RBB Bancorp (NASDAQ:RBB) Q3 2023 Earnings Call Transcript

RBB Bancorp (NASDAQ:RBB) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Good day, everyone, and welcome to the RBB Bancorp’s Third 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. Ma’am the floor is yours.

Catherine Wei: Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp’s results for the third quarter of 2023. With me today is Chief Executive Officer, David Morris; President Johnny Lee; Chief Financial Officer, Alex Ko; Chief Credit Officer, Jeffrey Yeh; Chief Administrative Officer, Gary Fan; and Chief Risk Officer, Vincent Liu. David and Alex 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. 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 RBB’s Chief Executive Officer, David Morris. David?

David Morris: Thank you Catherine. Good day everyone, and thank you for joining us today. We are pleased to be awarded a $5 million CDFI ERP award by the U.S. Treasury in the third quarter. We believe it’s a real testament to our ongoing efforts to support the communities in which we operate, and we intend to use the funds to help low and moderate-income communities recover from the COVID-19 pandemic by investing in their long-term prosperity. We were also pleased to reach our target 95% loan-to-deposit ratio in the third quarter. As we mentioned, this has been one of our strategic priorities, and now that we have achieved it, we expect to resume deposit-supported loan growth, which will enhance our profitability and margins.

Johnny, who joined us as President in the second quarter, has done an excellent job developing a pipeline of high-quality commercial loans that we expect to originate beginning in the fourth quarter. As part of the deleveraging process, we have also taken steps to de-risk our loan portfolio by reducing our exposure to certain loan categories that we believe could be at risk in a higher-for-longer interest rate environment. While we believe these proactive approaches to managing our balance sheet will help protect us against potential credit losses, it also impacted our margin and interest income as the exited loans tended to carry higher interest rates. The decline in yield on loans held for investment during the quarter was a direct result of the reduction in high-yielding loans as we sought to de-risk our balance sheet.

These actions, when combined with the additional pressure of deposit costs, negatively impacted net interest income and net interest margin, which declined to 2.87% in the third quarter. We expect NIM to decline in the fourth quarter due to continued pressure on deposit costs and loan yields. But we expect the redemption of the $55 million of sub-debt will benefit NIM in the future. Credit remained broadly stable in the third quarter, but we did take a $2.2 million charge against a specific loan that we hope to have off our books in the fourth quarter. We are optimistic that our proactive loan de-risking, combined with the third quarter charge-off and provisions have positioned us for improving credit over the coming quarters. With that, I’ll hand it over to Alex, who will discuss the financial results.

Alex?

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Alex Ko: Thank you, David. Slide three has a summary of third quarter results. The decrease in loan yield that David discussed resulted in a decline in interest income while continued pressure on deposit costs led to an increase in interest expense. The decline in net interest income was offset by sharply higher non-interest income, which benefited from the $5 million CDFI award. Non-interest expenses decreased by 8.9% primarily due to a reduction in legal and professional fees. As an insurance, we have referenced in the past, began to cover a significant portion of investigation-related legal expenses. We continue to closely manage expenses and anticipate total non-interest expenses to be approximately $17 million in the fourth quarter before a temporarily seasonal increase in the first quarter of next year.

As David mentioned, third quarter net interest margin decreased 50 basis points to 2.87% due to the impact of decreasing loan yield, lower loan balances, and increasing deposit costs. Slide four includes summary balance sheet information, and you can see that the decline in net loans helped for investment. The net loan to deposit ratio at the bank level at the end of the third quarter was 95.4%. Slide five provides additional detail about our loan portfolio, which totaled $3.1 billion at the end of the third quarter, with an annualized yield of 5.99%. Commercial real estate loans, which include construction and land development loans, comprise 46% of our total loans, and slide six and seven have some details about our exposure. Our CRD office loan exposure stands at $45 million and represents 1.4% of total loans and has an average weighted LTV of 62%.

Slide eight has details about our $1.5 billion residential mortgage portfolio, which mostly consists of non-QM mortgages in New York and California with an average LTV of 61%. Slide 10 has some details about our deposit franchise. Total deposit decreased by $21 million from the prior quarter. The decrease was mainly from a decrease in time deposits under $250,000. Non-interest bearing deposits decreased slightly from the prior quarter. However, the pace of reduction of non-interest bearing deposits significantly slowed in Q3 compared to Q2. Our average cost of interest bearing deposits for the quarter was 3.83%, up 36 basis points from the last quarter. It’s worth noting that the pace of increase has slowed significantly from 72 basis points in the second quarter and 82 basis points in the first quarter.

We continue to expect the pace of increases in deposit costs to slow in future quarters. Slide 12 provides some details on credit. Non-performing loans decreased to $40.1 million from $41.6 million from the last quarter due to $2.2 million partial charge off of one large loan. We are cautiously optimistic that the remaining balance of this loan will be resolved in the fourth quarter with no additional losses. Delinquent loan increased by $12 million from the prior quarter, mainly due to one large delinquent loan. However, after the end of the quarter, the delinquent loan balance decreased by $16 million after a non-credit related temporary delay in payment of the large loan was corrected. Apart from the $2.2 million charge off, credit quality remained stable.

Our allowance for credit losses remained stable at 1.36% of total loans. Our capital levels remain strong with all capital ratios well above regulatory well capitalized ratios. With that, we are happy to take your questions. Operator, please open up the call.

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Q&A Session

Operator: Certainly. [Operator Instructions] Your first question is coming from Nathan Race from Piper Sandler. Your line is live.

Nathan Race: Yes. Hi, everyone. Good morning.

David Morris: Good morning, Nathan.

Nathan Race: Appreciate the commentary around the pressure to the margin in the quarter, and it sounds like you guys are expecting additional compression at least in the fourth quarter as well. I was kind of wondering if you can kind of just frame up the magnitude of pressure that you’re expecting into the fourth quarter and early next year, assuming the rate hikes stop from here.

Alex Ko: Sure. I’d be happy to do that, Nathan. As you mentioned, our net interest margin actually compressed this quarter actually more than what we expected in the second quarter, and the reason for the larger compression was due to our de-risking strategy, as David mentioned. There was a large amount of payoff and paydown, especially payoff for the second quarter, but the level of the payoff came down in the third quarter. As an example, $165 million paid off in Q2. Now we’re still at $36 million payoff in the third quarter, and I would expect there is one large loan that will be paid off in the fourth quarter that will have a higher interest rate. It will maybe impact a little bit negatively to further compress loan yield and net interest margin, but that’s the only one that I think will have a negative impact on the loan yield and margin.

Related to deposit cost, as I mentioned, non-interest bearing deposit didn’t decrease that much, and also time deposit under $250K increased, but I think the level of the increase on the deposit cost will slow down in Q4 and more slow down or even stabilize next year. So that’s the two net interest income main margin impact. Also, as David mentioned, we are expecting to redeem our sub-debt, a total of $55 million on December 1st. So Q4 impact, it will be minimum, but it will more positively impact in Q4 as well as next year because the rate was 6.18%, and quarterly or annually, actually, about $850,000 we could have saved going forward. But anyhow, with all those in the combination of the loan deposit and redemption of the sub-debt, we would expect to compress in Q4 a little bit more, but not to the extent that we have seen a 50 basis point reduction in Q3.

Nathan Race: Got it. That’s very helpful.

David Morris: I also think it depends on what the Fed does. If the Fed increases rates now or in November, which most of us do not believe anymore, we would have probably less compression on the loan side than we’ll see if they do not increase rates. Okay?

Nathan Race: Got it. Understood. And Alex, I couldn’t quite catch in terms of the amount of non-core runoff that you had in 3Q and subsequent. I think you guys had about $320 million in kind of non-core loans that you guys were looking to run off going forward. So I guess I’m just curious where those balances stand going forward.

Alex Ko: Are you referring to the Q4 loan expected payoff? I just want to make sure I hear it correctly.

Nathan Race: Yes, I’m just trying to understand how much more non-core loans you guys have remaining as of today.

Alex Ko: Yes, I do believe we are talking about $57 million if you ask me the dollar amount. And I think that’s the only loan that we are aware that we strategically decided to let go or refinance by our competitors.