RBB Bancorp Q1 2023 Earnings Call
Yeah.
Good day, everyone and welcome to the <unk> Bancorp first quarter 2023 earnings call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Katherine way Investor Relations Officer at RPT Bancorp Ma'am the floor is yours.
Hello, everyone and thank you for joining us to discuss RVB Bancorp's financial results for the first quarter of 2023.
With me today are president and Chief Executive Officer, David Morris, Chief Financial Officer, Alex Ko, Our Chief Credit Officer, Jeffrey Yeh Chief administrative officer Gary.
Risk officer.
David and Alex will briefly summarize the results, which can be found in the earnings press release that is available on our Investor Relations web.
And then we'll open up the call to your question.
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 Bebe bancorp's operations and business environment.
All of which are difficult to predict and many of which are beyond the control of the company.
For a detailed discussion of these risks and uncertainties. Please refer to the documents. The company has filed with the S E C.
If any of these uncertainties materialize or any of these assumptions prove incorrect our <unk> bancorp's results could differ materially from its expectations as set forth in these statements.
The company assumes no obligation to update such forward looking statements unless required by law.
Now I'd like to turn the call over to David Morris David.
Thank you Catherine Good day, everyone and thank you for joining us despite the industry challenges for the first quarter Royall business Bank continued to make progress on the organizational realignment.
We began a year ago.
Since the start of the year, we brought on Alex Ko Arden.
As our new Chief Financial Officer, and we recently added Bob Franco Scott pull off cough.
The board of directors, we believe these actions taken after many productive discussions with our shareholders will allow us to turn the page on.
The events of last year and build shareholder value.
In the quarter, which saw multiple bank failures, we also increased our deposits.
For that.
We have our.
We have our loyal customers to think.
We work every day to serve this country's.
Countries vibrant Chinese American community and it is gratifying to see the strength of those relationships in a time of stress.
I'd like to take a moment to discuss our strategic priorities for 2023 before handing it over to Alex <unk>.
First we are focused on resolving all outstanding matters related to the events of last year.
I can assure you that management and the board are focused on putting these events and the related expenses behind us.
Second we are focused on liquidity, and then and intend to reduce our leverage this year.
Caution following the bank failures in March we increased our time deposit financing to ensure we had sufficient liquidity on hand.
We expect we will maintain a higher level of liquidity and plan to reduce the loan to deposit ratio to 95% by the end of the year.
Given the volatility in the market and the economic uncertainty. We believe this is the best strategy to protect long term shareholder value.
Third we intend to focus on supporting core existing customer relationships prioritizing these relationships will allow us to reduce our leverage.
While enhancing our deposit franchise.
With that I am pleased to hand, it over to Alex.
Bill will discuss the financial results before we open the call.
Two questions Alex.
Thank you David.
Cruising loan yield.
Stable loan portfolio balance drove record revenue in the first quarter.
But were offset by increase in interest expense.
<unk> expenses and other professional fees, mainly related to our transition to new external auditor.
Due to these expenses.
Net income for the quarter declined to $11 $1 million or <unk> 58 per share.
Net interest income for the quarter also declined to $34 $1 million.
Mainly due to increased deposit cost.
First quarter non interest income of $2 $5 million was stable from the fourth quarter.
The anchors in loan servicing fee income was partially offset by the decrease in gain on sale of loans.
Core noninterest expenses returned to the normalized run rate however.
We're impacted by the legal and other professional expenses, which increased by approximately $2 million compared to the prior quarter.
We expect the legal and other professional expenses to decrease going forward.
First quarter net interest margin of three 7% was down 56 basis points from the last quarter, but up.
From three 5% a year ago.
The decrease from the last quarter was mainly due to deposit cost increase.
Could you outpaced loan yield increase.
The loans held for investment increased by $4 million from the last quarter.
A small increase is mainly due to the increase in single family residential mortgage loans offset by the decreases in other loans.
Our yield on average, earning assets increased to 584% in the first quarter.
Which was a nine basis point increase from the last quarter.
A 184 basis point increase from the first quarter of 2022.
Continued commercial customer activity and rising interest rates drove a $159 million decrease in average noninterest bearing deposits.
And a $327 million increase in time deposits over the quarter.
Our average cost of interest bearing deposits for the quarter was 275%, which was up 82 basis points from the prior quarter.
In addition to the impact of Anchorage.
Increases in interest rates.
Part of this increase in deposit costs was driven by a fourth quarter decision to begin reducing deposit concentrations.
We are cautiously optimistic that the pace of increases in deposit costs showed a slow in future quarters.
Moving on to the credit quality.
Nonperforming loans increased to $26 4 million from $23 $5 million.
From the last quarter.
Due to an increase in single family residential loans of $4 7 million.
Delinquent loans decreased by $961000 compared to the prior quarter.
The company recorded a $2 million of provision for credit losses relate.
Related primarily to qualitative factors in light of an anticipated increase in classified loans.
As the company finalized its loan risk ratings for the quarter.
With $2 million of provision for credit losses, and minimum net charge offs.
Allowance for credit losses coverage ratio increased to 1.29%.
As of March 31, 2023, compared to 123% in the prior quarter.
Our capital levels remained strong with all capital ratios, well above regulatory well capitalized ratios.
Which we believe is prudent given the market risks.
With that we're 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 have any questions or comments. Please press star one on your phone at this time.
We do ask that while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Your first question is coming from Kelly Motta from <unk>. Your line is live.
Hi, Kelly.
Hi, good morning over there.
I thought maybe we could start with what youre doing with the balance sheet.
Yes.
Taking leverage down.
And part of those.
Prepared comments you had that you were going to.
Focus on.
With core relationships.
You kind of dig in a bit more on how you intend to bring leverage down is it going to be through loan sales are going to be.
Deemphasizing certain areas of lending just curious whatever.
Kind of commentary and color you can fill in around that.
Okay.
We will be tightening in Ireland, and we have tightened our underwriting guidelines, the CRE and construction lending, but more particularly.
Kelly.
We are.
Pulling back from out of out of area of lending.
And we're also.
Pulling back on on.
Bridge loans.
Out of area.
Hey.
So we're still going to lend in our areas comp pretty much all factors all loan types.
To our customers and to.
Within our area, but we're going to decrease out of area market.
Those loans roll off the books.
Between now on it.
Okay. Okay. Okay. So considering that I mean last year, along with loan growth.
With had been.
Barely quite strong.
You were at about 1% annualized growth. This year is that kind of 0.1.
The roll off of some of these like noncore types of lending is that kind of what we should be expecting.
On the loan side.
I think it's going to be between the low single digits loan growth, okay. So low single digits.
Whereas we're hoping that deposit growth will be.
In the upper single digits.
Got it okay.
And then.
To noninterest bearing declines I know, we've been talking about the past couple of quarters of some larger relationships that you decided.
Let go for concentration.
Considerations, obviously deposit growth is bad.
Yeah.
Source of emphasis now, especially getting the loan to deposit ratio down.
About how much more related to kind of these larger accounts might be part of I.
I guess left to go and.
Just trying to get a sense of when when this deposit base from kind of stable.
Stabilized, especially the noninterest bearing portion.
Only have one customer that's over 2% of our total deposit base.
That would be about another $25 million, where we would expect it to roll off between.
Now in year end to get it down to our 2% level.
Okay. Okay.
We've done most we did most of it last year.
Got it.
The vast majority of it last year.
Sure.
And on the expense side, you called out the $2 million of higher professional fees in part with the.
Auditor change.
I'd be worried about $19 million of expenses this quarter.
Standing there were some moving parts in Q1 is kind of been a $17 million run rate the right way to look at it I know you guys have added.
<unk> to the team and the board.
Doing several things so.
I'm just trying to understand since that extensive bounce around a little what kind of a good core run rate. We can expect with all the changes that you've been making recently.
Hum.
Yes.
We could.
We hope to get it below 17, but less thought to conservatively be at 17 and then.
Go.
Go from their next quarter.
Okay. Okay.
I will step back thanks, so much for the questions.
Kelly can I actually add a little bit more color because we do have some increase on the professional fees that are legal fees I'm not going to over two months of a detail for that I just wanted to add a comment that that going forward as we indicated in the prepared remarks I would expect that we will go down because most of the well.
Jewelry that we know have expense throughout the quarter.
And the last year, as well, but who knows how much it will come in but as of now I would expect that.
Our legal and professional fee.
Increased $2 million this quarter I don't think it will we'll repeat that so going forward it will be.
Smaller I just wanted to add on that.
Great. Thank you.
Thank you. Your next question is coming from Ben Garlinger from Hovde Group. Your line is live.
Ben.
I appreciate you guys, taking the time.
It seems like.
Obviously, you guys got in front of all of the deposit pressures in overall deposit growth was.
Pretty sizable this quarter I was curious if you guys are willing to give there.
What was the margin.
Yesterday or the spot rate at the end of the quarter I'm, just trying to get a sense of kind of where we are today given that the margin.
Kind of fell pretty precipitously in the first quarter.
Yes, you are correct, we had a compression of the margin for this quarter given our deposit pricing has gone up so much of it dramatically.
And.
Going forward margin forecast to be honest, it's very hard to have an accurate margin guidance is for now given the volatility. However in response to your spot rate question. We do have a spot rate of about three 8% as of March 31.
Okay I was looking more for the margin on a CD, but yes, but Martin is a very difficult.
I would expect that it will continue to compress but not to the level that we have experienced in Q1.
Given the deposit side I would expect.
That increase will slow down.
In the prepared remark. So it will continue to compress, but again not to the level that we have experienced in the Q1.
Gotcha Okay.
Yesterday, we saw two board members Marceau.
Thinking.
Initiatives is there anything.
And then brought on for expertise more consultancy or.
Just kind of thinking.
The addition of board members, what we should expect in terms of the third edition or <unk> as a whole.
Okay.
<unk>.
Scott what's brought on because Scott was.
Regional director of the FDIC.
So he will bring on great knowledge of how our regulatory environment.
Regulatory agencies work.
And we will be able to assist the board and help them learn.
All about those things.
Uh huh.
And.
Bob what's brought on because of his past experience that's running at a bank.
The only other person who has run a bank before thats on the board it's myself.
And so we believe having Bob onboard as connections locally.
So you know.
Deposit gathering to.
Uh huh.
Investors and to.
The real estate market I think is invaluable to the bank.
Okay.
Gotcha, that's helpful color, Thanks, I'll step back.
Thank you. Your next question is coming from Andrew <unk> from Stephens, Inc. Your line is live.
Hey, Andrew Hey, good morning.
Maybe just a follow up on.
One of Ben's questions.
Just to clarify that the CD spot rate at three 8% at $3 31, just making sure does that does that include the brokered time deposits or is that just retail customer is that an all in number of $3 eight.
Yes, it's all in the CD rate three 8%.
Okay.
Got it and then how does that compare to rates.
Prospectively, you're offering in the market right now.
Hello, we are offering a little bit higher than that we used to have deposit campaigns.
We don't do that anymore now, but we just do it in a pocket right, which is a more selective to the customers, it's a little bit higher than the spot rate that we just discussed okay. Gary are you. There can you add any other color on what youre doing with all the promotions and so forth.
Yeah sure I think.
Moving forward, obviously in deposit cost.
Priority for far maybe both.
Both total number of deposits and then the cost of.
What we're trying to get so there are a lot of the promotions we've been considering we're doing sort of on a quarterly basis and we're tailoring those to each specific market. So for example, something in New York that May work better for that customer base is something different and what will be running in California.
Sort of shift in strategy versus what RVB used to do.
Generally I think due to our customer relationships and the.
Kind of.
<unk>.
Existing customer base as well as the new customers that we have in and around our geographic presence, we're seeing about 25% to 50 basis points better than our other competitors. So.
Although the overall cost of deposits has been rising I think we are still do it.
Little bit better than our competitors and a lot of that has to do with the way we positioned some of the products and services as well as some of the cusp.
Customer relationships, we have with our bankers that are on the ground meeting with those customers.
Yes, Okay I appreciate it.
Color there.
If I could go back to some of the commentary around the loans and deposits on that.
On the loan specifically how much in loans that you have that you would classify as out of market loans and then further how much would you consider out of market bridge lending.
So our classified loan that is not in the cloud right Mark auto market out of market auto market and we have about $410 million on a market that is consider out of date or out of market lending.
Our policy is.
There will be higher than that as David mentioned earlier.
That is our main focus.
At least kind of out of market lending yes.
Yes.
Now Andrew I do want to step back and tell you that we do have mobile home parks out of market and those.
Are not going to.
That's part of our core business, so where that's.
Slightly different.
It's in that 400, and then anything that's.
Thats correct. Okay. Thank you for the number is probably closer to $250 million that we're targeting to get off the book, yes. Okay.
Nope it less than that yeah.
Got you, Okay, and then could you maybe give some color on what.
Types of relationships those are and then just given they are out of market. How are they how are they sorry. So how are they primarily syndications.
Auto market are mainly.
They range from multifamily our term loan to bridge loan.
Those are the.
Those data.
Relatively relatively short term.
It was originally the term is about 1% to three one to three years.
Yes. Most of these were originated in 2000 22019, 2020, and then we basically do.
And it was tough to deal with.
Starting from next year.
Okay.
And then just to clarify.
Around 250, maybe not all of that runs off this year, but that's kind of a portion.
You might look to you about our marketing you might want to run off the balance sheet. You think you can still grow loans in a low single digit range in 2023, despite that call it $250 million headwind.
Yes, I think so.
It's.
We may not have stellar growth, we may have a quarter with peak.
Climbing loan growth, but I think overall, we could do we could do that and I had a little bit actually.
Loan demand is.
Actually high.
The thing that is that we are very cautious and underwriting and also very cautious in that through our due diligence in this market.
Okay.
Understood and then last one last one for me and then I'll step back can you just remind us what the exposure is to office commercial real estate.
That's about.
About $50 million.
Okay.
About $50 million, so it's not very much.
So just a really small portion okay.
Hey, thanks for taking the questions.
Thank you. Your next question is coming from Kelly Motta from DW <unk>.
Life.
Hi, Thanks for letting me ask the follow up.
Joe did I hear that.
One of the things you're looking to do is keep liquidity higher on balance sheet I saw you build cash.
By about 150 million Bucks.
And the period to about 200 million is this a good.
Level of cash you like to run with or any any access and that just just trying to get a sense of that as we work to the sides of the balance sheet.
Sure Kelly.
Got it and then we have a cash.
Including due from banks, so we have a talented $31 million as opposed to last quarter December you. Andy was only $83 million. So we're intentionally increase but given the market volatility I would expect to continue to maintain this level or even higher.
As it deems necessary, but I think this quarter the management top priority is given what's happening it was a liquidity management I believe we did.
Good job.
Liquidity, including this one.
Available cash.
To be sufficiently enough to weather through this liquidity challenges.
Thank you maybe last one for me is.
Your pending deal.
Just wondering if that gateway is that something youre still looking.
For doing or any changes in thoughts around.
That with the market volatility in it.
I know got extended a couple of times now.
Yeah.
We continue to have discussions with all the relevant parties.
No decision has been made at this time Kelly.
Thank you.
Yes.
Thank you.
Once again, everyone. If you have any questions or comments. Please press star then one on your phone.
Your next question is coming from Ben Garlinger from Hovde Group. Your line is live.
Hey, guys I appreciate the follow up I was curious theres on the deposit mix shift.
Obviously time deposits increase for you in every other bank when rates go up.
Do you have any internal guardrails I'm looking back over.
Relatively short couple year history.
Close to 70% total.
Funding I was just curious if you have any sort of red lines that you wont exceed.
Oh.
Of Cds.
Cds.
Yes relative to the total I know you guys want to get the loan to deposit ratio lower.
You just got to reducing that denominator or reduce the numerator increase the denominator, but.
Some Cds or the only thing that's really kind of working in this market for any bank I was just kind of curious how we do have under our Alco guidelines, we do have policy limits yes.
I can't recall, what they are but we do have them okay.
Gotcha.
I think it's something like 66% or 65%, but I've got to go back and check.
And maybe less maybe 60 now.
Okay.
Gotcha, and then just wanted to quality.
Let me add a little bit more color on that and we intentionally increased our CD proportion, we did see the noninterest bearing deposit.
Decreased given what happened there.
<unk>.
<unk>, but I think it really benefits to increase the CD is to secure those funding sources. The fullest. It's impure goes no. We are not offering two years. So do you have the CD is the more nine months this or at most one year. So that we can actually secure our funding sources for that regard so.
I don't really view this.
Increase on the CD side, there is a negative it is a more secure even though of course was very lucky with the higher than others. I think it was a worth for us to increase the CD deposits.
There is a broker deposit, but there was a quite success on the retail deposit.
From the CD side as well.
Okay.
Okay are there any of that.
Yes, no I get it.
Thanks, I appreciate the color.
Sure.
Thank you. Your next question is coming from Andrew Terrell from Stephens, Inc. Your line is live.
Hi, Andrew Hey, Thanks for the thanks for the follow up.
I was hoping to get maybe a better sense of the noninterest bearing deposit flows in the <unk>.
Quarter.
Can you maybe help us think about that.
Throughout the quarter on a monthly basis, just how the noninterest bearing balances progressed and then some.
So far quarter to date in April have you seen any kind of stabilization in noninterest bearing deposit balances.
Yeah.
I'll attempt to.
After that I don't have that.
Monthly breakdown in front of me, but.
As I said earlier.
Those decreases on the noninterest bearing demand.
The pause it was due to one large relationship we are strategically in Mexico, starting last year. So that is a continued into Q1. So that's the reason why we have a decrease.
And also given the interest rate Mark catch those.
Those noninterest bearing they migrated to a CD or higher.
So that will continue but not to the level that we have experience given the market expectations for the interest rate for May is minimal, let's say 25 days or even a decrease is I would expect that run off of the noninterest bearing deposit will slow down.
But I think again I don't have the monthly breakdown, but it got stabilized.
Since the March 31st or the liquidity crisis, I didn't see much acceleration of those.
Noninterest bearing runoff.
Okay.
Do you have how much of the decline in the corner was was related to that one relationship.
Now one relationship was $26 million.
Okay.
Okay, we already reduced debt significantly.
Throughout 2022.
<unk>.
Okay.
Last from me just on buyback I didn't see any this quarter.
Updated thoughts I mean with a slower level of balance sheet growth you guys sit in a really strong capital position right. Now just what are your thoughts on whether a buyback is of interest.
The board is still discussing it.
At this time.
Okay. Thanks for taking the follow ups.
Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone.
Your next question is coming from Joseph Macondo from Finance investments Society.
Your line is live.
Hi, first I wanted to thank you guys for handling the liquidity crisis, very well as a shareholder and just thank you for being pretty good management over this last quarter.
Wanted to ask more questions about the buybacks.
But that were just asked me about.
I.
And that you guys have it.
A good liquidity level four navigate through this crisis.
There's lots of opportunities.
Repurchase shares at what may seem like to be an accretive value.
Going forward and do you see your high liquidity position in the market.
Okay.
Potential mergers and acquisition activities.
Something that you would consider above a buyback or.
Overall, when you are redeploying your earnings.
Okay.
Hi.
Yeah.
Right now I think doing any merger and acquisition.
In addition to what has already been announced would be.
It's too early for us to be comfortable in doing that.
We don't know.
Ah.
I personally believe that the banking system is very sound and we are very sound.
But if.
If we could have what happened.
In March 10th happen again overnight.
With a number of these larger banks.
So.
I don't think M&A is wise right at the moment.
For Us I.
Hi.
I do prefer.
The board is more interested in giving back.
Capital through the dividend process right now.
So that's I think number one and number two is they are very they are looking at re instituting the buyback, but that will be probably a month or two or so down the road.
Alright, thank you for that.
Okay.
Okay.
Yes.
Thank you as a final reminder, everyone that if you have any questions or comments. Please press star then one on your phone.
There are no further questions in the queue.
Once again, I really want to thank our customer base, who stuck with us.
During March where everything was going crazy.
And <unk>.
Appreciate them.
Very much and just saw that you know most of our customer base.
That has multiple millions of dollars with US are also investors in this bank so.
We want to thank them as well.
Fourth I also want to thank you for who have joined us today.
We look forward to speaking to many of you in the coming days and weeks have a great day. Thank you.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day.
Thank you for your participation.
Yeah.