RBB Bancorp
NASDAQ:RBB
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RBB Bancorp
Earnings Call Analysis
Q4-2023 Analysis
RBB Bancorp
The company has taken actions in 2023 that, considering the current economic outlook, place them in a position for potential loan growth. Although it may be too early to give precise guidance on the magnitude of loan growth, the expectation is to fund any expansion with corresponding deposit growth. Share buybacks are expected to proceed at a pace similar to the previous quarter, providing a stable method for returning value to shareholders.
The loan pipeline is looking optimistic with significant demand across various sectors. The company is strategically selecting deals that optimize returns without compromising credit quality. The overall objective is to generate appropriate returns while maintaining stringent credit standards. Despite the general slow pace of loan growth traditionally seen at the beginning of the year, there's an undercurrent of momentum building which bodes well for the bank's lending activities.
An opportunity exists to increase the loan-to-deposit ratio slightly, potentially up to 100%. The growth strategy includes a focus on the commercial side of the business, with an aim to expand demand deposits. This approach intends to support net interest income and improve margins. Effective utilization of Federal Reserve programs and other time deposits is also part of this overall funding strategy.
While there's a possibility of interest rates decreasing in the second half of the year, the exact timing and extent are uncertain. To maintain a resilient position, the bank plans to stay flexible, specially by utilizing nonmaturity deposits. This financial nimbleness allows the bank to swiftly adjust its funding strategies in response to the changing rate environment.
Currently, there is a loan under forbearance within the portfolio, tied to a government entity tenant. Management is optimistic about the tenant's ability to fulfill their obligations and resolve the forbearance status favorably. Furthermore, there are no specific reserves against this loan based on the impairment analysis, although it is classified as a risk. This indicates careful risk management and an expectation of steady cash flow from the property in question.
As of now, there are no special offers in the market for time deposits from the bank. However, there are special offerings for demand deposit accounts (DDAs), such as personal and business checking accounts. These types of accounts are typically beneficial for the bank, as they generally incur less interest expense than time deposits and contribute to lower funding costs.
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Good day, everyone, and welcome to the RBB Bancorp's Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the floor over to your host, Brian Stevens.
Thank you, Matt. Good day, everyone and thank you for joining us to discuss RBB Bancorp's results for the fourth quarter of 2023. 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 in the Investor Presentation and the Bank's SEC filings. Now I'd like to turn the call over to RBB's Chief Executive Officer, David Morris.
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. We increased liquidity and mitigated balance sheet risks 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 attainment of our target 95% loan-to-deposit ratio and the reduction in the higher-risk higher-yielding loans, did impact results. But with the majority of the work behind us, we are better positioned to create long-term shareholder value and expect profitability to improve over the coming quarters as we resume deposit funded loan growth and take steps to optimize our cost of financing.
In the fourth quarter, we were able to recognize the $5 million 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 fourth quarter and invested approximately $6.7 million to repurchase almost 400,000 shares. We have exhausted our current buyback authorization, but 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.
Thank you, David. I've been here for about 1.5 months. So I'm still getting up to speed, but needless to say, I'm very happy to be part of the RBB 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 fourth quarter of 2023 financial performance.
Slide 3 of our investor presentation has a summary of fourth quarter results. We achieved $12.1 million in net income or $0.64 per diluted share. Net income for the fourth quarter benefited from the recognition of a pretax $5 million CDFI ERP award. Adjusting for this revenue, fourth quarter net income would have been $8.6 million or $0.45 per diluted share. Tangible book value per share increased 4% during the fourth quarter to 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 million reduction in average loans held for investment. This reduction, combined with a rate-related increase in interest expenses resulted in a $1.9 million decrease in net interest income and further pressure on net interest margin, which declined to 2.73% in the fourth quarter. Credit quality improved in the fourth quarter with nonperforming loans decreasing by 21% to $31.6 million. This decrease is primarily due to the payoff of a $9.9 million nonperforming construction loan with no additional losses.
Our allowance for loan losses remained stable at 1.38% of total loans, compared to 1.36% at the end of the third quarter. Noninterest expenses totaled $16.4 million and declined by 2.9% compared to the prior quarter, primarily due to lower salaries and benefits expense. We anticipate total noninterest expenses to increase in the first quarter due to a temporary seasonal increase related mostly to taxes and to reflect compensation adjustments as we start the new year.
As a result, noninterest expenses are expected to be around $17.5 million.
Slide 4 includes summary of 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 billion at the end of the year and had a fourth quarter annualized yield of 5.96%. Commercial real estate loans, which include construction and land development loans, comprise 45% of our total loans, and Slides 6 and 7 have some details about our exposure.
We continue to have limited CRE office loan exposure, which stood at $43 million and represented 1.4% of total loans at the end of the fourth quarter.
Slide 8 has details about our $1.5 billion 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 $3.2 billion at the end of the fourth quarter, a $20.7 million increase compared to the third quarter. This increase was due to a $53.5 million increase in interest-bearing deposits, and a $32.8 million decrease in noninterest-bearing demand deposits. Included in the increase in interest-bearing deposits was a $20.4 million reduction in wholesale deposits, which were replaced by non-maturity deposits.
Our average cost of interest-bearing deposits for the fourth quarter was 4.08%, an increase of 25 basis points from the third quarter, versus the 36 basis point increase from the second quarter to the third 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 thresholds. With that, we are happy to take your questions. Operator, please open up the call.
[Operator Instructions] your first question is coming from Nathan Race from Piper Sandler.
Question just on the expense run rate into this year. I appreciate the guidance for 17.5% as a starting point for the first quarter. But just curious on how you think about the cadence of expenses in 2Q and 3Q as well.
Sure. Nice to meet you over the phone here. So when we think about noninterest expenses, I think, there's a couple of ways, but one is our operating expense ratio relative to our earning assets. We think we've observed that it was closer to about 185 at the beginning of 2023, and it migrated down to about 163 in the fourth quarter of 2023. 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 noninterest expenses might look closer to 170 of average earning assets plus or minus some basis points.
Okay. Got it. And then does that higher expense run rate for the first quarter, 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?
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.
Okay. 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.
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. We can provide a range, but it might be a little bit too wide at this point.
Understood. I appreciate that Lynn. And if I could just follow up with David on the pace of share repurchases going forward. I understand that you guys will likely be re-engaging in the authorization that's out there, coming out of the fourth quarter, but just any thoughts on just the pace of buybacks over the next quarter or 2?
I would think the pace of buybacks should be similar to that, that we have on the fourth quarter. I think that's pretty much what we want to do.
Your next question is coming from Kelly Motta from KBW.
I was hoping to touch more on loans in the pipeline there. Just wondering if you could spend a minute or so just discussing -- I know Johnny has been working to build the pipelines and develop C&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 a quarter or 2 of loan contraction as things start to stabilize with one another.
Kelly, this is Johnny. Well, last year, as you know, we're 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 returns.
But I think credit quality is still first and foremost as far as selecting the types of deals to take on. But credit quality and then definitely, we want to general appropriate returns, and that's how we're looking at this pipeline right now. But overall, I think I'm relatively pleased with it, but then generally usually is a slow mind, but then I think the momentum is definitely there.
Got it. That's helpful. And as we look ahead, I know you 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? And when -- if and when we get rate cuts, how quickly you think betas will react on the downside?
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 expectation 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, call it, 95% to 100% as we look at other sources for funding.
I think we all -- the Fed's program has been out there. I think we've been successful in bringing in some nonmaturity 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 comment 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 magnitude. We think staying flexible on the funding side of the balance sheet is going to be important. So having some nonmaturity 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 recognized we're not going to navigate through probably a changing interest rate environment.
That's super helpful. 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 million in Office with LTVs over 85%. 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?
This is Jeffrey. This is a loan that we are -- that is in forbearance. We have already -- have a forbearance agreement with the power and that the issue with this power is that they are working with their tenants and their tenants are government entity and that we are not concerned about the source of -- their ability to pay the rent. They just have to work with their tenant. So then we are kind of optimistic that at the end of the forbearance agreement. This, the issue could be resolved.
Your next question is coming from Andrew Terrell from Stephens.
If I could just follow up on some of the last question there around the Office loan. 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 in criticized or classified today? And then is there a specific reserve against that loan today?
In terms of the specific reserve, there is no specific reserve because that they should be able to cash flow based on the source of the rent. And besides and based on the value of the [indiscernible] . And then we have done the impairment analysis and indicated no impairment.
And it is certainly in classified book.
No, no, classified loan, yes.
Okay. Got it. Very good. 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? And then I heard some of the commentary around just the expectation to lean a little more heavily into the C&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?
Well, there'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 investments, 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 would give us the flexibility to go down the curve quicker, okay? Also, so it won't be locked in.
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 first quarter, how much you've got rolling off and at what cost?
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 answer the rest of the question.
Andrew, can you ask your question again?
Yes, I think David answered the first part, the other part was just the time deposit repricing dynamics in the first quarter. Just how much is they're scheduled to roll off and at what cost is rolling off at?
Sure. So -- so we -- like I said, we ended the quarter with -- our cost of deposits for the fourth quarter were about 4% -- 4.08%. And within the numbers at the end of the year, we have about $275 million of wholesale funds that are maturing in the first quarter. 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.
There is a portion of our retail deposits that will reprice in the first 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 rates. 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. So hopefully, that's helpful. I think the time deposits that are coming off are, I think, between $450 million and $500 million, and then we'll work to retain those in the current marketplace.
Okay. Perfect. No, that's very helpful. I appreciate it. And lastly, if I could sneak it in. Can you just remind me, the $150 million of FHLB that's termed out at low 1% cost right now. I think the maturity of that was in 2025, if memory serves. Can you just remind me the specific kind of date of maturity for the FHLB borrowings?
It would be the first quarter of 2025 -- late first quarter of 2025. There's multiple maturity dates. So -- but it's all in late first quarter of 2025.
[Operator Instructions] Your next question is coming from Tim Coffey from Janney.
Dave, David, I was wondering if you can kind of talk me to -- would you -- when it comes originated loans in the near term, are you opening to originated for sale?
On the mortgage side, yes. And SBA also. Mortgage and SBA, yes.
How do you see that market evolving over the course of this year? Do we need the rate cuts in the back half of the year to really start to engage that customer base?
I think SPA is a -- not on the SPA 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 to where it was before it went back up above 4%. We need to be down around 3% for that to happen.
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 derisked the portfolio, do you see a real reason to dramatically increase in provisions this next year?
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.
We have reached the end of question-and-answer session. I will now turn the call over to David Morris, President and CEO, for closing remarks.
Once again, thank you for joining us today. We look forward to speaking to many of you in the coming days and weeks. Have a nice day.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.