Q4 2022 RBB Bancorp Earnings Call
[music].
Okay.
Good day, everyone and welcome to the R. P. B Bancorp earnings conference call for the fourth quarter 2022.
At this time all participants are placed on a listen only mode and the floor will be opened for questions and comments after the presentation.
Please note that today's event is being recorded.
It is now my pleasure.
To turn the call over to your host.
This is Catherine way ma'am the floor is yours.
Thank you good day, everyone and thank you for joining us to discuss <unk> Bancorp's financial results for the fourth quarter of 2022.
With me today are president and CEO and CFO David Morris.
And Chief Accounting Officer, Sean Chin, EVP, and Chief administrative officer, Gary fan, EVP, and Chief Risk Officer, Vincent Liu and EVP, and Chief Credit Officer Jeffrey Yeh.
David will provide a brief summary of the results, which can be found in the earnings press release that is available on our Investor Relations website, and then we'll open up the call to your questions.
During this conference call statements made by management May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such forward looking statements are based upon specific assumptions that may or may not prove correct.
Forward looking statements are also subject to known and unknown risks and uncertainties and other factors relating to our BB bank cards operations and business environment all.
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 our BB bank cards 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.
Thank you Catherine.
Good day, everyone and thank you for joining us joining us today bond growth, increasing loan yields and declining expenses drove record fourth quarter and 2022 results with quarterly net income of $17 6 million.
And earnings per share of <unk>, 92 cents and annual net income of $64 3 million and earnings per share of 3.33.
Net interest income for the quarter was stable at $39 million.
The positive impact of loan growth and increase in yields was offset by sharply higher deposit costs.
Fourth quarter noninterest income of $2 4 million was down slightly from the third quarter due to lower loan sales and servicing fees.
A $3 $6 million decrease in net interest expenses from last quarter was primarily attributable to book to bonus reversal of $2 million and lower loan origination commissions of about 6 million.
Alright $5.500 million.
As new compensation guidelines took effect basically the team myself.
Included.
<unk> Board established calls on deposit gathering and loan originations and our compensation was affected as a result.
Fourth quarter net interest margin of 4.26% was down slightly from last quarter, but up from $3 four 3% a year ago.
We remain cautiously optimistic that we'll be able to maintain our NIM around four in the first quarter, but expect that it will likely peak, but it likely peaked in the third quarter of last year annualized.
Return on average assets and return of total common equity were one point.
8% and $14 five 9% respectively.
The fourth quarter.
Net net.
Net loans held for investments increased by about $111 million to $3 3 billion in the fourth quarter, and CRE and residential mortgages showing good growth in construction and other decreasing for the last quarter.
Our yield on average, earning assets increased to 575% in the fourth quarter, which was a 62 basis point increase from last quarter and 878.
Basis points increase from the prior year.
Continued commercial customer activity and rising rates drove a $108 million decrease in <unk>.
Average non interest bearing deposits over the quarter.
Our average cost of interest bearing deposits for the quarter was 193%, which was up 111 basis points from the prior quarter as they expect to catch up in deposit cost materialized.
We continue to be below our competitors on deposit pricing, but have been forced to increase rates to retain deposits.
Nonperforming loans were.
Were stable at 11.5 million from last quarter, and the and loans 30 to 89 days past due returned to a normalized level after a temporary increase in the third quarter.
Subsequent to our adoption of Cecil.
We recorded a provision for credit loss of $3 million in the fourth quarter of.
2022, compared to $1 8 million in the.
Third quarter.
<unk>.
2022.
We also recorded a reversal of provision for off balance sheet commitments up $930000 in the fourth quarter 2022, compared to a reversal of 28000 in the third quarter of 2022.
Our capital levels remained strong with all of our capital ratios well above regulatory minimums, we purchased 49000 shares in the fourth quarter at an average price of 20.
$20 77 stuff.
We have 433000 shares left on the buyback.
Annually, we are saddened by the tragic loss of life and the three recent shootings in California, including them, one last Saturday and Monterey Park all of our employees are safe.
But understandably upset by such a horrific event that occurred so close to one of our branches.
In response to the Stratus tragedy tragedy.
We made a $20000 donation to Asia Pacific community fun.
Yeah.
100% of the donation.
Well, if we go into victims families in an effort to help the community recover.
With that we're happy to take your questions. Operator, Please open up the call.
Thank you. The Soar is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that we're posing your question you. Please pick up your handset embellishing on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Thank you. Our first question is coming from Kelly Motta with <unk>. Please go ahead.
Hi, David Hi, Kelly. Thank you thanks for the question.
It started off with expenses.
In your prepared remarks that there was.
Some reversals.
Trying to get a sense.
Actually fell out of the run.
What's a good.
Kind of go forward outlook.
<unk> point.
Given the movement that occurred this quarter.
Our.
Our policy is to accrue.
<unk> been to accrue at 6% of pre tax and pre.
Pretax bank earnings.
We're changing that to accruals to pretax bank core earnings right now, but really changed is the amount that is we have corn conformed our bonus structure to that of <unk>.
Of our peers. So for example, I am eligible to get receive up to a one one.
Hunter at 50.
50% of my salary.
Versus before the president and CEO was eligible to get to 5% of our pre tax earnings.
So that is really the biggest number there.
And that's the biggest change okay.
I don't.
Two 5% of our pre tax earnings would have been $2 $5 million for me.
But just not but that's not one and a half times my salary.
Okay got it.
Thanks for the help just trying to understand how that ties into the go forward run rate. It seems like there is this riverstone perhaps in Q4.
With the crude.
Go forward basis, if we were to kind of back out.
The reversal, maybe that's a different way of asking what's what.
A number we can build off of 13 million after the prior three quarters.
But again you also had.
Ah.
The wrap up of investigations and things like that so I'm just trying to understand would.
When you take out kind of reversals and in for Q.
What would be more.
Normal had had.
<unk> been accruing under.
How do you anticipate to do so going forward.
So.
I think again.
If you look at it and the way that I have I still have a couple of positions open that are going to be executive level and they will be getting.
Again, there are going to be additional bonuses next year, not the full amount of the $2 million, but certainly.
Possibly significant dollars.
In taking us up to the holding company level instead of the bank level.
Pre tax income I think you will we will get a very much closer number for what we'll actually spend okay, because we base our bonuses pump bank core numbers.
As far as the legal expenses concern.
This year.
I think you will have.
Significantly.
We will have less expense.
To the tune of AR.
Well, our legal it's Gotta go down, but our auditing expenses going to go up because we went through it we went to CRO, who has significantly more expensive for them are.
Then <unk> is so I do think legal will be going down.
Not.
Not quite sure.
Okay.
Okay.
Put all of that here I'm just checking some numbers.
Okay.
Yeah.
Alright that those fees should be going down.
Bye.
But a couple of million dollars actually.
On an annualized basis.
Okay.
Okay got it I assume excluding gain.
Wei.
Right.
And.
Is that still <unk>.
Things progressing with that acquisition.
We will know.
From March the first I would hope.
Okay.
That's helpful. Maybe last for me and then I'll step back and let some more into the queue, but just.
Just wanted to ask on the deposit side.
And some pressure on noninterest bearing over the past year.
After increases during during Covid.
Im wondering kind of the cadence of.
Deposit flows when you when you anticipate.
Starting to slow down and it looks like the gap was was funded with time deposits was any of that brokered funding just any any color as to the.
The cadence of <unk>.
Shift and Wildcat.
Anyway, Okay.
Our biggest issue.
Has been we have these couple of trust accounts, which I've talked about in the past.
Which we asked to have move last year disc.
December had about $550 million with us and we asked them to move it down between 250 and $300 million.
Of which they did.
But.
One of them is a crypto company.
Exchange.
And that one again with crypto winter from to $2 50 down to one of approximately $1 50 at the end of the third quarter.
And then in the fourth quarter, we decided to have one of the customers we set up.
One of the sub customers we.
Wade.
We had a discussion that I didn't really like that customer.
Two weeks later, they move that customer out of our.
Book, and when you went from $150 million out to $25 million okay.
So that's the.
The big issue with the demand deposits $300 million was planned to go off then we have the crypto winter with the one that went from $2 50 to $1 50, and then we asked.
We're still banking this customer we asked that one big customer, we didn't really like them and we ask them to move away, Okay and that is not S. Tx or anybody else's headlines in the news just so that you know.
Got it that's helpful. David if I could just sneak in.
Follow up to that.
I'll quickly those are quite large accounts just wondering.
Now that you've taken those levels down what what is I think any color as to kind of what the largest account sizes are at the bank.
Sure if you want to frame it as top 10 accounts or however, you look at it but I'm just curious as to.
And we have sort of large customers.
That.
The pressure.
We have.
Our policy now is no customer over $100 million.
No single customer well when I say single single relationship over a $100 million with the bank anymore. Okay.
And I do have some.
We have.
Our most of our high.
Our most of our.
People that have deposits over $25 million or either directors or former directors or.
<unk>.
Our former presidents of banks that who have companies of banks that we have purchased.
Hey.
So when you look at that.
You know.
Good number we have retained a good number of the deposits from the either the chairperson of the president of the banks that we have purchased.
In.
In the La region Okay.
Awesome. Thanks for all the color today, even step back okay.
Thank you. Our next question is coming from Nick could surely with Piper Sandler. Please go ahead.
Thanks.
Good day, everyone, how are you or Greg.
Good I just wanted to make sure I heard your NIM commentary correctly, you're expecting a 4% print in the first quarter and do you have any color on that on the trajectory throughout the year or a sense of magnitude at this point.
I think our NIM will continue.
<unk>.
I think.
The hysteria of rates going up and up and up.
<unk> has ceased.
So most of our competitors are in the 425 range on Cds for us to attract Cds, we have to be around four okay about four.
So you're going to see everything reprice.
To about four if we wanted to retain those depositors.
Yes.
For the remainder of the year.
So I think youre going to see over the next quarters, our NIM going down even though rates may go up still 75 basis points I don't think.
The deposit rates are going to continue to go up as much I may be wrong with that because thats supposed to be.
They haven't really with the last rate increase at an increase.
Hey.
The community priced everything starting September and early October at four 425, four and a half four fifth.
475, that's where they've been people have been pricing stuff.
So we've take pay has taken a conscious.
Effort to keep everything between four and 425.
Okay.
So can you give me a sense for at this point, obviously, a lot can change and it's a wildcard, but what are your thoughts kind of in the middle of the year do you think the magnitude starts to slow down in terms of the.
Cost increases on the liability side.
Any sort of quantification would help there well.
I think like I said, I said about 4%.
In the first quarter, we're optimistic on that the second quarter I think it will be around $3 75.
It's about 25 bps for the next couple of quarters.
Hey.
That's helpful. Okay, and then in light of your capital position and valuation are you expecting a more forceful repurchase activity over the course of the year relative to 2022.
We're hoping.
That will be the case.
Hey.
Thank you for taking my questions.
Thank you. Our next question is coming from Tim Coffey with Janney. Please go ahead.
Hey, good morning, David.
This is a follow up on the deposit costs.
And is there what were what was your spot rate on deposits.
The end of December .
What do you mean by spot rate, what's our offering right.
Yeah, what was it what was the rate of interest bearing deposits.
Number three one.
What we're offering was around four 2018.
Okay, Okay, yeah yeah.
Yeah Yeah.
Okay. Okay. So we're talking about a sizable step up in the cost of your interest bearing deposits from where you ended.
The average rate was okay, yes.
If we kind of put to the loan side and the borrower side of the equation what kind of commentary are you hearing from them is it more related to rates or is it just more economic outlook, that's given them any kind of hesitation.
Body that has a floating rate loan wants to try to fix it.
Pat Pat seven five which we're not doing.
And if they pay off the loan we get the prepayment fee.
So.
Alright.
Loan loans in general commercial lending has slowed down greatly.
Okay and the last two months greatly in the last two months.
And I think it's all rate driven.
Okay. Okay.
And then what's the.
How should we think about the efficiency ratio going forward.
It seems like it's got the possibility to break above 40.
But does it hit 45.
I haven't done any modeling of that.
Tim.
I think we will be.
I Havent done any modeling so I can't answer that question on that okay. Okay.
And then sorry, if I missed this at my has already been asked but do you have any sense of where your noninterest bearing deposits as a percentage of total deposits might exit the Sierra.
I think our noninterest bearing deposits I think the run off has happened for us.
We still have some customers who want to go everybody. What is the once that DDA has to become interest, but when you're a business that's kind of hard to do because you need to have the cash flow and.
We are still are banks that are.
Require <unk>.
<unk> Reg D on.
Paul the interest bearing stuff so.
We still count six transactions so.
I think it's going to be relatively the same.
Okay, great. Yeah. Those are my questions. Thank you very much.
Thank you. Our next question is coming from Ben Garlinger with half the group. Please go ahead.
Hey, good afternoon, good morning, I guess for your time.
I apologize.
Belaboring the point on expenses, but kind of given the puts and takes here.
Is it fair to say once you have the hires excluding gateway into the fold something around 16 per quarter is a good run rate.
Throughout the rest of the year, so $32 64 total on the year or am I thinking about it incorrectly.
Total expenses.
Should be.
In the east.
The 16 16, two range something like that.
Okay.
Yes, that's fair.
Pretty close thanks, So just a lot of puts and takes so forgive me on that one.
And then kind of just.
More diligence perspective, just sort of.
Curiosity do you have any other crypto related clients either lending or deposits.
Well, we only have the two.
The one is active and the other one is in Cds, we don't worry about that.
Okay.
Yes, we have there we have the series B funds okay.
So we don't worry about that so much.
Gotcha and then.
My last question is kind of more of a philosophical at 10000 foot view, you just said that lending demand has come down.
Overall customer.
Deposit rates are continuing to go up is there any source.
New deposit initiatives.
Initiatives that could be used rather than.
Going to going to market at a higher CD rate.
I know youre not going to have as much loan demand to match again, so I'm just curious if there's different avenues.
A funding outside of CD or broker deposits well, we hired Gary.
One of the things he is going to do is take over the New York regions and we have a lot of.
Interesting thoughts on different things that we could try.
So that's.
I don't really see much of that and probably until the third or fourth quarter of this year, but we're going to kind of implement a lot of things in New York.
That maybe a slightly different than what we do here in California.
I think here in California, where you are a completely pay relationship bank.
Once you.
Contact volume relationships, you only grow as fast as your.
<unk> growth so.
We could bring.
Bring in additional <unk>.
Our relationship officers to help grow.
The call is faster here in California.
<unk>.
And so forth.
Also but that would be adding to the expense side.
Or we would have to reallocate.
Head count to do such okay.
Gotcha, so kind of sit tight if there as a result, its more so water six months of the year, if theres anything in this year, but if there is expenses probably ramped.
Yeah.
Yes, we have things in our strategic plan that we're looking at but we're not ready to announce any of those things at this time.
There are some things that we are planning to do that could really help on the deposit side.
We are putting in our C&I platform that will hopefully be able to attract.
Depositors and the C&I.
Customer.
To the bank okay.
Sure Yeah, no I really appreciate the color.
Thank you.
Thank you once again, if you have any questions or comments. Please press star one on your phone at this time.
Our next question is coming from Andrew Taro with Stephens. Please go ahead.
Hey, good morning.
Good morning.
David maybe just on that last 0.1st.
Getting into maybe a little more C&I type lending that can bring deposit relationships.
With it as well can you just talk about maybe.
I mean, obviously, maybe a bit different type of lending than current composition of the balance sheet can you just talk about kind of risk parameters in place as you make that kind of pivot or.
Step more heavily into that market.
Well, let me step back for a second Andrew we already do C&I and we already have the risk parameters set.
They haven't changed the issue if it takes us two weeks to do alone and it needs to be done in within a day on a C&I loan you have to be able to have the loan done within a day and it takes us two weeks.
Okay. So that's what we're really doing.
Okay.
Got it and just so you know.
The rest of our book we have either.
Decreased our loan to value on almost every product.
Twice.
Okay. So by five basis points, each time, and we've increased our DCF DSC are.
Why.
By five also on every product type.
So.
Sure.
We did that over the year or two but that isn't we're not even seeing loans that.
Fall out of those boxes, even right at the moment.
And what our aggregate across CRE portfolio aggregate loan to values and debt service coverage rates at.
I would say aggregate with the.
The policy, probably the aggregate is $1 25.
Actuals will probably be north of 130.
And loan to value is around 60, now and I would say actual will be probably in the fifties.
Okay.
Now mortgages slightly different mortgage is still we haven't.
We're still.
Max Max a 70% loan to value, but most of our average loan to value on mortgages around <unk>.
60%.
Okay. Okay.
If I could shift over to.
On the fee income side can you just maybe provide some expectations for gain on sale and an overall fee income as we move into 2023.
We have seen.
We're seeing the New York.
Uh huh.
Investors come down from the $8 five that are in the seven five range now were still not producing loans at seven 5% mortgage were around the seven right.
So if they could get that if we can get it down a little bit further we could be selling some we do have $230 million pulls out to a.
Local not a local bank, but to a bank.
Another <unk>.
Chinese American Bank, that's on the East coast.
<unk>.
That they would want to possibly purchase comp so.
We're looking at that also are one of our major goals is to get the gain on sale of loans back up to about a $2 million per quarter.
Number.
Okay. Okay.
And then last one for me is just to kind of a point of clarification on.
On the margin and the interest bearing deposit costs.
I think you mentioned spot interest bearing costs at the end of the year low 4% I just wanted to make sure I'm hearing you right that the full quarter average for interest bearing costs was 193%.
That cost was at the at the end of December right. That's what that is.
So the spot the costs I'm talking about is the.
They are offering right, what we offer to our customers. Okay. So the incremental funds as opposed to what was already on the balance sheet, yes, okay understood. Thanks, taking the questions.
Okay.
Thank you.
Our next question is coming from Kelly Motta with <unk>. Please go ahead.
Hey, Thanks for letting you step back in the queue.
I just know we spent a lot of time on the deposit side and your loan growth is really strong.
This quarter I know you have to balance.
What's going on in your markets and the economy as well as.
Pressure on funding, but just wondering on kind of what your broader outlook is for for loans as we look throughout 2023.
Is it mostly going to be CRA, CRE and <unk> driven.
You spoke about.
Ni has something.
Essentially to ramp up over time, but just.
Generally wondering what your thoughts are for this upcoming year.
I see.
What we're hoping is mortgage will take.
Take a back seat because we've already put our mortgage portfolio is now about 40% 43% of of our.
Our total portfolio, which really if you think about as the safest alone you can do.
Okay, especially at a loan to value of 60%.
So we don't really want to grow that.
With the rate we want to grow.
CRE and C&I C&I, it's not going to be a huge growth number this year.
And so forth, we'll see how well it does and then.
You know take time to roll it out probably by really.
It really roll it out to larger loans and so forth.
At the end of the year, maybe but it's really meant for the smaller loans.
<unk>.
<unk>.
$500000.
Type a C&I loan that we just can't really do it because it takes too long.
Hum.
So all right.
Most of our growth will be in the commercial real estate side.
We're looking we're looking at rates most will not all we have rates anywhere from.
Bikes.
Fix them.
<unk> not 378 up to 10% right now.
On on that on those products.
No.
I see maybe.
The summertime you may see a little bit more construction out there because of.
They can build.
With.
The month of rain so.
Nobody is drawing down on their construction loans.
<unk>.
But we're not going out and particularly stressing any one category.
Okay.
Thanks, David.
Just to answer you really answered I do see production to be below significantly below 10% I would say mid mid single digits. This year.
Okay.
On loan growth.
Thank you.
As we have no further questions in queue at this time I will hand, it back to Mr. Morris for any closing comments.
Once again, thank you all for joining US today, we look forward to speaking to many of you in the coming days and weeks.
New year gone see fast style.
Thanks.
Thank you and this does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.
Thanks.
Sure.
And this is pronounced.