RBB Bancorp (NASDAQ:RBB) Q4 2022 Earnings Call Transcript

RBB Bancorp (NASDAQ:RBB) Q4 2022 Earnings Call Transcript January 24, 2023

Operator: Good day, everyone. And welcome to the RBB Bancorp Earnings Conference Call for the Fourth Quarter 2022. At this time, all participants are placed on a listen-only mode and the floor will be open for questions and comments after the presentation. Please note that today’s event is being recorded. It is now my pleasure to turn the call over to your host, Ms. 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 financial results for the fourth quarter of 2022. With me today are President, CEO and CFO, David Morris; SVP and Chief Accounting Officer, Shalom Chang; EVP and Chief Administrative Officer, Gary Fan; EVP and Chief Risk Officer, Vincent Liu; and EVP and Chief Credit Officer, Jeffrey Yeh. David will provide a brief summary of the results, which can be found in the earnings press release that is available on our Investor Relations website and then we will 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 today. Loan growth increasing loan yields and declining expenses drove record fourth quarter and 2022 results, with quarterly net income of $17.6 million and earnings per share of $0.92, and an annual net income of $64.3 million and earnings per share of $3.33. Net interest income for the quarter was stable at $39 million as the positive impact of loan growth and increase in yields was offset by sharply higher deposit costs. Fourth quarter noninterest income of $2.4 million was down slightly from the third quarter due to lower loan sales and servicing fees. A $3.6 million decrease in net interest expenses from last quarter was primarily attributable to bonus reversal of $2 million and lower loan origination commissions of about $6 million, sorry, $5 million — $500,000 as new compensation guidelines took effect.

Basically, the team, myself included, miss Board established goals on deposit gathering and loan originations and our compensation was affected as a result. Fourth quarter net interest margin of 4.26% was down slightly from last quarter but up from 3.43% a year ago. We remain cautiously optimistic that we will be able to maintain our NIM around 4 in the first quarter, but expect that it will likely — that it likely peaked in the third quarter of last year. Annualized return on average asset and return of total common equity were 1.8% and 14.59%, respectively, in the fourth quarter. Net loans held for investments increased by about $111 million to $3.3 billion in the fourth quarter and CRE and residential mortgages showing good growth and construction and other decreasing for the last quarter.

Our yield on average earning assets increased to 5.75% in the fourth quarter, which was a 62 basis point increase from last quarter and 178 basis point increase from the prior year. Continued commercial customer activity and rising rates drove $108 million decrease in average non-interest-bearing deposits over the quarter. Our average cost of interest-bearing deposits for the quarter was 1.93%, which was up 111 basis points from the prior quarter as the expected catch up in deposit costs materialized. We continue to be below our competitors on deposit pricing, but have been forced to increase rates to retain deposits. Non-performing loans were stable at $11.5 million from last quarter and loans 30 days to 89 days past due returned to a normalized level after a temporary increase in the third quarter.

Subsequent to our adoption of CECL, we recorded a provision for credit loss of $3 million in the fourth quarter of 2022, compared to $1.8 million in the third quarter of 2022. We also recorded a reversal of provision for off-balance sheet commitments of $930,000 in the fourth quarter of 2022, compared to a reversal of $28,000 in the third quarter of 2022. Our capital levels remain strong with all of our capital ratios well above regulatory minimums. We purchased 49,000 shares in the fourth quarter at an average price of $20.77. We have 433,000 shares left on the buyback. Finally, we are saddened by the tragic loss of life in the three recent shootings in California, including the one last Saturday in Monterrey Park. All of our employees are safe, but are understandably upset by such a horrific event that occurred so close to one of our branches.

In response to this tragedy, we made a $20,000 donation to Asian Pacific Community Fund, of which 100% of the donation will be going to victims families in an effort to help the community recover. With that, we are happy to take your questions. Operator, please open up the call.

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Q&A Session

Operator: Thank you. Thank you. Our first question is coming from Kelly Motta with KBW. Please go ahead.

Kelly Motta: Hi, David.

David Morris: Hi, Kelly.

Kelly Motta: Thank you. Thanks for the question. Can start off with expenses, you noted in your prepared remarks that there was some reversals in there. Just trying to get a sense of what actually fell out of the run rate, as well as what’s a good kind of go-forward outlook and starting point given the movement that occurred this quarter?

David Morris: Our policies to accrue — has been to accrue at 6% of pre-tax and pre — and pre-tax bank earnings. We are changing that to accruals to pre-tax Bancorp earnings right now. But really changed is the amount that we have conformed our bonus structure to that of our peers. So for example, I am eligible to get received up to a 150% of my salary versus before the President and CEO was eligible to get 2.5% of our pre-tax earnings. So that is really the biggest number there and that’s the biggest change, okay. I don’t — 2.5% of our pre-tax earnings would have been like $2.5 million for me. So that would just not — but that’s not 1.5 times my salary, okay.

Kelly Motta: Got it. Thanks for the help. Just trying to understand how that ties into the go-forward run rate. It seems like there is this reversal perhaps in 4Q for what

David Morris: Yeah.

Kelly Motta: was the crude on a go-forward basis, if we were to kind of back out how the reversal, maybe that’s a different way of asking what a number we can build off of, because $13 million after the prior three quarters feels low, but again, you also had the wrap-up of the investigations and things like that. So I am just trying to understand when you take out kind of reversals in 4Q, what would be more normal had you have been accruing under how you anticipate to do so going forward?

David Morris: So, I think, again, if you look at it in the way that I have — I still have a couple of positions open that are going to be executive level and they will be getting, again, there are going to be additional bonuses next year, not the full amount of the $2 million, but certainly, possibly significant dollars and taking us up to the holding company level instead of the bank level of pre-tax income. I think you will — we will get a very much closer number for what we will actually spend, okay, because we base our bonuses on Bancorp numbers in all. As far as the legal expense is concerned, this year, I think, you will have significant — we will have less expense to the tune of up — well, our legal is going to go down, but our auditing expense is going to go up, because we went accrual, who was significantly more expensive than our — than EV is.

So I do think legal will be going down, not quite sure, okay, we put all of that here. I am just checking some numbers. Yes, those fees should be going down by a couple of million dollars actually on an annualized basis, okay?

Kelly Motta: Okay. Got it. I assume excluding gateway, which

David Morris: Right.

Kelly Motta: can you and is the close of that still 2Q, how are things progressing with that acquisition?

David Morris: We will know come March 1st I would hope, okay.