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spk02: 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 Way. Ma'am, the floor is yours.
spk00: Thank you. Good day, everyone, and thank you for joining us to discuss RVB 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 Phan, EVP and Chief Risk Officer Vincent Miu, and EVP and Chief Credit Officer Jeffrey Yip. 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'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?
spk03: 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 92 cents 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 increasing yields was offset by sharply higher deposit costs. Fourth quarter non-interest 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 $500,000 as new compensation guidelines took effect. Basically, the team, myself included, missed 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'll be able to maintain our NIM around four in the first quarter, but expect that it likely peaked in the third quarter of last year. Annualized return on average assets 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 in construction and other decreasing for the last quarter. Our yield on average earning assets increased to 5.75 percent in the fourth quarter, which was a 62 basis point increase from last quarter and a 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 percent, 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 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 Monterey 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.
spk02: Thank you. The floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Our first question is coming from Kelly Motta with KBW. Please go ahead.
spk01: Hi, David. Hi, Kelly. Thank you. Thanks for the question. I thought I could 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?
spk03: Our policies to accrue has been to accrue at 6% of pre-tax and pre-tax bank earnings. We're changing that to accrue to pre-tax bank or earnings right now. What really changed is the amount that we have conformed our bonus structure to that of our peers. So, for example, I am eligible to receive up to 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. That's the biggest change. 2.5% of our pre-tax earnings would have been like $2.5 million for me, which is not one and a half times my salary. Got it.
spk01: Thanks for the help. Just trying to understand how that ties into the go-forward run rate. It seems like there was this reversal, perhaps, in 4Q for what was accrued on a go-forward basis. If we were to kind of back out the reversal, maybe that's a different way of asking what's 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 investigations and things like that. So I'm just trying to understand, would you take out kind of reversals in 4Q? What would be more normal had you been accruing under how you anticipate to do so going forward?
spk03: So I think, again, if you look at it in the way that I have, I still have a couple positions open that are going to be executive level, and they will be getting, you know, again, there are going to be additional bonuses next year, not the full amount of the $2 million, but certainly, you know, possibly significant dollars in terms taking us up to the holding company level instead of the bank level of pre-tax income, I think we will get a very much closer number for what we will actually spend, okay? Because we base our bonuses on Bancorp numbers and 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, well, our legal is going to go down, but our auditing expense is going to go up because we went to Crow, who is significantly more expensive than EB is. So I do think legal will be going down. Not quite sure. Okay, we put all that here. I'm just checking some numbers. Yeah, those fees should be going down by, you know, a couple million dollars, actually, on an annualized basis.
spk01: Okay, got it. I assume excluding Gateway. Is the close of that still 2Q? How are things progressing with that acquisition?
spk03: We will know come March 1st, I would hope. Got it.
spk01: That's helpful. Maybe last for me and then I'll step back and let some more into the queue. But I just wanted to ask on the deposit side, there's been some pressure on non-interest bearing over the past year after increases during COVID. Wondering kind of the cadence of deposit flows when you anticipate those starting to slow down and looks like the gap was funded with time deposits. Was any of that brokered funding, just any color as to the cadence of makeshift and what your funding was?
spk03: Okay. Our biggest issue has been we have these couple of trust accounts, which I've talked about in the past, which we asked to have moved Last year, December had about $550 million with us and we asked them to move it down between 250 and 300 million of which they did. But, um, one of them is a crypto company, uh, exchange. And that went again with crypto winner from two to 50 down to one approximately. I mean, one 50 at the end of the third quarter. And then in the fourth quarter, we decided to have one of the customers, one of the sub-customers, we had a discussion that I didn't really like that customer, and two weeks later, they moved that customer out of our book, and we went from $150 million down to $25 million. Okay? So that's the... The big issue with the demand deposits, $300 million was planned to go off. Then we had the crypto winner with the one that went from $250 to $150. And then we asked, we're still banking this customer. We asked that one big customer. We didn't really like them, and we asked them to move away. And that is not FTX or anybody else that's headlined in the news, just so that you know.
spk01: Got it. That's helpful, David. If I could just sneak in a follow-up to that real quickly. Those are quite large accounts. Just wondering, you know, now that you've taken those levels down, what is any color as to kind of what the largest account sizes are at the bank? I'm not sure if you want to frame it as top 10 accounts or however you look at it, but just curious as to any sort of large customers that could add to the pressure?
spk03: Yeah, we have our policy now is no customer over $100 million. No single customer, well, when I say single, single relationship over $100 million with the bank anymore. And we do have some we have most of our people that have deposits over $25 million are either directors or former directors or former presidents of banks who have companies of banks that we have purchased. When you look at that, we have retained a good number of the deposits from either the chairperson or the president of the banks that we have purchased in the L.A. region.
spk01: Awesome. Thanks for all the colors today, David. I'll step back.
spk03: Okay.
spk02: Thank you. Our next question is coming from Nick Cucciarali with Piper Sandler. Please go ahead.
spk03: Hey, Nick. Good day, everyone. How are you?
spk05: We're great. Good. I just wanted to make sure I heard your NIM commentary correctly. You're expecting a 4% print in the first quarter, and do you have any color on the trajectory throughout the year or a sense of magnitude at this point?
spk03: I think our NIM will continue to advance. I think the hysteria of rates going up and up and up is has ceased. So most of our competitors are in the 425 range on CDs. For us to attract CDs, we have to be around four, OK, about four. So you're going to see everything reprice to about four if we want to retain those depositors, OK, for the remainder of the year. So I think you're going to see over The next quarters are going down. Even though rates may go up still 75 basis points, I don't think the deposit rates are going to continue to go up as much. I may be wrong with that because they're supposed to be – they haven't really – with the last rate increase, they didn't increase. The community priced everything starting September and early October at 425, 4.5, 4.5. you know, 475. That's where people have been pricing stuff. So we've taken a conscious effort to keep everything between 4 and 425. Okay?
spk05: So can you give me a sense for, at this point, obviously a lot can change and it's a wild card, but what are your thoughts kind of in the middle of the year? Do you think... the magnitude starts to slow down in terms of the cost increases on the liability side? Or just any sort of quantification would help there.
spk03: Well, I think, like I said, I said about 4% in first quarter. We're optimistic on that. The second quarter, I think, will be around 375. I think it'll be about 25 bps for the next couple of quarters.
spk05: Okay? That's helpful. Okay, thank you. And then In light of your capital position and valuation, are you expecting a more forceful repurchase activity over the course of the year relative to 2022?
spk03: We're hoping that that will be the case. Okay. Okay.
spk08: Thank you for taking my question.
spk02: Thank you. Our next question is coming from Tim Coffey with Jani. Please go ahead.
spk07: Hey, morning, David. This is a follow-up on the deposit cost questions there. What was your spot rate on deposits at the end of December? What do you mean by spot rate? What's our offering rate? Yeah, what was the rate of interest-bearing deposits at December 31st?
spk03: What we were offering was around 418. Okay.
spk07: Okay. Yeah. Yeah. Yeah. Yeah. So we're talking about a sizable step up in the cost of your interest-bearing deposits from where you ended, what the average rate was. Okay. Yeah. If we kind of flip to the loan side and the borrower side of the equation, what kind of commentary are you hearing from them? Is it more related to rates or is it just more economic outlook that's giving them any kind of hesitation?
spk03: Well, everybody that has a floating rate loan wants to try to fix it at 7.5, which we're not doing. And if they pay off the loan, we get the prepayment fee. So loans in general, commercial lending, has slowed down greatly in the last two months, greatly in the last two months. And I think it's all rate-driven.
spk07: Okay, okay. And then how should we think about the efficiency ratio going forward? It seems like it's got the possibility to break above 40, but does it hit 45?
spk03: I haven't done any modeling of that, Tim. I think we will be I haven't done any modeling, so I can't answer that question on that. Okay, okay.
spk07: And then, sorry if I missed this, but it might have already been asked, but do you have any sense of where your non-interest-bearing deposit percentage of total deposits might exit this year at?
spk03: I think our non-interest-bearing deposits, I think the runoff has happened for us. I mean, we still have some customers who want to go. Everybody wants their... DDAs to become interest. But when you're a business, that's kind of hard to do because you need to have the cash flow. And we are still a bank that follows Reg D on all the interest-bearing stuff. So we still count six transactions. So I think it's going to be relatively the same.
spk07: Okay. Okay. Great. Yeah. All right. Those are my questions. Thank you very much.
spk02: Thank you. Our next question is coming from Ben Gerlinger with Hovda Group. Please go ahead.
spk06: Good morning. I guess it's your time. I apologize if it's belaboring the point on expenses, but kind of the puts and takes here, is it fair to say once you have the hires excluding Gateway into the fold, something around 16 per quarter is a good run rate?
spk03: throughout the rest of the year so 32 64 total on the year or am i thinking about it incorrectly total expenses should be in the you know the 16 16 to range something like that okay
spk06: Okay, yeah, that's fair. I had a pretty close one, so it's just a lot of puts and takes, so forgive me on that one. And then kind of just more diligence perspective, just out of curiosity, do you have any other crypto-related clients either lending or deposits?
spk03: Well, we only have the two. The one is active, the other one is in CDs, so we don't worry about that. Okay. We have their Series B funds, okay? So we don't worry about that so much.
spk06: Gotcha. And then my last question is kind of more of a philosophical or 10,000-foot view. You just said that lending demand has come down and overall customer deposit rates have continued to go up. Is there any source of new deposits kind of initiatives that could be used rather than going to market at a high CD rate? I know you're not going to have as much loan demand to match it against. I'm just curious if there's different avenues of funding outside of CD or broker deposits.
spk03: Well, we hired Gary. One of the things he's going to do is take over the New York region, and we have a lot of interesting thoughts on different things that we could try. So we won't really see much of that probably until the third or fourth quarter of this year. But we're going to implement a lot of things in New York that are maybe slightly different than what we do here in California. I think here in California, we are completely a relationship bank. And once you contact all your relationships, you only grow as your relationships grow. So we could bring in additional relationship officers to help grow us faster here in California and so forth also. But that would be adding to the expense side, or we would have to reallocate headcount to do such. Okay?
spk06: Gotcha. So kind of sit tight. If there's results, it's more so latter six months of the year, if there's anything this year. But if there is, expenses probably ramp.
spk03: Yeah. We have things in our strategic plan that we're looking at, but we're not ready to announce any of those things at this time. So there are some things that we're planning to do that could really help on the deposit side. And one of them I can tell you is we don't really do CNI very well, and we are putting in a CNI platform that will hopefully be able to attract, you know, depositors and the CNI customer to the bank. Okay?
spk06: Sure. Yeah, no, I really appreciate the call. I'll put it back. Thank you.
spk02: Thank you. Once again, if you have any questions or comments, please press star one on your phone at this time. Our next question is coming from Andrew Terrell with Stevens. Please go ahead.
spk04: Hey, good morning. Good morning. David, maybe just on that last point first, getting into maybe a little more CNI type lending that could bring deposit relationships. With it as well, can you just talk about maybe, I mean, obviously, maybe a bit different type of lending than current composition of the balance sheet. Can you just talk about kind of risk parameters in place as you make that kind of pivot or step more heavily into that market?
spk03: Well, let me step back for a second, Andrew. We already do CNI, and we already have the risk parameters set. Okay, they haven't changed. The issue is it takes us two weeks to do a loan. It needs to be done within a day. On a CNI loan, you have to be able to have this loan done within a day. And it takes us two weeks. So that's what we're really doing. And just so you know, on the rest of our book, we have either decreased our loan-to-value on almost every product twice, so by five basis points each time, And we've increased our DSCR twice by five also on every product type. So we did that over the year too. But we're not even seeing loans that fall out of those boxes even right at the moment.
spk04: And what are aggregate, across the CRE portfolio, aggregate loan-to-values and debt service coverage rates at?
spk03: I would say aggregate would be, the policy probably the aggregate is 125. Actuals will probably be north of 130. And loan-to-value, around 60 now and I would say actual would be probably in the 50s okay now mortgage is slightly different mortgage is still we haven't we're still you know max max is 70% loan to value but most of our average loan to value on mortgage is around 60% okay
spk04: Okay. And then if I could shift over to the fee income side, can you just maybe provide some expectations for gain on sale and then overall fee income as we move into 2023?
spk03: Well, we are seeing the New York investors come down from their 8.5. They're in the 7.5 range now. We're still not producing loans at 7.5 in mortgage. We're around the 7 rate. So if they could get that, if we can get it down a little bit further, we could be selling some. We do have two $30 million pools out to a local, not a local bank, but to a bank, another Chinese-American bank that's on the East Coast that they would want to possibly purchase. So We're looking at that also. One of our major goals is to get the gain on sale of loans back up to about a $2 million per quarter number. Okay?
spk04: Okay. And the last one for me is just kind of a point of clarification on the margin and the interest-bearing deposit costs. I think you mentioned spot interest-bearing costs at the end of the year, low 4%. I just wanted to make sure I'm hearing you right that the full quarter average for interest-bearing cost was 1.93%, just what that cost was at the end of December.
spk03: Right. That's what that is. So the cost I'm talking about is our offering rate, what we offer to our customers.
spk04: Okay. So the incremental funds as opposed to maybe what was already on the balance sheet.
spk03: Yes.
spk04: Okay. Understood. Thanks for taking the question.
spk03: Okay.
spk02: Thank you. Our next question is coming from Kelly Motta with KBW. Please go ahead.
spk01: Hey, thanks for letting me step back in the queue. I just know we spent a lot of time on the deposit side and your loan growth is really strong this quarter. I know you have to balance what's going on in your markets and the economy as well as pressure on funding, but just wondering on kind of what your broader outlook is for for loans as we look throughout 2023? Is it mostly going to be CRE and resi-driven? I know you spoke about CNI as something potentially to ramp up over time, but just generally wondering what your thoughts are for this upcoming year.
spk03: I see what we're hoping is mortgage will take a back seat because we've already put our mortgage portfolios now about 40%, 43% of our total portfolio, which really, if you think about it, is the safest loan you can do, especially at a loan to value of 60%. So we don't really want to grow that. With the rest, we do want to grow CRE. And C&I is not going to be a huge growth number this year and so forth. We'll see how well it does and then, you know, take time to roll it out probably by, you know, really roll it out to larger loans and so forth at the end of the year maybe. But it's really meant for the smaller loans of, you know, $500,000 or type of C&I loan that we just can't really do because it takes too long. So most of our growth will be in the commercial real estate side. We're looking at rates most, well, not all. We have rates anywhere from like six and three, not three, seven-eighths up to 10% right now on those products. I see maybe in the summertime you may see a little bit more construction out there because they can build. We've had a month of rain, so nobody's drawing down on their construction loans. But we're not going out and particularly stressing any one category. Okay.
spk01: Thanks, David.
spk03: Just to really answer your question, I do see production to be below, significantly below 10%. I would say mid-single digits this year. Okay. On long road.
spk02: Thank you. Thank you. As we have No further questions in queue at this time. I will hand it back to Mr. Morris for any closing comments you have.
spk03: Once again, thank you all for joining us today. We look forward to speaking to many of you in the coming days and weeks. Happy New Year.
spk02: Thank you, and this does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.
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