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spk04: 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 Way, Investor Relations Officer at RBB Bancorp. Ma'am, the floor is yours.
spk00: Thank you. 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 Coe, Chief Credit Officer Jeffrey Yeh, Chief Administrative Officer Gary Pan, and Chief Risk Officer Vincent Luiz. 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 Legislation 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?
spk09: 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 Koh as our new Chief Financial Officer. And we recently added Bob Franco and Scott Palofkov 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 a quarter which saw multiple bank failures, we also increased our deposits. And for that, we have our 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 sufficient liquidity on hand. We expect we will maintain a higher level of 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. Third, we intend to focus on supporting core existing customer relationships. Prioritizing these relationships will allow us to reduce our leveraged 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?
spk05: Thank you, David. Increasing loan yield 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 58 cents per share. Net interest income for the quarter also declined to $34.1 million, mainly due to increased deposit costs. 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 percent was down 56 basis points from the last quarter, but up from 3.5 percent a year ago. The decrease from the last quarter was mainly due to deposit cost increase, which outpaced loan yield increase. That loan's helpful 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 nine basis point increase from the last quarter, and a 184 basis point increase from the first quarter of 2022. Continued commercial customer activity and rising interest rates drove a $159 million decrease in average non-interest 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 percent, 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 costs 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. Non-performing 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 an 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, the allowance for credit losses coverage ratio increased to 1.29 percent as of March 31, 2023, compared to 1.23 percent in the prior quarter. Our capital levels remain 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.
spk04: Certainly. At this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Kelly Mota from KVW. Your line is live.
spk01: Hi, Kelly. 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 going to 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 de-emphasizing certain areas of lending. Just curious, whatever kind of commentary and color you can fill in around that.
spk09: 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. Got it.
spk01: 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-up of some of these, like, non-core types of lending, is that kind of what we should be expecting on the loan side?
spk09: 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.
spk01: Got it. Okay. And then with the non-interest bearing declines, I know we've been talking about the past couple 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 to 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?
spk09: 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.
spk01: Okay.
spk09: So we did most of it last year. I mean, I did the big majority of it last year.
spk01: And on the expense side, you called out the $2 million of higher professional fees in part with the auditor change. You were at about $19 million of expenses this quarter. Understanding there were some moving parts in Q1 is kind of then a $17 million run rate 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. Yeah.
spk09: we could go, we hope to get it below 17, but let's start conservatively and be at 17 and then, you know, go from there next quarter. Okay?
spk01: Okay. Great. I will step back. Thanks so much for the questions.
spk05: You know, 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 going forward, as we indicated in the prepared remarks, I would expect that it will go down because most of the 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, which Increase $2 million this quarter. I don't think the world will repeat that. So going forward, it will be smaller. I just want to add on that.
spk01: Great. Thank you.
spk11: Thank you. Your next question is coming from Ben Gerlinger from Hovde Group.
spk04: Your line is live.
spk02: Hey, Ben. Hey. Appreciate you guys taking the time. It seems like obviously you guys got in front of a lot of the deposits. pressures and overall deposit growth was pretty sizable this quarter. I was curious if you guys were willing to give me. What was the margin yesterday or the spot rate at the end of the quarter? Just trying to get a sense of kind of where we are today, given that the margin kind of felt pretty precipitously in the first quarter.
spk05: Yeah, you're correct. We had a compression of the margin for this quarter, given our deposit pricing has gone up so much dramatically. And going forward, margin forecast, to be honest, it's very hard to have accurate margin guidances for now, given the volatility. However, in response to your spot rate question, we do have a CD spot rate of about 3.8% as of March 31st. um okay i was looking more so for the margin not a cd but yeah but margin is a very difficult you know i i would expect that it will continue to compress but not to the level that we have experienced in q1 given the deposit side i would expect that increase will slow down as we said in the prepared remark so it will continue to compress but Again, you know, not to the level that we have experienced in the Q1.
spk02: Gotcha. Okay. And yesterday I saw you added two board members, more so thinking about initiatives. Is there anything, are they brought on for expertise, more consultancy, or just kind of thinking the addition of board members, what we should expect in terms of their addition for RBB as a whole?
spk09: Okay. Scott was brought on because Scott was a regional director of the FDIC, and so he will bring on great knowledge of how our regulatory environment and regulatory agencies work, and will be able to assist the board in helping them learn all about those things. Bob was brought on because of his past experiences running a bank. The only other person who has run a bank before that's on the board is myself. And so we believe having Bob on board, his connections locally to deposit gathering, to investors, and to real estate market, I think is invaluable to the bank.
spk04: Thank you. Your next question is coming from Andrew Terrell from Stevens, Inc. Your line is live.
spk10: Andrew Terrell Hey, Andrew. Andrew Terrell Hey, good morning. Maybe just to follow up on one of Ben's questions. Just to clarify, the CD spot rate at 3.8% at 331, Just making sure, does that include the broker time deposits or is that just retail customer? Is that an all-in number, the 3.8?
spk05: Yes, it's all-in, the CD rate, 3.8%. Okay, got it.
spk10: And then how does that compare to rates from a retail perspective that you're offering in the market right now?
spk05: You know, we are offering a little bit higher than that. We used to have a deposit campaigned, but we don't do that anymore now, but we just do it in our pocket rate, which is more selective to the customers. It's a little bit higher than the spot rate that we just discussed.
spk09: Okay. Gary, are you there? Can you add any of the color of what you're doing with all the promotions and so forth?
spk07: Yeah, sure. I think, you know, moving forward, obviously, deposit costs is a priority for REBs. both total number of deposits and then the cost of what we're trying to get. So a lot of the promotions we've been considering, we're doing sort of on a quarterly basis and we're tailoring those to each specific market. So for example, something in New York that may work better for that customer base is something different than what we'll be running in California. And that's a sort of shift in strategy versus what RBB used to do. Generally, I think due to our customer relationships and the kind of the existing customer base as well as the new customers that we have in and around our geographic presence. We're seeing about 25 to 50 basis points better than our other competitors. So although the overall cost of deposits has been rising, I think we're still doing a little bit better than our competitors. And a lot of that has to do with the way we position some of the products and services as well as some of the customer relationships we have with our bankers that are on the ground meeting with those customers.
spk10: Yep. Okay. I appreciate all the added color there. If I could go back to some of the commentary around the loans and deposits. On the loans specifically, how much in loans do you have that you would classify as out-of-market loans? And then further, how much would you consider out-of-market bridge lending?
spk06: So then our classified loan that is... No, no. Out-of-market. Out-of-market? Out-of-market. Out-of-market. And we have a total of about $410 million of out-of-market. That is considered out-of-state or out-of-market lending. And our policy limit is about a little bit higher than that. That, as David mentioned earlier, that is our main focus to de-risk our out-of-market lending. Yeah.
spk09: Andrew, I do want to step back and tell you that we do have mobile home parks out of market. And those are not going to work. That's part of our core business. So that's slightly different. But that's in that $410 million. That is included, yes.
spk06: That's correct.
spk09: Thank you for that. So the number is probably closer to $250 million that we're targeting to get off the books.
spk06: Yes. Actually, a little bit less than that.
spk09: A little bit less than that, yeah.
spk10: Gotcha. Okay. And then could you maybe give some just color on what types of relationships those are? And then just given they are out of market, how are they sourced? Are they primarily syndications?
spk06: Out-of-market are mainly, they range from multifamily, term-long to bridge-long. Those are relatively short-term. Originally, the term is about one to three years.
spk09: Yeah, most of these were originated in 2020. Right.
spk06: And we basically started with this starting from last year.
spk10: Okay. And then just to clarify, so there's around 250, maybe not all of that runs off this year, but that's kind of the portion that you might look to have out of market, that you might look to run off the balance sheet. You think you can still grow loans in the low single-digit range in 2023 despite that $250 million headwind?
spk09: Yes, I think so. We may not have stellar growth. We may have a quarter with declining loan growth. But I think overall, we could do that.
spk06: Can I add a little bit? Actually, the loan demand is actually high. The thing is that we are very cautious in underwriting and also very cautious in our due diligence in this market.
spk10: Okay. And the last one for me, and then I'll step back. Can you just remind us what the exposure is to office commercial real estate?
spk09: It's about $50 million. Okay. About $50 million. So it's not very much.
spk10: Yeah, so just a really small portion. Okay. Well, very good. Thank you for taking the questions.
spk04: Thank you. Your next question is coming from Kelly Mota from KBW. Your line is live.
spk01: Hi. Thanks for letting me ask the follow-up. I have here that one of the things you're looking to do is keep liquidity higher on balance sheet. I saw you built cash. by about $150 million at least on an end of period to about $200 million. Is this a good level of cash you like to run with or any excess in that? Just trying to get a sense of that as we work through the size of the balance sheet.
spk05: Sure, Kelly. As you noted, we have a cash including different banks, we have $231 million, as opposed to last quarter, December year-end, it was only $83 million. So intentionally, we increased. But given the market volatility, I would expect to continue to maintain this level or even higher as it deemed necessary. But I think this quarter, the management's top priority is, given what's happening, it was liquidity management. I believe we did a have a good job in terms of liquidity, including this available cash to be sufficient enough to weather through these liquidity challenges.
spk01: Thank you. Maybe last one for me is your pending deal. Just wondering if that gateway, if that's something you're still looking for. forward to doing or any changes in thoughts around that with the market volatility and it's I know got extended a couple times now.
spk09: We continue to have discussions with all the relevant parties. No decision has been made at this time, Kelly.
spk01: Thank you.
spk04: Thank you. Once again, everyone, if you have any questions or comments, please press star, then 1 on your phone. Your next question is coming from Ben Gerlinger from Hovde Group. Your line is live.
spk02: Hey, guys, appreciate the follow-up. I was curious, just on the deposit mix shift, obviously time deposits increase for you and every other bank when rates go up. I was just kind of curious, do you have any internal guardrails? I'm looking back over a relatively short couple-year history, and I see something close to 70%. total funding. I was just curious if you have any sort of red lines that you won't exceed.
spk08: Oh, of CDs?
spk02: Yeah, relative to total. I know you guys want to get the loan-to-deposit ratio lower, so it means you've got to reduce the numerator or increase the denominator, but CDs are the only thing that's really kind of working in this market for Any bank, I'm just kind of curious.
spk09: We do have, under our ALCO guidelines, we do have policy limits. Yes. And I can't recall what they are, but we do have them. Okay.
spk02: Gotcha.
spk09: I think it's something like 66% or 65%, but I've got to go back and check. It may be less, maybe 60 now. Okay. Okay.
spk02: Gotcha. And then I just wanted to follow up on the question.
spk05: Let me add a little bit more color on that. You know, we intentionally increased the CED proportion. You know, we did see the non-interest bearing deposit decrease given what happened to reduce the concentration. But I think it really benefits to increase the CED to secure those funding sources No, for certain periods. No, we are not offering two years or three years of CD. It's more nine months or at the most one year so that we can actually secure our funding sources for that regard. So I don't really view this increase on the CD side as a negative. It is more secure. Even though cost was relatively higher than others, I think it was worth for us to increase those CD deposits. Those are the, there is a broker deposit, but there is quite success on the retail deposit from the CD side as well. Okay. Are there any other?
spk11: Yeah, no, I get it. Thanks. Appreciate the call. Sure. Thank you. Your next question is coming from Andrew Terrell from Stevens, Inc.
spk04: Your line is live.
spk09: Hi, Andrew.
spk10: Hey, thanks for the follow-up. I was hoping to get maybe a better sense of the non-interest-bearing deposit flows in the quarter. Can you maybe help us think about the cadence throughout the quarter on a monthly basis, just how the non-interest-bearing balance has progressed? And then so far, quarter to date in April, have you seen – any kind of stabilization in non-interest-bearing deposit balances?
spk05: Yeah, I will attempt to answer that. I don't have that monthly breakdown in front of me, but as I said earlier, those decrease of the non-interest-bearing demand deposit was due to one large relationship strategically starting last year. So that is continued in the Q1. So that's the reason why we have a decrease. And also, you know, given the interest rate market, those non-interest bearing, they migrated to CD or higher-earning assets. So that will continue, but not to the level that we have experienced, given the market expectation for the interest rate for May is a minimum, let's say, 25 days, or even it decreases, I would expect that runoff of the non-interest bearing deposit will slow down going forward. But I think, again, I don't have the monthly breakdown, but it got stabilized since the March 31st or the liquidity crisis. I didn't see much acceleration of those non-interest bearing runoff.
spk10: Yeah. Okay. Do you have how much of the decline in the quarter was related to that one relationship?
spk09: That one relationship was $26 million. Okay. Okay. We already reduced it significantly throughout 2022. Yep. Okay.
spk10: Last for me, just on buyback, I didn't see any this quarter. Just updated thoughts. I mean, with a slower level of balance sheet growth, you guys sit in a really strong capital position right now. Just love to hear your thoughts on whether buyback is of interest.
spk09: The board is still discussing it at this time.
spk11: Okay. Thanks for checking the follow-ups.
spk04: Thank you. Once again, everyone, if you have any questions or comments, please press star, then 1 on your phone. Your next question is coming from Joseph Macondo from Finance Investment Society. Your line is live.
spk03: Hi. First, I want to thank you guys for handling this liquidity crisis very well as a shareholder, and just thank you for being pretty good management over this last quarter. I was wanting to ask more questions about the buybacks that we're just asking about. I understand that you guys have a, uh, create a good liquidity level for the navigator of this crisis, but, uh, uh, there's lots of opportunities to repurchase shares at what may seem like to be an accreted value, uh, going forward. And due to your high liquidity position in the market would, uh, would, uh, potential mergers and acquisitions, uh, activities be, uh, something that you would consider above a buyback or, just overall when you're redeploying your earnings?
spk09: Right now, I think doing any merger and acquisition, in addition to what has already been announced, would be it's too early for us to be comfortable in doing that. We don't know. I personally believe that the banking system is very sound, and we're very sound But we could have what happened in March 10th happen again overnight with a number of these larger banks. So I don't think M&A is wise right at the moment for us. I do prefer, you know, the board is more interested in giving back capital through the dividend process right now. So that's, I think, number one. And I think number two is they are looking at reinstituting the buyback, but that will be probably a month or two or so down the road.
spk03: All right. Thank you for clarifying that.
spk04: Thank you. As a final reminder, everyone, if you have any questions or comments, please press star then 1 on your phone.
spk11: There are no further questions in the queue.
spk09: Once again, I really want to thank our customer base who stuck with us during March where everything was going crazy and appreciate them. Very much. And just so that you know, most of our customer base that has multiple millions of dollars with us are also investors in this bank. So we want to thank them and so forth. I also want to thank you for who have joined us today. We look forward to speaking to many of you in the coming days and weeks. Have a great day. Thank you.
spk04: Thank you everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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