RBB Bancorp

Good day and welcome to the RBB Bancorp Q3 2024 earnings call. At this time, all participants are on a listen-only mode. After management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to Rebecca Rudow. The floor is yours.

Thank you, Kelly. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the third quarter of 2024. With me today, are Chief Executive Officer David Morris, President Johnny Lee, Chief Financial Officer Lynn Hopkins, Chief Credit Officer Jeffrey Yeh, Chief Operations 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 up the call to your questions. I would ask that everyone please refer to the disclaimer regarding forward-looking statements in the investor presentation and the company's SEC filing. Now I'd like to turn the call over to RBB's Chief Executive Officer, David Morris. David?

Thank you, Rebecca. Good day, everyone, and thank you for joining us today. We reported third quarter net income of $7 million, or 39 cents per share, with results including a pretax $2.8 million recovery on a fully charged-off loan and a $3.3 million credit provision. Net interest margin increased by one basis point, which was less than we expected, but we remain optimistic that it will have the opportunity to expand over the next few quarters with the expected decline in short-term market interest rates. we began to see some of the deposit-funded loan growth we referenced last quarter. Loans increased by $44 million in the third quarter, supported by $175 million of loan production at a weighted average rate of 7.26 percent. Johnny will talk more about our expectations for loan growth over the next few quarters. Deposits increased by $69 million from the last quarter, with non-interest-bearing deposits remaining stable. We continue to focus on attracting and retaining core deposits to fund our loan growth. We did increase wholesale deposits in the third quarter as they were less expensive than retail deposits, but at 4.8% of total deposits, We are significantly less reliant on them than a year ago when they were at 13.9% of total deposits. Non-performing loans increased in the third quarter, and Johnny will share more information about that. But we continue to work through these loans and believe we will be able to resolve the majority of them by mid-next year. We were pleased to announce the resolution and termination of our consent order in August. Our directors and staff worked very hard to address our regulatory concerns and to strengthen our compliance programs. With this hard work behind us, we believe we have the opportunity to focus on growth and other value-creating opportunities for the bank. With that, I hand it over to Johnny.

Thank you, David. As David mentioned, loans grew at a 5.8% annualized rate in the third quarter. Supporting this growth was a very robust $175 million of loan production, which comes after strong second quarter loan production of $117 million. Net loan growth has been tempered by payoffs and paydowns due primarily to borrowers' lack of further needs for their loans or their desire to wait until rates come down further before refinancing. Payoffs also included loans with higher potential credit risk that RBB wanted to exit and loans that were refinanced by other banks that offer aggressive rates and credit terms that we were not willing to match. Absent a change in this dynamic, we expect our loan balances to continue to grow at a moderate pace, which will gradually accelerate as we continue to hire more seasoned commercial lenders. We intend to continue growing loans in a pruned manner by focusing on credit quality and relationships that will generate reasonable and sustainable returns for RVB. Starting on slide nine of the investor presentation, we provide some additional details on credit. Non-performing loans total $60.7 million or 1.52% of total assets at the end of the third quarter. The $6.1 million increase on the second quarter was mainly due to two loans, totaling $13.3 million that migrated to non-accrual status, offset by $6.1 million in full payoffs and $1.2 million in partial charge-offs. 99% of our long-performing loans are in our operating market, so we feel comfortable that we have good handle on them and can work effectively to resolve them. However, it will take a little time. Slide 10 has details about our nine MPLs that are greater than $1 million. The two new non-performing loans are a $10 million C&D loan and a $3.3 million CRE loan. The C&D loan is on a completed mixed-use commercial property that has a pending certificate of occupancy and remains well secured. The CRE loan is well-collaborated based on a recent appraisal However, there's an environmental issue, and the borrower has stopped making payments as an action plan for remediation efforts is put in place. With respect to the increase in special mention and substandard loans, we are closely monitoring our borrowers' performance, including the status of unpaid property taxes, to ensure we are capturing and measuring the risk in our loan portfolio. This includes reporting, special asset meetings, external credit review, and active engagement with our borrowers. Our special mention loans increased $58 million in total, $77.5 million at the end of the third quarter. The increase was primarily due to a $43.6 million C&D loan for a completed hotel construction project and five CRE loans that totaled $25.2 million. All of these loans are current, but they have unpaid property taxes which trigger the downgrades. We are working with borrowers to resolve their delinquent property taxes. In addition, an 11.7 million C&D loan migrated to substandard. It is on a completed apartment project that is in process of stabilization and transition to bridge financing. However, the process has taken longer than anticipated, and there are also delinquent property taxes. Nonetheless, this loan remains current on its payments. Substandard loans total $79.8 million at the end of third quarter. The $16.8 million increase from the second quarter was primarily due to downgrades of three loans, totaling $25 million. An $11.7 million C&D loan with payments current, and as previously described, the $10 million C&D loan and $3.3 million CLE loan, which migrated to non-accrual status. This increase was offset by loan payoffs of $6.7 million, charge-offs of $1.2 million, and upgrades and paydowns, totaling $884,000. With that, I'll hand it over to Lynn who can go into some more financial details about the course.

Thanks, Johnny. Please feel free to refer to the investor presentation we have provided as I continue to share comments on the company's third quarter of 2024 financial performance. Slide three of our investor presentation has a summary of our third quarter results. As David mentioned, net income was $7 million. or 39 cents per diluted share, which matches last quarter's EPS. The one basis point increase in net interest margin to 268 was less than we had expected, but the loan production combined with stabilizing funding costs should support continued expansion over the next few quarters. Interest income increased 1.5 million, with growth in loan interest income making up for a decline in interest earned on securities. Non-interest income increased by $2.3 million to $5.7 million due mostly to a $2.8 million recovery on a fully charged off loan from an acquired bank. Non-interest expenses increased by $297,000 to $17.4 million due to higher salaries and other expenses which were partially offset by lower insurance, regulatory, and legal expenses. Slide 5 and 6 have additional details about our loan portfolio and yields. Commercial real estate loans as a percentage of total loans expanded modestly to 41%, while C&D loans decreased to 6%. Slide 7 has details about our $1.5 billion residential mortgage portfolio, which consists of well-secured non-QM mortgages, primarily in New York and California, with average LTV of 56%. Following up on Johnny's comments about credit, slide 12 walks through our allowance for credit losses, which increased 2.1 million in the third quarter. The increase was due to a $3.3 million provision for credit losses, including higher specific reserves of 2.5 million, offset by net charge-offs of 1.2 million. Specific reserves increased based on the decrease in the fair value collateral for two properties related to one relationship. The charge-offs were primarily related to a CND loan and a CRE loan, which were written down to their estimated fair value and included in our largest non-performing loan table on page 10 of the investor deck. The CRE loan had a carrying balance of $1.2 million at the end of the third quarter and has since been paid off with no further loss in early October. The ratio of our Allowance for Credit Losses, or ACL, the total loans increased to 1.41%, inclusive of the specific reserves, while the coverage ratio of our ACL to non-performing assets decreased to 72% and 76%. This decrease was due in part to an increase in individually evaluated loans, which did not require an additional allowance for loan losses, offset in part by higher specific reserves. Slide 13 has details about our deposit franchise. Total deposits increased from the second quarter to $3.1 billion, with growth in all deposit types, while non-interest-bearing deposits remain stable. Our average all-in cost of deposits increased by four basis points from the second quarter to 3.63% in the third quarter, including an estimated quarter-end spot rate of 3.53%. Tangible book value per share increased to $24.64 due to earnings, accretive share repurchases, and a recovery of AOCI offset by dividends of about $3 million. We repurchased about 508,000 shares at an average price per share of $21.53 in the third quarter, which completed the program authorized in February of this year. Our capital levels remain strong with all capital ratios above regulatory, well-capitalized levels. With that, we are happy to take your questions. Operator, if you could please open up the call.

Certainly. 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 a speakerphone to provide optimum sound quality. Please hold a moment while we pose for questions. Your first question is coming from Brendan Nozol with Hufti Group. Please pose your question. Your line is live.

Hey, good morning, folks. Hope you're doing well.

Thanks, Brendan.

Thanks, Brendan.

I just want to start off on the margin here a little bit. We lost you. Did we lose the whole line? We didn't hear that. Can you say that over again, please?

Yeah, am I coming through now? Yes. Okay. Sorry about that. Just want to dig into the margin a little bit more, given your comments for, you know, some expansion over the next few quarters. Just kind of curious, you know, what sort of magnitude are you thinking as we kind of move into 2025 on those dynamics?

Sure. I can make a couple additional comments about our NIM. So, we are still positioned as a liability sensitive bank. I think that our spot rate at the end of the quarter being at three deposit rates, being at 353 is an indication that our cost of deposits are going to trend downward. I think the key drivers for any NIM expansion relates to the repricing of our CD portfolio. The majority of it reprices over the next 12 months. Over the next quarter, $800 million has the opportunity to reprice, and it has an average rate of just under 5%. I think on the earning asset side, we've indicated that our loan production is coming in higher than our overall average loan rates. Plus, we have a large portion of our loan portfolio that's fixed or variable or hybrids that are sitting on their floors or not eligible to reprice yet. And that's 60% or about two-thirds of the portfolio. So we're in a declining rate environment. I think as far as expansion, I don't know if I can comment exactly the magnitude. But I think the deposit spot cost is probably a good indication of the minimum amount. And then I think we would be cautiously optimistic there would be room for more.

That's a helpful color. Thank you. Maybe pivoting to gain on sale of loans. Just kind of curious if you've seen any signs of life in the secondary market for that paper that would allow originations and production to increase and flow through fee income.

Sure, so I'll start, and Johnny can add some additional color. So I think the SBA premiums have been relatively consistent in the third quarter compared to the second quarter. Our volume was a little bit lower, and he can comment on the premiums. And then on our mortgage banking product, those have been, I think, relatively thin margins, and the competition's been there as well. Johnny, if you want to add color on that.

Yeah, well, on the SPS side, again, the gross premium has been averaging about 8% to 9% on average. So, obviously, that's a segment where we continuously want to drive more businesses, and our pipeline is actually still looking relatively healthy at this stage.

I think on the mortgage side, they've been 101, maybe 102.

Okay, fantastic. Thank you for taking the questions.

Your next question is coming from Matt Clark. Excuse me, with Piper Sandler. Please pose your question. Your line is live.

Hey, Matt. Hey, good morning, everyone. How you doing? Yeah, a few from me. Maybe just rounding out the margin conversation. Do you have the average margin in the month of September, Lynn?

Thought you might ask that question. So we would estimate our margin was moving up during the quarter, ending the last month. I would say that because we placed some loans on non-accrual and that occurred in September, kind of normalizing for that, we were probably closer to a 275.

Okay, got it. And then you mentioned you have $800 million in CDs coming off for just under 5%. What are your new offer rates, or what do you expect that to renew into?

So I think with the Fed having moved rates down, we look at the 12-month CD, both in the wholesale market and the retail market, I would say 2%. The offer rates have been between 50 and 70 basis points lower than the average that we see coming off.

Okay. And then what's your expectation for your deposit data through this easing cycle?

So far, we've had the opportunity to move down the full 50 basis points that the that the short-term fed funds rate has come down, but it takes some time to come through the full deposit, the cost of our funds. So right now, I think it's pretty high beta relative to new deposit products.

Okay, okay.

And then the securities yields came down, I think, 43 bps to 413, and I think the balances are down 19 or 20 million. I guess, what went on there?

Yeah, so during the quarter, we had some commercial paper that we allowed for it to mature. We invested some of it in longer-duration securities. And then a portion over the loan portfolio and then a little piece left in cash. So mostly commercial paper that was rolling over and with rates coming down, those returns also came down. So we were pivoting to other opportunities.

Okay. And then lastly, on the buyback, you just completed it. Any expectation to re-up the buyback?

I think we're looking at it after taking down about $20 million this year so far. So we're seriously looking at it.

Fair enough. Thank you.

Your next question is coming from Kelly Motz with KBW. Please pose your question. Your line is live.

Hey, Kelly. How are you?

Good morning. I am good.

Thanks for the question. I guess maybe starting with expenses, just a couple of items there. I noticed your insurance and reg assessments was down quite a bit. Wondering if that is a good, I think it was about $650,000, if that's a good run rate or any drivers of that. I'm not sure if that has to do with the resolution of the regulatory order you had in your quarter.

Kelly, thanks for the question. I think for that particular line item, we've reached the place where that might be a good indication of our near-term run rate. Got it. Helpful.

And then the salaries and benefits picked up. I know you had some greater production. Wondering if you could provide any color as to what drove that, if you know, you've been adding new producers and any thoughts on how that could trend here in the next couple of quarters as you balance profitability and supporting the growth you see?

Sure. So I think the higher salary and benefits is reflective of the higher loan production. It was mostly associated with incentives as we come down to the last part of the year. You know, I think Without commenting necessarily on that single line item, I think overall expenses have been trending between $17 million and $17.5 million. So I expect kind of going forward, given ongoing investment in ourselves, including higher production, maybe we would trend at the higher end of the range. But I expect our overhead range to stay there. Got it.

That's really helpful. All right. And I was hoping, I appreciate the color on the call about the credit migration you've had. The release says you're looking, you expect resolution of some of this migration to occur kind of by next year. Can you expand on what you're doing there? MPAs are a little bit higher. They're about 2% of scenario, just kind of what you're working on there, expectations for charge-offs, and what does kind of a more normalized range of credit look like for you?

Hi, Kelly. This is Johnny. So right now, we're working on the nine MPLs that exceed one million, and we are expecting roughly 70% of it to hopefully come off within next year. We have pretty good visibility on the pathway and how those will be coming down through their trustee sales or as the investors are prepared to take out or refinance these credits.

Okay, go on. Kelly, I would add to Donnie's comment. You had said, you know, any expectations of additional charge-offs. I think this visibility on these ones that he was commenting on, currently we're not seeing, you know, charge-offs there, but it will take some time.

Got it. Got it. That's helpful. And then... It was nice to see some loan production pick up. Your commentary said a moderate amount of growth ahead and accelerating kind of thereafter. Where are you still seeing good opportunities, and how are you guys thinking about, you know, what's in the pipeline and kind of the outlook for growth as you manage that versus maybe it sounds like still working off some problems weaker borrowers out of the bank?

Well, obviously the weaker borrowers with Kelly, I'm sorry, just Johnny. Yeah, obviously the weaker borrowers, you know, we certainly, any opportunity we have, we want to kind of match them out. But as far as the new production is concerned, our pipeline has always been very healthy since I was at the beginning of this year. Obviously, we're kind of, you know, picking our battles and where we should be, you know, fighting because of the certain areas of market, segments of the market is still very competitive. So we're sticking to our credit quality, you know, first, and making sure all this new process of looking at meets our credit standards, underwriting standards, also the rate, the pricing. Obviously, if you look at Q3, our growth has been predominantly from the CRE MFR space on the commercial side. Obviously, we have some non-QN products that we were able to successfully fund during Q3. I do see a lot of the SBA side picking up. We do have a relatively healthy pipeline there. CNI trade finance, typically, we see good traction there, but those typically take a little bit more time. But there's a healthy pipeline behind that as well.

Probably one just additional comment, Kelly. For the fourth quarter, our annualized growth rate was about 6% overall, supported by the $175 million of new production. So I think our comment about modest growth and kind of opportunities that we're seeing in our marketplace, I think it's follows that trend is, I think, our general view.

Got it. Thanks so much for the questions. I'll step back.

Yeah, thanks, Kelly.

Your next question is coming from Andrew Terrell with Stevens. Please pose your question. Your line is live. Hey, good morning. Hi there.

Hey, good. Hey, I just wanted to follow up on some of the margin discussion briefly, and specifically, Lynn, going back to your comment around kind of the actions you've taken post the Fed, I think you mentioned, you know, seeing kind of 100% beta or 50 basis points off, maybe some of the interest bearing deposits. Can you just maybe expand upon that a little bit further? I'm just trying to compare that versus the 353 spot rate disclosure on the total deposits. It seems like if, you know, most of the interest bearing went down, I guess, outside of CDE's went down by 50 basis points immediately following the Fed. It feels like that spot rate number should be lower. So I'm just trying to compare some of that commentary. So if you could elaborate further, I think it'd be helpful.

Sure. I mean, so the Fed moved in September, and we took our measurement on September 30th. So remember, 60% of our funding base is CDs. So we do have to wait for the CDs to mature before we can reprice them. So our current offering rates plus the opportunities as they come off are now 50 to 70 basis points lower than the rate that's there at September 30th. So while we already saw 10 basis points in the spot rate at the end of the quarter, I think there's opportunity for larger change in the fourth quarter. Does that help? Yeah, we wouldn't have seen it reflected as of September 30th. And then the non-maturity deposits, it's about 20% of our funding base. Those came down modestly, but probably not at 100% beta. I think the CDs is our biggest opportunity.

Yeah. Okay. So I should think about maybe the SPA rate as inclusive of the actions you took on like the non-maturity deposit side. And then, you know, you'll get a more material impact from the time deposit repricing and the actions you took there in the fourth quarter.

Yes. And as rates continue to come down, or if we expect them to, you know, we have a CD ladder that matures over the next 12 months. So while I called out the fourth quarter, there's an equal amount maturing kind of in the first and second quarters next year. And I would just say in the first quarter next year, the average rate coming off is still in the high fours. So that has a big opportunity to move as well.

Yep, yep, for sure. Okay. And then can you just remind us post the – I know there was some action taken with the commercial paper in the securities portfolio this quarter – Can you remind us, you know, period and just what was the mix of the securities book that was floating rate in nature?

For the securities book, the amount that's floating rate, I will have to come back to you there. I only had my loan portfolio teed up. So the commercial paper that came off was about $40 million. Hold on one second.

Yeah, no worries, no worries. If I could just ask one more, you know, just some of the commentary around the margin and the kind of positive progression from here. I'm curious if that contemplates any rate cuts. during the fourth quarter. And I get that the balance sheet is liability sensitive, but it does feel like, you know, the timing of rate cuts or how quickly rate cuts occur will matter just given the CD heavy nature of the deposit base. And I'm just curious, you know, if we were to get two incremental 25 basis point rate cuts during the fourth quarter, just from a timing standpoint, could the margin, you know, be stable, even leg down a little bit? Obviously understanding that give you kind of more of a benefit into 2025.

Sure. So let me make two comments there. One is you're getting at the magnitude by how much our net interest margin should have the opportunity to expand because we're liability sensitive. And I think that we will be able to take advantage of it because we have a good CD ladder. I think my second comment is we have noticed that the wholesale market understands the interest rate environment and where rates are headed. And we've been able to, I think, opportunistically use the wholesale funds to lower our overall cost of funds. And I think that's probably an opportunity that's there. Again, doing it in a modest amount, our reliance on wholesale funds is significantly lower than last year. So I think those are the two places. So despite when the Fed is moving rates, I think everyone can see where they're moving to. We're trying to take advantage of that and lower it as much as possible.

Yeah, okay. That makes sense, and I appreciate it. Thank you all for taking the questions.

Thank you. Once again, if you do have any questions or comments, please press star 1 on your phone at this time. Please hold a moment while we poll for any additional questions. You have a follow-up question coming from Matt Clark with Piper Sandler. Please pose your question. Your line is live.

Hey, thanks. I think you have some debt coming due in the first quarter, inter-quarter. Can you just update us on the amount and your plans to refinance that?

Sure. Thanks, Matthew. I can start. So we have 150 million of FHLB advances priced around 120. that are coming due in March of next year. I think for plans to reprice, given we're in a declining rate environment, we should be able to take advantage of that. However, at the same time, we did put on a $50 million put-able advance at the end of September. We were able to price that around 340, 345. And it has a final for four years is the structure. There is a one-time call, and again, we would look to something like that to help, I think, refinance the $150 million. Plus, we'll be looking at our own loan growth and opportunities to grow deposits. So, as of now, I think we're feeling pretty comfortable with the maturity of the $150 million advance. Obviously, 120 is a very attractive rate, so we'll work hard to get more cost-effective funding.

Great. Thank you.

That does conclude our Q&A session. At this time, I would now like to turn the floor back over to David Morris for any 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 great day. Thank you again. Bye-bye.

Thank you everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.