RBB Bancorp (NASDAQ:RBB) Q1 2023 Earnings Call Transcript

RBB Bancorp (NASDAQ:RBB) Q1 2023 Earnings Call Transcript April 25, 2023

RBB Bancorp misses on earnings expectations. Reported EPS is $0.58 EPS, expectations were $0.72.

Operator: 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.

Catherine Wei: 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?

David Morris: 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.

Photo by Bank Phrom on Unsplash

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?

Alex Ko: 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.

See also 25 Highest Paying Jobs in the World and Top 50 Perfume Brands in the World.

Q&A Session

Operator: Certainly. At this time, we’ll be conducting a question-and-answer session. Your first question is coming from Kelly Motta from KBW. Your line is live.

David Morris: Hi, Kelly.

Kelly Motta: 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.

David Morris: 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

Kelly Motta: 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?

David Morris: 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.

Kelly Motta: 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?

Alex Ko: 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.

Kelly Motta: Okay.

Alex Ko: So we’ve done most — we did most of it in last year, Kelly. I mean, big majority of it in last year.

Kelly Motta: 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.

Alex Ko: 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.

Kelly Motta: Okay. Great. I will step back. Thanks so much for the questions.

David Morris: 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 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.

Kelly Motta: Great. Thank you.

Operator: Thank you. Your next question is coming from Ben Gerlinger from Hovde Group. Your line is live.

David Morris: Hey, Ben.