RBB Bancorp

Good day, everyone, and welcome to the RBB Bancorp's fourth quarter 2023 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the floor over to your host, Brian Stevens. Sir, the floor is yours.

Thank you, Matt. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the fourth quarter of 2023. With me today are Chief Executive Officer David Morris, President Johnny Lee, Interim Chief Financial Officer Lynn Hopkins, Chief Credit Officer Jeffrey Yeh, Chief Administrative Officer Gary Phan, and Chief Risk Officer, Vincent Liu. David and Lynn 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 the call up to your questions. I would ask that everyone please refer to the disclaimer regarding forward-looking statements in the investor presentation and the bank's SEC filings. Now I'd like to turn the call over to RBB's Chief Executive Officer, David Morris. David?

Thank you, Brian. Good day, everyone, and thank you for joining us. We undertook several initiatives last year to position RBB for the future. We strengthened our management team by adding respected senior executives including Johnny Lee as president and Lynn Hopkins as interim chief financial officer. We restructured our operations and established a more formal reporting structure to better manage our national franchise business. We increased liquidity and mitigated balance sheet risk by reducing our loan-to-deposit ratio and strategically exiting certain higher risk loan relationships. We also address regulatory concerns by adopting enhanced corporate governance policies and reconstituting our board of directors. With respect to the consent order we disclosed in October, we believe we have addressed all the deficiencies identified, but there can be no guarantee that additional measures will not be required. We are also pleased to share that we were notified by the SEC that they have concluded its investigation and that it did not intend to recommend any enforcement action against the bank. Some of the actions we took last year, namely corporate governance and AML-related expenses, increased liquidity Entainment of our target 95% loan to deposit ratio and a reduction in higher risk, higher yielding loans did impact results. But with the majority of the work behind us, we are better positioned to create long-term shareholder value and expect profitability to improve over the coming quarters as we resume deposit-funded loan growth and take steps to optimize our cost of financing. In the fourth quarter, we were able to recognize the $5 million CDFI ERP award that I mentioned last quarter as we distributed the funds to related recipients. Before I hand it over to Lynn, who we are thrilled to have as part of our team, I did want to mention that we were active buyers of our shares in the fourth quarter and invested approximately $6.7 million to repurchase almost 400,000 shares. We have exhausted our current buyback authorization but recognize the benefits of having a buyback in place and expect to discuss a reauthorization at the next board meeting. Lynn? Welcome and take it away.

Thank you, David. I've been here for about a month and a half, so I'm still getting up to speed, but needless to say, I'm very happy to be part of the RBB team. I look forward to reconnecting with everyone in the coming weeks. Please feel free to refer to the investor presentation we have provided as I share my comments on the company's fourth quarter of 2023 financial performance. Slide 3 of our investor presentation has a summary of fourth quarter results. We achieved $12.1 million in net income, or $0.64 per diluted share. Net income for the fourth quarter benefited from the recognition of a pre-tax $5 million CDFI ERP award. Adjusting for this revenue, fourth quarter net income would have been $8.6 million, or $0.45 per diluted share. Tangible book value per share increased 4% during the fourth quarter to end the year at 2348 due to net earnings, lower unrealized losses on our securities portfolio, and share repurchases. Yield on our interest earning assets was relatively stable from last quarter, but interest income declined slightly due to a $102 million reduction in average loans held for investment. This reduction, combined with a rate-related increase in interest expenses, resulted in a $1.9 million decrease in net interest income and further pressure on net interest margin, which declined to 2.73% in the fourth quarter. Credit quality improved in the fourth quarter, with non-performing loans decreasing by 21% to $31.6 million. This decrease was primarily due to the payoff of a $9.9 million increase non-performing construction loan with no additional losses. Our allowance for loan losses remained stable at 1.38% of total loans, compared to 1.36% at the end of the third quarter. Non-interest expenses totaled $16.4 million and declined by 2.9% compared to the prior quarter, primarily due to lower salaries and benefits expensed. We anticipate total non-interest expenses to increase in the first quarter due to a temporary seasonal increase related mostly to taxes and to reflect compensation adjustments as we start the new year. As a result, non-interest expenses are expected to be around $17.5 million. Slide four includes summary balance sheet information, and you can see the decline in loans held for investment. As David mentioned, We believe there are near-term steps we can take to reduce our funding costs, which should benefit margins and net interest income. Slide 5 provides additional detail about our loan portfolio, which totaled $3 billion at the end of the year and had a fourth quarter annualized yield of 5.96%. Commercial real estate loans, which include construction and land development loans, comprise 45% of our total loans, And slide six and seven have some details about our exposure. We continue to have limited CRE office loan exposure, which stood at $43 million and represented 1.4% of total loans at the end of the fourth quarter. Slide eight has details about our $1.5 billion residential mortgage portfolio, which consists of well-secured non-QM mortgages in New York and California. with an average LTV of 61%. Slide 10 has some details about our deposit franchise. Total deposits were $3.2 billion at the end of the fourth quarter, a $20.7 million increase compared to the third quarter. This increase was due to a $53.5 million increase in interest-bearing deposits and a $32.8 million decrease in non-interest-bearing demand deposits. Included in the increase in interest-bearing deposits was a $20.4 million reduction in wholesale deposits, which were replaced by non-maturity deposits. Our average cost of interest-bearing deposits for the fourth quarter was 4.08%, an increase of 25 basis points from the third quarter, versus the 36 basis point increase from the second quarter to the third quarter. We continue to expect the pace of increases in our deposit costs to slow in future quarters. Our capital levels remain strong with all capital ratios above the regulatory well-capitalized thresholds. With that, we are happy to take your questions. Operator, please open up the call.

Certainly. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Your first question is coming from Nathan Harris from Piper Sandler. Your line is live.

Yes. Hi, everyone. Good afternoon. Hi, Nathan. A question just on the expense run rate into this year. I appreciate the guidance for 17 and a half as a starting point for the first quarter, but just curious on how you think about the cadence of expenses in 2Q and 3Q as well.

Sure. Nice to meet you over the phone here. So when we think about non-interest expenses, I think There's a couple ways, but one is our operating expense ratio relative to our earning assets. I think we've observed that it was closer to about 185 at the beginning of 2023, and it migrated down to about 163 in the fourth quarter of 2023. I think as we look forward with some of the initiatives the bank undertook in 2023 and the expense related to those, we would anticipate that non-interest expenses might look closer to 170 of average earning assets, you know, plus or minus some basis points.

Okay, got it. And then does that higher expense run rate for the first quarter, does that contemplate some hires that you guys have made recently? And if so, how do you guys kind of think about those hires impacting the growth outlook in both loans and deposits going forward?

I think without getting into all of the details of hires and, you know, the ins and outs of the salary expense, I think we believe we have the appropriate staff to be able to achieve goals in 2024 and grow appropriately. So I think it's all included in the number. Thanks.

Okay. Thank you. And if I could just follow up, are there any kind of guideposts that you guys can provide in terms of how to think about both loan and deposit growth during 2024?

So I think that at the end of 2023, we have our loan to deposit ratio down just below 95%. I think, again, with the actions the bank took during 2023 and given the current economic outlook, we expect to participate in some loan growth. Might be a little bit premature to provide, I think, specific guidance there. We do expect to fund our loan growth with deposit growth as we move forward here. It provides a range, but it might be a little bit too wide at this point.

Understood. I appreciate that, Lynn. And if I could just follow up with David on the pace of share repurchases going forward. I understand that you guys will likely be reengaging in the authorization that's out there coming out of the fourth quarter, but just any thoughts on just the pace of buybacks over the next quarter or two?

I would think the pace of buybacks should be similar to that that we have on the fourth quarter. I think that's pretty much what we want to do.

Okay, great. I will step back. Thank you, everyone.

Thank you. Your next question is coming from Kelly Mota from KBW. Your line is live.

Hi, Kelly. Are you there?

Once again, Kelly Mota from KBW. Your line is live.

I apologize. I was muted in talking to myself. Good morning. Hi, David and Lynn. It's wonderful to hear from you again. Hi, Kelly. Great. Thanks, Kelly. I was hoping to touch more on loans and the pipeline there. Just wondering if you could spend a minute or so just discussing. I know Johnny's been working to build the pipelines and develop C&I relationships. Just wondering kind of where that stands and it takes time for those pipelines to come on. whether we could see another maybe quarter or two of loan contraction as, you know, things start to stabilize with one another. Hi.

Hey, Kelly. This is Johnny. How are you? Well, you know, last year, as you know, we were trying to achieve that loan-to-deposit ratio, 95%. So we were kind of navigating through that and there were demands, obviously, but then we're trying to balance it so that we don't overshoot it. So we had actually already positioned ourselves to build that momentum for growth for this year. And I would simply share that the pipeline right now looks relatively promising, but I think the challenge right now is the mix. We have demands on all fronts, but obviously we want to optimize the returns. But I think credit quality is still first and foremost as far as, you know, selecting the, you know, appropriate types of deals to take on. But credit quality and then definitely we want to generate appropriate returns, and that's how we're looking at this pipeline right now. But overall, I think, you know, I'm relatively pleased But then, you know, generally usually it's a slow month, but then I think the momentum is definitely there.

Got it. That's helpful. And as we look ahead, I know you guys have done a lot of work to bring the loan-to-deposit ratio down to a more normalized level. Just wondering how any kind of prospective growth, how you anticipate funding Is it still retail CDs? A lot of my banks are leaning on just wondering what the outlook for funding looks like at this time. And if and when we get rate cuts, how quickly do you think betas will react on the downside?

Kelly, let me start. I will mention off of Johnny's comments, you know, I think the pipeline's building and I think there is an expectation that we will convert that into net loan growth. And as we look at the ratio of loan to deposits, we brought the ratio down. There's probably an opportunity for that to, you know, move between, call it 95% to 100% as we look at other sources for funding. I think we all know that the FEDS program's been out there. I think we've been successful in bringing in some non-maturity relationship deposits and other time deposits. So I think there's an opportunity for growth. It will be funded with deposits with some focus on the commercial side of the business. There's an expectation that We have an opportunity to grow demand deposits, which is obviously very helpful for net interest income and the margin. With respect to your comment or question about betas, I think we can appreciate that the talk about interest rates potentially coming down in the second half of this year, none of us know exactly the timing or The magnitude, I think staying flexible on the funding side of the balance sheet is going to be important. So having some non-maturity deposits can be helpful, potentially staying a little bit shorter to give us that flexibility. And then I don't know that I have a comment necessarily on the betas per se, but we definitely recognize we're not going to navigate through probably a changing interest rate environment.

That's super helpful. Thanks, Lynn. Maybe last one for me and I'll step back. Flipping through the slides, I really like the slides on office and all the color you guys provide. On site six, it looks like there's about $9 million in office with LTDs over 85%. Just wondering if David or or anybody could provide some color on what kind of sits on the bucket and, you know, how concerned or not you are with office in general and kind of that higher LTV portion.

Hi, this is Jeffrey. This is a loan that is in forbearance. We have already have a forbearance agreement with the borrower and that The issue with this power is that they are working with their tenant, and their tenant are government entity. And then we are not concerned about the source of their ability to pay the rent. They just have to work with their tenant. So then we are kind of optimistic that at the end of the forbearance agreement, the issue could be resolved.

Okay, thanks for that, Jeffrey. I appreciate it. I will step back.

Thank you. Your next question is coming from Andrew Terrell from Stevens. Your line is live.

Hey, good morning, everybody. And Lynn, good to speak with you again.

Yes, likewise. Thanks, Andrew.

If I could just follow up on the last question there around the office loan. Does that sit anywhere on the balance sheet from... Can you just talk about where it sits from like a risk rating standpoint? Is it in criticized or classified today? And then is there a specific reserve against that loan today?

In terms of a specific reserve, there is no specific reserve because they should be able to cash flow based on the source of the rent. And besides, based on the our value of the clear rule. And then we have done the impairment analysis and indicated no impairment.

And it is for the classifieds?

No, those are classified, yes.

Okay.

Got it. Very good. Thank you. If I could go back to David, just you mentioned in the prepared remarks kind of taking steps in 2024 to optimize the cost of funding. or maybe the cost of deposits. And then I heard some of the commentary around just the expectation to lean a little more heavily into the CNI-oriented business, which would obviously carry a greater mix of DDAs and some core funding there. Is that really the kind of strategy, or is there anything else that you're looking at that you could kind of elaborate on that you could leverage, you could pull in kind of 2024 to optimize the cost of funding?

Well, there's all... We have multiple options out there, Andrew. And without getting into real specifics, it's not just loans and deposit ratios. It's also other items out there to help us with the cost of funding and so forth. I said loans. I'm sorry. There's other types of vehicles besides just deposits that can help us. Also, we do... promotions like every bank does, and we can guide those promotions into something that is lower yielding than the highest rate CD and something that will give us flexibility to go down the curve quicker. Okay. Also, so it won't be locked in.

Okay. Understood. And maybe just following up on that point specifically, can you refresh us on any time deposit specials you're offering right now and kind of what the term or duration and the rate is on the specials you're offering? And then if you could also just remind us on the repricing dynamics for the first quarters, how much you've got rolling off and at what cost?

Right now we do not have a real special out there. in the market for time deposits, we do have a special out for, I believe it's DDA right at the moment. Okay, personal checking. Okay, and business checking. Now, also, I'll have Lynn answer the rest of the question.

Can you ask your question again?

Yeah. I think David addressed the first part. The other part was just the time deposit repricing dynamics in the first quarter. How much is there scheduled to roll off and at what cost it's rolling off at?

Sure. So we, like I said, we ended the quarter with our cost of deposits for the Fourth quarter, we're at about 4%, 408. And within the numbers at the end of the year, we have about $275 million of wholesale funds that are maturing in the first quarter. Those are pretty fully priced in in the current interest rate environment. So to the extent that we need to roll those. I think they would have limited impact on our net interest margin. There is a portion of our retail deposits that will reprice in the first quarter. And again, I think that we're seeing some inversion in the yield curve related to funding costs. So To the extent that they're very short-term, they might reprice up a bit. To the extent that we look out 12 months, we're probably pretty close to, I think, current carrying rates. So I think it's going to have a bit of a muted impact as we look forward and as our funding base continues to reprice in the current environment. So hopefully that's helpful. The I think the time deposits that are coming off are, I think, between $450 and $500 million, and then we'll work to retain those in the current marketplace.

Okay, perfect. That's very helpful. I appreciate it. And last one, if I could sneak it in. Can you just remind me, the $150 million of FHLB that's termed out at a low 1% cost right now, I think the maturity of that was in 2025, if memory serves correctly. Can you just remind me the specific kind of date of maturity for the FHLB borrowings?

It would be the first quarter of 2025, late first quarter, 2025. There's multiple maturity dates, but it's all late first quarter, 2025.

Perfect. Okay. Well, I appreciate you all taking the questions, and congrats on your good quarter. Thank you. Thank you.

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 Tim Coffey from Janney. Your line is live.

Great. Thank you. Morning, everybody. We're good. Good. Dave, David, I was wondering if you can kind of talk me to you. When it comes to originating loans in the near term, are you opening to originating for sale?

On the mortgage side, yes. And SBA also. Mortgage and SBA, yes.

How do you see that market evolving over the course of this year? Do we need the rate cuts in the back half of the year to really start to engage that customer base?

I think SBA is a... Not on the SBA side, no. Okay, on the mortgage side, I don't know if you need rate cuts per se. You need a change in... maybe a lowering of the long end of the yield curve because that's what prices mortgages. So we need the 10-year treasury to get back down to where it was before it went back up above four. We need to be down to round three for that to happen.

And then just kind of on your reserve statement, And obviously, I understand what comes through the income statement. It's a piece on the economy and the economic outlook. But if it continues to improve and you de-risk the portfolio, do you see a real reason to dramatically increase provisions this next year?

Really, we cannot project that out right now, Tim. We... We don't have a crystal ball, and we do not know what's going to happen with the economy and so forth. However, saying that, our loan portfolio has improved with its quality and so forth. So if it continues to improve, there may be something down there.

All right. That's it for me. Thank you for the time.

OK.

Thank you. We have reached the end of the question and answer session. I'll now turn the call over to David Morris, President and CEO, for closing remarks.

Once again, thank you for joining us today. We look forward to speaking to many of you in the coming days and weeks. Have a nice day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.