up 82 basis points from the prior quarter. In addition to the impact of increasing interest rates, part of this increase in deposit cost was driven by a fourth quarter decision to begin reducing deposit concentrations. We are cautiously optimistic that the pace of increases in deposit costs should slow in future quarters.
Moving on to the credit quality. Nonperforming loans increased to $26.4 million from $23.5 million from the last quarter, due to an increase in single family residential loans of $4.7 million. Delinquent loans decreased by $961,000 compared to the prior quarter. The company recorded $2 million of provision for credit losses related primarily to qualitative factors in light of anticipated increase in classified loans as the company finalized its loan risk ratings for the quarter. With $2 million of provision for credit losses and minimum net charge offs allows for credit losses coverage ratio increased to 1.29% as of March 31, 2023, compared to 1.23% in the prior quarter. Our capital levels remained strong with all capital ratios well above regulatory well capitalized ratios, which we believe as prudent given the market risks.
With that, we are happy to take your questions. Operator, please open up the call.
Certainly. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Kelly Motta from KBW. Your line is live.
Hi, Kelly.
Hi. Good morning over there. I thought maybe we could start with what you're doing with the balance sheet, kind of taking leverage down. And part of those prepared comments you had were that you were focus on what you view as core relationships. Can you kind of dig in a bit more on how you intend to bring leverage down? Is it going to be through loan sales? Are you going to be deemphasizing certain areas of lending? Just curious whatever kind of commentary and color you can fill in around that.
We will be tightening our and we have tightened our underwriting guidelines in CRE and construction lending. But more particularly, Kelly, we are pulling back from out of area lending. And we're also pulling back on bridge loans and out of area. Okay. So we're still going to lend in our areas, pretty much all factors, all loan types to our customers and within our area. But we're going to decrease out of area market and let those loans roll off the books [Multiple Speakers]
Got it. Okay. Okay. So considering that, I mean, last year loan growth had been fairly quite strong. You were at about 1% annualized growth this year. Is that kind of when factoring in the roll off of some of these, like, non-core types of lending? Is that kind of what we should be expecting on the loan side?
I think it's going to be between the low single digits loan growth. Okay. Low single digits. Whereas we're hoping that deposit growth will be in the upper single digits.
Got it. Okay. And then with the non-interest bearing declines. I know we've been talking about in the past couple of quarters of some larger relationships that you decided to let go for concentration considerations. Obviously, deposit growth is the source of emphasis now, especially getting the loan deposit ratio down. About how much more related to kind of these larger accounts might be part of, I guess, left to go? And just trying to get a sense of when this deposit base can kind of stabilize especially the non-interest bearing portion?
We only have one customer that's over 2% of our total deposit base. And that would be about another $25 million where we would expect it to roll off between now and year end to get it down to our 2% level. Okay.
Okay.
So we've done most -- we did most of it in last year, Kelly. I mean, [indiscernible] big majority of it in last year.
And on the expense side, you called out the $2 million of higher professional fees in part with the auditor change. Just -- I mean, you were about $19 million of expenses this quarter. Understanding there were some moving parts in Q1 is kind of then a $17 million run rate is the right way to look at it. I know you guys have added to the team and to the board and are doing several things. So I'm just trying to understand since that extensive bounce around a little what kind of a good core run rate we can expect with all the changes that you've been making recently.
We hope to get it below $17 million, but let's start conservatively and be at $17 million and then go from there next quarter. Okay.
Okay. Great. I will step back. Thanks so much for the questions.
Yes, Kelly, can I actually add a little bit more color? Because we do have some increase on the professional fees and the legal fees. I'm not going to go over too much of a detail for that, but I just want to add a comment that, that going forward as we indicated in the prepared remarks, I would expect that will go there. Because most of majority that we know have expensed throughout the quarter and the last year as well. But who knows how much it will come in, but as of now, I would expect that a legal and professional fee [indiscernible] increased $2 million this quarter. I don't think we will repeat that. So going forward, it will be smaller. I just want to add on that.
Great. Thank you.
Thank you. Your next question is coming from Ben Gerlinger from Hovde Group. Your line is live.
Hey, Ben.
Hey, appreciate you guys taking the time. It seems like, obviously, you guys got in front of a lot of the deposit pressures and overall deposit growth was pretty sizable this quarter. I was curious if you guys were willing to give -- what was the margin yesterday or the spot rate at the end of the quarter? Just trying to get a sense of kind of where we are today given that the margin kind of fell pretty precipitously in the first quarter?
Yes, you're correct. We had a compression on the margin for this quarter, given our deposit pricing has gone up so much of it dramatically. And going forward, margin forecast to be honest, it's very hard to have accurate margin guidances for now given the volatility. However, in response to your spot rate question, we do have a CD spot rate of about 3.8% as of March 31.
Okay. I was looking more so for the margin, not a CD, but –
Yes, but margin is very difficult. I would expect that it will continue to compress, but not to the level that we have experienced in Q1. Given the deposit side, I would expect that increase will slow down as we said in the prepared remarks. So it will continue to compress, but again, not to the level that we have experienced in the Q1.
Got it. Okay. And yesterday, I saw you added two board members, more so thinking initiatives. Is there anything -- are they brought on for expertise, more consultancy or just kind of thinking the addition of Board members, what we should expect in terms of their addition for RBB as a whole.
Okay. Scott was brought on because Scott was a regional director of the FDIC. And so, he will bring on great knowledge of how our regulatory environment and regulatory agencies work. And we'll be able to assist the board and helping them learn all about those things. And Bob was brought on because of his past experience of running a bank. The only other person who has run a bank before that's on the board is myself. And so, we believe having Bob on board his connections locally to deposit gathering, to investors and to real estate market, I think is invaluable to the bank. Okay.
Got you. That's helpful color. Thanks. I’ll step back.
Thank you. Your next question is coming from Andrew Terrell from Stephens, Inc. Your line is live.
Hey, Andrew.
Hey, good morning. Maybe just a follow-up on one of Ben's questions. Just to clarify that the CD spot rate at 3.8% at [March] (ph) 31. Just making sure does that include the broker time deposits or is that just retail customer? Is that an all-in number of 3.8?
Yes, it's all in the CD rate of 3.8%.
Okay. Got it. And then how does that compare to rates from a retail perspective that you're offering in the market right now?
No, we are offering a little bit higher than that. We used to have a deposit campaign, but we don't do that anymore now, but we just do it in our pocket raise, which is more selective to the customers. It's a little bit higher than the spot rate that we just discussed.
Okay. Gary, are you there? Can you add any of the color of what you're doing with all the promotions and so forth?
Yes, sure. I think moving forward, obviously, deposit cost is a priority for RBB, both total number of deposits and then the cost of what we're trying to get. So a lot of the promotions we've been considering we're doing sort of on a quarterly basis and we're tailoring those to each specific market. So for example, something in New York that may work better for that customer base, it’s something different than what we'll be running in California. And that's sort of a shift in strategy versus what RBB used to do. Generally, I think due to our customer relationships and the kind of existing customer base, as well as the new customers that we have in and around our geographic presence. We're seeing about 25 basis points to 50 basis points better than our other competitors. So although the overall cost of deposits has been rising, I think we're still doing a little bit better than our competitors and a lot of that has to do with the way we position some of the products and services as well as some of the customer relationships we have with our bankers that are on the ground meeting with those customers?
Yes, okay. I appreciate all the added color there. If I can go back to some of the commentary around the loans and deposits. On the loan specifically, how much in loans do you have that you would classify as out of market loans? And then further, how much would you consider out of market bridge lending?
So then, our specified loan [indiscernible] out of market. And we have tot of about $410 million of out of market that is considered out of state or out of market [indiscernible]. Our policy limit is about a little bit higher than that we -- that as David mentioned earlier, that is our main focus to derisk our out of market lending.
Yes. Now, Andrew, I do want to step back and tell you that we do have mobile home parks out of market. And with both are not going to -- that's part of our core business. So we're -- that's slightly different. But that's in that $410 million number.
That is included. Yes, that's correct.
Okay. So the number is probably closer to $250 million that we're targeting to get off the books.
Yes. Actually a little bit less than that.
A little bit less than that. Yes.
Got you. Okay. And then could you maybe give some just color on what types of relationships those are? And then just given they are out of market, how are they sourced? Are they primarily syndications?
Our market are mainly -- range from multifamily term loan, to bridge loan. Those are relatively short term. Originally the term is about one to three years.
Yes, most of these were originated in 2020 -- 2019-20 20.
And we basically start to derisk starting from last year.
Okay. And then just to clarify. So there's around $250 million maybe not all of that runs off this year, but that's kind of the portion that you might look to about a market that you might look to run off the balance sheet, do you think you can still grow loans in the low single digit range in 2023 despite that, call it, $250 million headwind?
Yes. I think so. We may not have stellar growth. We may have a quarter with declining loan growth. But I think overall we could do that.
And I add a little bit, actually the loan demand is actually high. [indiscernible] we are very cautious in underwriting and also very cautious in us do our due diligence in this market.
Okay. Understood. And then last one for me and then I'll step back. Can you just remind us what the exposure is to office commercial real estate?
It's about $50 million.
Okay.
Yes, about $50 million. So it's not very much.
Yes. So just a really small portion. Okay. Well, very good. Thank you for taking the questions.
Thank you. Your next question is coming from Kelly Motta from KBW. Your line is live.
Hi. Thanks for letting me ask a follow-up. I note that -- I have heard that one of the things you're looking to do is keep liquidity higher on balance sheet. I saw you build cash by about a $15 million bucks, at least on an end of period to about $200 million. Is this a good level of cash you like to run with or any excess in that? I'm just trying to get a sense of that as we work through the size of the balance sheet.
Sure, Kelly. As you noted, we have a cash including due from banks. So we have a $231 million as opposed to last quarter, December year ended it was only $83 million. So intentionally, we increased. But given the market volatility, I would expect to continue to maintain this level or even higher as it deemed necessary. But I think this quarter, the management's top priority is given what's happening, it was a liquidity management. I believe we did a good job in terms of liquidity, including this available cash to be sufficient enough to weather through this liquidity challenges.
Thank you. Maybe last one for me is, your pending deal. Just wondering if that’s gateway, is that's something you're still looking forward to doing or any changes in thoughts around that with the market volatility and it's -- I know about extended a couple of times now.
We continue to have discussions with all the relevant parties. No decision has been made at this time, Kelly.
Thank you.
Thank you. [Operator Instructions] Your next question is coming from Ben Gerlinger from Hovde Group. Your line is live.
Hey, guys. Appreciate the follow-up. I was curious just on a positive mix shift, obviously, time deposits increase for you and every other bank when rates go up. I was just kind of -- do you have any internal guardrails? I'm looking back over relatively short couple of year history and I see something close to 70% total of funding. I was just curious if you have any sort of red lines that you won't exceed?
Of CDs?
Yes, relative to total. I know you guys want to get the loan to deposit ratio lower, so it mean, you either got to reduce in the denominator or reduce the numerator, increase the denominator. But in CDs, that was the only thing that's really kind of working in this market for any bank. I was just kind of curious.
Right now, we do have -- under our [Alco] (ph) guidelines, we do have policy limits. Yes. And I can't recall what they are, but we do have them. Okay.
Got you.
And like I think it's something like 66% or 65%, but I got to go back and check. And maybe less -- maybe 60% now.
Okay. Got you. And then just wanted to follow-up on the question –
An just let me add a little bit more color on that. We intentionally increased the CD proportion. We did see the non-interest bearing deposit decreased, given what happened -- the reduced -- the concentration. But I think that it really benefits to increase the CDs to secure those funding sources for certain periods. We are not offering two years or three years of CD. It's more nine months or at the most one year, so that we can actually secure our funding sources for that regard. So I don't really view this increase on the CD side as a negative, it is more secure. Even though cost was relatively higher than others, I think it was worth for us to increase those CD deposits. Those are -- there is a broker deposit, but there is a quite success on the retail deposit from the CD side as well.
Okay. Are there any –
Yes. No, I got it. Thanks. Appreciate the color.
Sure.
Thank you. Your next question is coming from Andrew Terrell from Stephens Inc. Your line is live.
Hi, Andrew.
Hey, thanks for the follow-up. I was hoping to get maybe a better sense of the non-interest bearing deposit flows in the quarter. Can you help us think about the cadence throughout the quarter on a monthly basis, just how the non-interest bearing balances progressed? And then, so far quarter to date in April, have you seen any kind of stabilization in non-interest bearing deposit balances?
Yes. I will attempt to answer that. I don't have that monthly breakdown in front of me. But as I said earlier, those decrease of the noninterest bearing deposit was due to one large relationship, strategically [indiscernible] starting last year. So that has continued into Q1. So that's the reason why we have a decrease. And also given the interest rate market, those non-interest bearing, they migrated to CD or higher earning method. So that will continue, but not to the level that we have experienced, given the market expectation for the interest rate for May is a minimum, let’s say, 25 days or even the decreases, I would expect that run off of the noninterest bearing deposit will slow down going forward. But I think, again, I don't have the monthly breakdown, but it got stabilized since the March 31 or liquidity crisis. I didn't see much acceleration of those non-interest bearing run off.
Yes. Okay. Do you have how much of the decline in the quarter was related to that one relationship?
One relationship was $26 million. Okay. We already reduced it significantly throughout 2022.
Yes. Okay. And one last for me just on buyback. I didn't see any this quarter. Just updated thoughts, I mean, with a slower level of balance sheet growth, you guys sit in a really strong capital position right now. Just love to hear your thoughts on whether buyback is of interest?
The Board is still discussing it at this time.
Okay. Thanks for taking the follow ups.
Thank you. [Operator Instructions] Your next question is coming from Joseph [Maccando] (ph) from Finance Investment Society. Your line is live.
Hi. First, I want to thank you guys for handling the liquidity crisis very well as a shareholder. And just thank you for being pretty good management over this last quarter. I wanted to ask more questions about the buyback that we're just asking about. I understand that you guys have to create a good liquidity level to navigate throughout this crisis. But there is lots of opportunities to repurchase shares at what you may seem like to be an accretive value going forward. And due to your high liquidity position in the market, would potential of mergers of acquisition activity be something that you would consider above the buyback or just overall when you're redeploying your earnings?
Hi. Right now I think doing any merger and acquisition in addition to what has already been announced would be -- it's too early for us to be comfortable in doing that. We don't know -- I personally believe that the banking system is very sound and we're very sound. But if we could have what happened in March 10th happen again overnight with a number of these larger banks. So I don't think M&A is wise right at the moment for us. I do prefer -- the Board is more interested in giving back capital through the dividend process right now. So that's I think number one. And I think number two is, they are very -- they are looking at reinstituting the buyback, but that will be probably a month or two or so down the road.
All right. Thank you for clarifying that.
Thank you. [Operator Instructions] There are no further questions in the queue.
Once again, I really want to thank our customer base who has stuck with us during March where everything was going crazy and appreciate them very much. And just so that you know, most of our customer base that has multiple millions of dollars with us are also investors in this bank. So, we want to thank them and so forth. I also want to thank you for who have joined us today. We look forward to speaking to many of you in the coming days and weeks. Have a great day. Thank you.
Thank you everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.