Q3 2022 RBB Bancorp Earnings Call
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Yes.
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Please standby your program is about to begin.
If you need assistance during your conference today. Please press Star Zero, Good day, everyone and welcome to the RBC Bank Corp Earnings Conference call for the third quarter 2022 at.
At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing star one on your Touchtone phone you may withdraw yourself from the queue by pressing star two.
Please note. This call is being recorded I will be standing by if you should need any assistance.
And now I would like to turn the conference over to MS. Katherine way. Please go ahead.
Thank you good day, everyone and thank you for joining us to discuss RBC Bank current financial results for the third quarter of 2022 with me today are president and CEO and CFO David Morris.
<unk> and Chief Credit Officer, Jeffrey EVP.
EVP Chief Risk Officer, Vincent Liu EVP, and Chief strategy Officer assignment.
And Chief Accounting Officer, Sean King.
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 1095.
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 <unk> bancorp's operations and business environment, all of which are difficult to predict and many of which are beyond that.
<unk> of the company for a detailed discussion of these risks and uncertainties. Please refer to the documents the company has filed with the SEC.
Any of these uncertainties materialize or any of these assumptions prove incorrect our <unk> 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 Meyers David.
Thank you Catherine Good day, everyone and thank you for joining us today.
<unk> rates continue to drive performance to record levels in the third quarter with net income of $16 7 million and earnings per share of <unk> 87.
Net interest.
And comps increase too.
A record $37 million of loans grew and margins improved.
Third quarter non interest income decreased by $887000 from the previous quarter due primarily to the second quarter gain of 757.
On a corporate real estate assets that we sold as expected.
Non interest expense decreased from last quarter, primarily due to the $1 $2 million decrease in expenses related to the substantially completed board of directors investigation, I hope to be able to announce the conclusion of findings of the investigation during the fourth quarter.
Net interest margin continued to increase during the quarter from 4.08% in the second quarter to $4 three 1% in the third quarter and 338% a year ago.
We're cautiously optimistic that we'll be able to maintain.
And elevated NIM.
Quarters to come as we anticipate that asset yields will continue to increase more quickly than deposit cost.
Annualized ROA and ROE TCE increased in the third quarter to 172% and $16 five 8% respectively.
Return on equity, which excludes the impact of OCI.
OCI also increased to $13 nine 3% from 13, 3% in the second quarter and 13, five 2% last year.
Net loans held for investments increased by about $173 million to $3 2 billion in the third quarter with CRE and residential mortgages showing good growth in C&I construction and other loans all decreasing from the last quarter.
Yield on average, earning assets increased to 5.13%.
Which was 47 basis point increase from the last quarter.
116 basis point increase from the prior year.
Yes.
With respect to funding commercial.
Customer activity drove a $118 million decrease in average non interest bearing deposits over the quarter.
Our average cost of interest bearing deposits for the quarter was.
0.82%, which was up 33 basis points from the prior quarter as I mentioned last quarter.
Increase was expected.
Looks likely to continue for the next few quarters, we continue to be below our competitors on deposit pricing.
But I have been forced to increase rates.
We obtained deposits.
Nonperforming loans decreased to $11 5 million from $13 9 million last quarter loans 30 to 89 days delinquency increased 39 increased to $39 9 million in the third quarter compared to $8 3 million in the second quarter. The increase was due in part.
The two loans one was a construction loan.
$11 3 million.
On a project that is substantially complete.
With delinquent for.
<unk> 52 days.
Due to administrative delays in processing and extension.
One was a commercial real estate loan of $8 8 million that was also delinquent for 52 days.
Similar delays both extensions were planned well in advance, but unfortunately could not be completed on schedule and so led to the increase in the.
Delinquency loans as of October 21.
30 to 89 days delinquent have decreased to $14 5 million.
So while the September 30.
30th numbers look alarming, we do not think it is a sign of deteriorating credit.
Yeah.
We took a provision for credit losses of $1 8 million in the third quarter, primarily attributable to loan growth.
Capital levels remained strong.
All of our capital ratios well above regulatory minimums.
Continue to repurchase shares in the third quarter with.
With 95000 shares repurchased at an average.
Price of 2020.
$20 93.
We have 482000 shares left.
On the buyback and intend to continue to utilize it as appropriate.
That we are happy to take your questions. Operator, Please open up the call.
Thank you at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question, we'll pause for just a moment to allow questions to queue.
Our first question comes from Kelly Motta with <unk>. Your line is open. Please go ahead.
Hi, good afternoon, or good morning, there. Thanks for the question.
I think maybe starting with <unk>.
Early stage delinquencies and the process believes that you cited.
David.
Your expenses are lower to you do you have all the people you need in place.
Rodney operations are you.
With the delays.
Do you have the capacity to support.
The business or are there places that you are adding people.
Just trying to close the loop there.
We have.
We have plenty of staff and our credit department to do their sleep. These delays so sometimes out of our control.
Due to our client base and their travel schedules to Asia.
So that sometimes we have this from time to time, Okay, where things go delinquent.
So that.
Now that we are.
Looking for a controller in the.
<unk>.
The accounting area because.
Shalom will take over the role of Chief Financial Officer at some point in time in the next few months so.
The Chief accounting officer position as a stepping stone for him and I will be relinquishing that that title at that time.
I also said in our press release that we are looking for a precedent that will come in.
That will be the face of the bank to our local community. It will still drive strategy and it will still be the chief Executive Officer.
Okay.
Managing the whole organization in total.
Got it thank you and importantly.
Importantly for us to congratulate you on your title officially David So congratulations on that.
New role.
Thank you guys.
Been doing for a while.
Got it.
<unk> has been really strong it looks like there.
There was a lot of that was single family residential.
I'm wondering if.
If there was any portion that was purchased at all.
The Fannie Mae or non QM, and just kind of any outlook for.
Single family as well as overall kind of loan growth outlook.
Okay.
Single family, let's start with Fannie Mae Fannie Mae is.
Close to zero production. So most of our production to this non QM are pricing now is.
Approaching 7% on that.
Product and probably soon will be over 7%.
So and we're seeing.
I'm trying to say, we've seen that also coming back a little bit.
We were doing in the $40 million a month.
Dropping down to about $35 million.
As far as.
Commercial is concern or bigger proper Vince we have some large loans paying off some large construction loans paying off in the fourth quarter.
So.
Having the same growth we had in the third quarter for the fourth quarter will be very difficult for us.
Got it understood maybe last question for me is.
On the deposits.
The decline in noninterest bearing but increase in increase.
Increases in.
Your interest bearing deposits wondering if there was.
Any migration between line items, and just kind of overall outlook for.
Funding your growth, whether you are going to be tapping.
More wholesale sources any any sort of outlook on that.
I prefer to fund our loans grew our customer base, but time to time because of the liquidity needs. We do use.
Outside brokers.
Broker deposits.
What I see is.
Certainly people, who have who are very extremely wealthy if they're not keeping their money aside to invest into other assets like real estate.
Or.
We have people going into two year treasuries because of where the rates are today and those types of things.
They are.
Slowly transferring some of the deposits over into either money markets or into or into.
Cvs.
Our biggest issue.
We do have one customer that does trading in.
The first trading crypto.
And so forth that customer.
Whereas if they.
They are very <unk>.
Solid as a.
The financials.
Their volume has shrunk tremendously because of the crypto winter and we've gone from $300 million down to approximately $100 million and DDP noninterest bearing DDA.
And so forth. So that's also.
R R. One.
One customer.
Okay.
Got it I will step back and let others ask questions. Thank you so much for the time, David and congratulations again, okay. Thank you Kelly.
Once again I would like to ask a question. Please press star one on your Touchtone phone.
I'll go next to Nick <unk> with Piper Sandler Your line is open. Please go ahead.
Good day, David and I will echo the congratulations as well.
Thank you Nick.
I just wanted to make sure I heard your NIM commentary correctly are you expecting further expansion in the fourth quarter or are you anticipating the pickup in liability costs there'll be some compression here.
Thanks.
Sure.
The.
Fourth quarter will show.
Huge gain and NIM, Okay, I think we will still expand but I think as we get to the end of this and we begin to.
More and more Cds, reprice, and more and more people move out of noninterest bearing youre going to see that the NIM will stabilize and then eventually as rates begin to go down we will.
We will see NIM compression.
Okay could.
Could you update us on your expectations for the gain on sale businesses, you mentioned close to zero production on the Fannie side, but do you expect that to pick up in the coming quarters and then if you could touch on the SBA front, especially in light of the lower premiums in there.
I do not expect Fannie Mae to come back until we see.
Okay.
Pricing back down to the 4% range.
Okay.
We are working on.
Trying to.
For next year to sell our non QM product.
We're trying to.
Convince the.
Sure.
The regulators of Fannie Mae that.
The.
Bulk sales that we do.
No.
Advantageous to the minority depository institutions.
We're working on that angle to try to be able to sell our non QM loans.
Fannie Mae.
Right now I don't see for the fourth quarter I see our gain on sale being aware of this.
<unk>.
And although we do have a.
A few more SBA seven asked to sell.
And all but that business itself has.
We'll go and we'll go into a recession or at the top of our R. R.
Rob.
Interest rates are coming to the top hopefully in the next month or two.
Maybe three and that business has slowed down dramatically.
Okay do you have an updated timeframe for the closing of the gateway deal.
It will be next year I don't have the exact month, but we're still in a deal.
Okay.
And then lastly, how are you thinking about repurchase so it looks like it slowed this period relative to the second quarter yet the average price was relatively similar is this is just a desire to keep more dry powder for loan growth or how are you thinking about that.
Well, we're still going to be out of the market, but our R. R.
We look at where our stock prices trading on a day to day basis basically so.
And what is also the volume that's been traded so we were out there.
The whole.
Whole month of.
September .
All of October .
That's all we were able to do.
Mainly because of.
Of the volume.
Thank you for taking my questions.
Yes.
Our next question comes from Ben Garlinger with Hovde Group. Your line is open. Please go ahead.
Hey, good afternoon, or good morning, everyone.
Hi, David.
Congrats on the.
Well congratulations on the.
So permanent job broke hurdle I was curious if we think back just a little bit.
On the.
And our work is in the thought process behind it I'm sure.
A lot of different avenues that you guys could take us outside or potentially sell the bank.
And then what are you just thought about entering a recession and you guys also have.
Quite a few openings are.
Musical chairs.
Played with positioning.
Behind the scenes effort before you can kind of fully play 100% off of.
I'm curious what the appetite is towards.
<unk>.
Overall continuity as an individual firm and whether you have gateway still pending but.
Was there ever a thought process of partnering with somebody larger.
Then we constantly review that.
Sure.
The board constantly reviews.
Whether or not.
Timing is right to.
The merger not the merch.
And so forth they specifically meet twice a year and half half.
Bankers come out here and tell them about the market and so forth.
So.
And I meet with bankers, probably every month about the same thing and if anything changes I will mention.
You mentioned that Dr Cal and and the rest of the Executive Committee of the board.
Gotcha. Okay. That's helpful color and then finally in terms of expenses I know you still clearly you have the.
A larger position, we don't need to be placed.
When you think about it.
Probably growing blocking and tackling type wonder most people once everybody is in place do you think of our expense base changes in any meaningful manner or are we just talking more kind of title changes.
From what it currently holds here of the past quarter or two.
Clearly the president will be hired from outside the bank.
So from there you would have to add a president of salary.
However, there may be other salary eliminations.
That I can't really speak about.
To help fund that.
Gotcha I understand okay, well I appreciate the color and commentary.
Congratulations again David.
That's all for me I'll step back in queue. Thanks.
Okay.
Our next question comes from Tim Coffey with Janney. Your line is open. Please go ahead.
Good morning, David.
Hey, congratulations on the new title.
Has there been a longtime comment.
Okay. Thanks, Tim.
So my questions are kind of on the loan to deposit ratio.
Do you have.
Our goals to our target for that ratio over the next four quarters or five quarters.
I think because of what's going to happen in the market youre going to see loan growth slow.
And we're seeing some of that already so.
I think we're going to look at.
The loan to deposit ratio of.
We always run above 100% typically we run above 100%, but I think youll see us between 100 and 105 instead of $105 110.
Hey.
Yeah.
Yes, yes.
It looks like you have plenty of capacity for additional borrowings and thats. What they are the most cost effective source of funding right now.
You could go higher.
As to where you get the loan growth of course.
And then just speaking of loan growth.
Given the.
I guess, the downtrend in CRE, especially from the payoffs, which tend to be bigger volume figure dollar volume loans.
Good loan growth to be de Minimis. This next quarter.
No I still think we will have when we say de Minimis I'm thinking just thinking about $10 million or something like that I think we will still have about $50 million quarter.
Okay. Okay.
So overall between the two.
Right Okay.
Okay. Those are my questions. Thank you.
<unk>.
Our next question comes from Andrew <unk> with Stephens. Your line is open. Please go ahead.
Hi, good morning.
Yes, I want to echo.
What others.
Congratulations Dave.
David on the title.
Okay.
Thank you just to start.
On the margin.
Can you remind us.
The CD portfolio, what you have.
Re pricing and the <unk>.
Fourth quarter scheduled basis, and then what the roll on roll off dynamics look like from a cost standpoint.
Okay, so quarter three four.
Shows that.
Okay.
That really cant be correct.
I can follow up if that's easier.
Okay, I see that there would be about.
Sure.
$200 million.
That will be.
Re pricing in the fourth quarter.
Okay.
Kind of.
Kind of new CD rates are you offering in the market right now I know you've been able to kind of lag competitors, but curious for new Cds or pricing for you guys.
We are close to 3%.
Okay.
Our competitors some of our competitors are at $3 50.
Would you anticipate if we get incremental rate increases here in the fourth quarter.
You kind of raise that 30% rate.
I believe it will have forced us to do it.
Again like I said, we have people we have competitors that are over three 350 people at $3 75, we have competitors.
And that will give there.
VIP customers.
Three in a quarter.
<unk> 350 like that.
Most people are projecting that will be.
Our fed fund rate of between four and $4 50, although I've seen projections as high as 6% on the fed funds rate.
If we go to 6%.
I think.
That will be.
Catastrophic for both loans and deposits.
Has dropped maybe too tough of a word but I think it would be.
Very concerning.
Okay.
Understood.
Looking at your kind of deposit cost increase this quarter interest bearing deposit costs.
Call It 33 basis points.
My math gets you to kind of a mid 20% interest bearing deposit beta can you just remind us kind of your expectations through the cycle for.
Deposit betas.
I think you can see deposit beta is closer to 50. This go round.
Got it.
Okay.
Yes.
<unk>.
And then just maybe stepping back kind of bigger picture question.
With the announcement.
Regarding the CEO .
I know you mentioned earlier on the call kind of your your focus full time on strategy at the organization Holistically going forward I was just hoping you could.
Hey, paints a picture of as we look out over kind of next.
Three five years, what does the strategy look like as far maybe as anything anything materially changed versus previously and then kind of where are you. Most focused on over the next several years as you think about kind of organically or inorganically growing the franchise.
Okay number one is.
I think we will continue our growth strategy.
That we had.
For example.
We will complete our gateway acquisition, then we will concentrate on growing in the areas that we have.
Either through end market.
Acquisitions.
Or just de Novo growth.
And the next in the near term.
However, like I said.
Prior.
We're always looking for other opportunities and if something.
Comes up we will do that.
That makes sense a strategic alternative.
Yes. It makes total sense I appreciate it if I could just sneak one more and do you have the balance of how much you have outstanding.
Snick credits.
Oh, it's not.
Net credit.
We actually do not or we do not take new creative.
At this moment.
Our credit risk and we have about 20% to $35 million.
$5 million.
Yes.
Perfect. Thanks, Thanks for taking my questions I appreciate it.
Once again, ladies and gentlemen, it was star one if you had a question or comment for today's call.
Moving back to Jordan Hymowitz with.
Philadelphia Financial. Please go ahead your line is open.
Actually last question I apologize spoke go to Kelly Motta with <unk>.
Line is now open Kelly. Please go ahead.
Hi.
Some of the step back Mike My question was answered.
And further Q&A I appreciate it okay.
Thank you.
And with that I do not have any other questions holding I'll turn the conference back for any additional or closing comments.
Once again, thank you all for joining US today, we look forward to speaking to many of you in the coming days and weeks have a great day.
And ladies and gentlemen that will conclude today's conference. We thank you for your participation you may disconnect. Your phone line at this time.
Okay.
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