Q3 2023 RBB Bancorp Earnings Call

Good day, everyone and welcome to the <unk> Bancorp third 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 ma'am the floor is yours.

Good day, everyone and thank you for joining us to discuss our BB Bank cards results for the third quarter of 2023 with me today is Chief Executive Officer, David Morris President John <unk>.

<unk> Financial Officer, Alex <unk>, Chief Credit Officer, Jeffrey Wong, Chief administrative officer, Gary fan and Chief risk Officer.

David and hours will briefly summarize the results, which can be found in the earnings press release and Investor presentation are available on our Investor Relations website.

Then we'll open up the call to your questions Gary.

During this conference call statements made by management May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 90 95.

Forward looking statements are based upon specific assumptions that may or may not prove correct.

We're looking statements are also subject to known and unknown risks uncertainties and other factors relating to our D V 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 RVB 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 <unk>, Chief Executive Officer, David Morris David.

Thank you Catherine Good day, everyone and thank you for joining us today.

We are pleased to be awarded a $5 million C. D. F. I E. R. P Award by the U S. Treasury in the third quarter. We believe it's a real testament to our ongoing efforts to support the communities in which we operate and we intend to use the funds to help low and moderate income communities.

Cover from the COVID-19 pandemic by investing in their long term prosperity.

We were also pleased to reach our target 95% loan to deposit ratio in the third quarter. As we mentioned this has been one of our strategic priorities and now that we have achieved it we expect to resume deposit supported loan growth, which will enhance our profitability in March.

Since.

Johnny who joined US as president in the second quarter has done an excellent job developing a pipeline of high quality commercial loans that we expect to originate beginning in the fourth quarter.

As part of the deleveraging process. We have also taken steps to derisk, our loan portfolio by reducing our exposure to certain loan categories that we believe could be at risk.

A higher for longer interest rate environment.

While we believe these.

Proactive approaches to managing our balance sheet will help protect us against potential credit losses.

It also impacted our margin and interest income as they exited loans tended to carry higher interest rates.

The decline in yield on loans held for investment during the quarter was a direct result of the reduction in high yielding loans as we thought to derisk our balance sheet.

These actions when combined with the additional pressure off deposit costs negative too negatively impacted net interest income and net interest margin, which declined to 287% in the third quarter.

We expect NIM to decline in the fourth quarter due to continued pressure on deposit cost and loan yields, but we expect the redemption of the $55 million a sub debt.

We'll benefit NIM in the future.

Credit remained broadly stable in the third quarter, but we did take a $2.2 million charge against a specific loan that we hope to have off our books.

In the fourth quarter.

We are optimistic that our proactive loan derisking combined with the third quarter charge offs and provisions have positioned us for improving credit.

Over the coming quarters.

With that I'll hand, it over to Alex who will discuss the financial results Alex.

Thank you David Slide three it has a summary of third quarter results.

The decrease in bond yields that David discussed resulted in a decline in interest income while continue to pressure on deposit costs led to an increase in interest expense.

The decline in net interest income was offset by sharply higher noninterest income, which benefited from the $5 million C. D F I R.

Noninterest expenses decreased by eight 9%, primarily due to a reduction in legal and professional fees.

Sure, Yes, we have our restaurants in the past you got to cover a significant portion of investigation related legal expenses.

Continue to closely manage expenses and anticipate total noninterest expenses to be approximately $17 million in the fourth quarter before eight temporarily seasonal increase in the first quarter of next year.

As David mentioned third quarter net interest margin decreased 50 basis point to 2.87% due to the impact of decreasing loan yield lower loan balances.

Increasing deposit cost.

Slide four includes summary balance sheet information.

You can see that the decline in net loans held for investment.

The net loan to deposit ratio at the bank level at the end of the third quarter. It was 95, 4%.

Slide five provides additional detail about our loan portfolio, which totaled three point of $1 billion at the end of the third quarter, we don't annualized yield.

599%.

Commercial real estate laws, which include construction and land development loans comprised 46% of our total loss as slides six and seven have some details about our exports are.

Our CRE office law exposure stands at $45 million and represents one 4% of total loans and that has an average weighted LTV of 62%.

Yeah.

Slide eight has details about our $1 $5 billion residential mortgage portfolio, which mostly consist of non QM mortgages, and New York, and California, where the average LTV of 61%.

Slide 10 has some details about our deposit franchise.

Total deposits decreased by $21 million from the prior quarter. The decrease was mainly from a cake or is it in time deposits under $250000.

Noninterest bearing deposits decreased slightly from the prior quarter. However, the pace of reduction of noninterest bearing deposit cig and this clearly slowed in Q3 compared to Q2.

However, the cost of interest bearing deposits for the quarter was 383%.

36 basis points from the last quarter.

It's worth noting that the pace of increase has slowed significantly from 72 basis points in the second quarter.

And 82 basis points in the first quarter.

We continue to expect the pace of increases in deposit costs to slow in future quarters.

Yeah.

Slide 12 provides some details on crowded.

Nonperforming loans decreased to $40.1 million from $41 $6 million from the last quarter due to a $2 $2 million partial charge off of one large alone.

We are cautiously optimistic that the remaining balance of this loan will be resolved in the fourth quarter with no additional losses.

Yeah.

Delinquent loans increased by $12 million from the prior quarter, mainly due to one large delinquent alone. However, after the end of the quarter, but delinquent loan balances decreased by $16 million. After a non credit related temporary delay in payment of the large law.

It was corrected.

Well apart from the $2 2 million dollar charge off.

Credit quality remained remain stable.

Our allowance for credit losses remained stable at 136% of total loans.

Our capital levels remain.

Strong with all capital ratios, well above regulatory well capitalized ratios.

With that we are happy to take your questions operator.

Please open up the call.

Certainly everyone at this time, we'll be conducting a question and answer session.

Do you have any questions or comments. Please press star one on your phone at this time.

We do ask them about posing your 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.

Please hold while we poll for questions.

Your first question is coming from Nathan race from Piper Sandler Your line is lives.

Yes, hi, everyone. Good morning good.

Good morning Nathan.

I appreciate the commentary around the pressure to the margin in the quarter and it sounds like you guys are expecting additional compression in the fourth quarter as well. It was kind of wondering if you could kind of just frame up the magnitude of pressure that you expect into the fourth quarter and early next year assuming this.

Uh huh.

And assuming the.

Great. Thanks.

Start from here.

Sure I'd be happy to do that Nathan.

As he mentioned our net interest margin actually compress this quarter actually more than what we expected in the second quarter and the reason for the larger compression was due to our de risking strategy as David mentioned.

There was a large amount of a payoff and paydowns, especially pay off for the second quarter, but the level of the pay off it came down in the third quarter. As an example, $165 million paid off in Q2, and I always thought of $36 million pay off in the third quarter.

And I would expect there is a one large along that will be paid off and.

Our fourth quarter that will have a higher <unk>.

Interest rate it will maybe impact negatively.

To further compress loan yield and net interest margin, but that's the only one that I think will have a negative impact on the loan yield and our margin.

Related to deposit cost as I mentioned noninterest bearing deposit they don't give us that much and also time deposit.

On the 250, K AR increased but I think the level of the increase on the deposit cost will slow down.

In Q4, and more slow down or even stabilize next year.

So.

That's the two in that interest income Maine.

The margin impact also.

As David mentioned, though we are expecting too.

Redeem our sub debt a total of $55 million.

December 1st so Q4 impact it will be a minimum but it will.

More positively impacting Q4 as well as next year, because the rate was $6, one 8% and quarterly.

<unk> or annual they actually about $850000, we could have saved.

<unk> Ford, but also with all of those and the combination of the law on deposits and the redemption of the sub debt, we would expect to compress.

Compressed in Q4.

A little bit more.

But not to the extent that we have seen a 50 basis point reduction in Q3.

Got it that's very helpful. I guess I think it depends on what the fed does.

If the fed increases rates.

Now or and then November which most of US do not believe anymore.

We would have.

Probably less.

Compression on the loan side.

Then.

We'll see if they do not increase rates.

Okay.

Got it understood.

So I didn't quite catch in terms of the amount of kind of noncore runoff that you had in <unk> and subsequent.

It's about $320 million and kind of noncore loans that you guys were looking to run off going forward. So I guess I'm, just curious where those.

Balances stand going forward.

Are you referring to the Q4, a little unexpected pay off I, just want to make sure I hear it correctly.

I'm just trying to understand how much more in kind of non core loans you guys have remaining as of today.

Yeah, I believe we were all talking about $57 million, if you're asking me the dollar amount.

And I think that's the only loan data we are aware that we strategically decided to let go or refinanced by other our competitors.

Okay got it and then just curious around any additional color you can provide on the charge off in the quarter. It sounds like it came from one loan in particular, so any other color on that.

It would be helpful.

Yes, I'll talk about it first so other people can.

China, It's a.

It was split with a $12 million loan on our books that we've charged off $2 $2 million.

The reason for the collateral.

Salary decreases.

And at least according to the appraisal is due to this millionaire stack.

Where it is in the city of L. A and it's a block away from Beverly Hills, which does not have a millionaire.

There's tax so.

With the new appraisal we.

Touched off they do have all offer on the play.

Place that would get us L. A hole right at the moment and we'll see if that can be.

To close by the end of the year.

Got it.

If I could just ask one more on kind of the.

Expectations for share repurchases, continuing any thoughts on perhaps when that could occur in any governors that we should be.

Monitoring in terms of perhaps resuming share repurchases going forward, we're very optimistic that we'll be able to.

Resume our repurchase in November timeframe, we're hoping mid November okay.

Great that's perfect 433000 shares left.

Understood.

Appreciate all the color. Thank you.

Thank you. Your next question is coming from Andrew <unk> from Stephens. Your line is live.

Hey, good afternoon.

Hey, Andrew how are you.

Good how are you guys.

Good.

Thanks, taking the questions I wanted to follow up on some of the questions around the margin.

Just to make sure I understand maybe the magnitude of how we should think about the move into fourth quarter.

Do you have the the spot cost of deposits at the end of the quarter, either total or or interest bearing.

Yes, Andrew let me give you a breakdown of the spot rate for the deposits are.

Now and MMA accounts Ah we have.

About two 5% combined.

And the savings account, we have all of our $134 million.

The spot rate for that is a 1.15%.

C D. Let me break it down between those two under 250 at over 350.

Under $250000 C D. The spot rate is 443%.

And the city of over 250000, the spot rate is four 5%.

Okay. That's incredibly helpful. I really appreciate it.

And then similar question just on on loans as well I'm trying to understand the timing throughout the quarter of win win to pay down occurred the weight on the loan yields.

Might be just if you have just like the exit spot spot loan yield on the loan portfolio or how it's trending so far in the fourth quarter.

Yeah.

Hello.

Right now for the fourth quarter, we haven't had significant runoff at all in the fourth quarter, we expect.

We have a $20 million mortgage loan sale, that's closing today and there are about six.

$6 75.

Coupons.

And then we have this 157 million, which is up nine point in time My 0.5.

Five.

And we don't know exactly when that's going to roll off it's currently on our books today.

We expect that it would be rolling off by November 15th.

It was supposed to go by the end of this month, but it's.

Only a week away so.

No Andrew let me give you a little bit more color if that will be helpful. On your model of the origin.

Like if we had to about $45 million loan originated for the Q3, no we've been talking about the.

Pay off and pay down but the rate was not bad in the average rate of 975% and we will continue to originate our launch obviously, we are deleveraging at a high risk.

Laws.

That's the one point the second point you know the margin compression for the quarter was due to the payoff Paydown and I did mention $165 million in Q2 and $36 million in Q3 and other than that no 57 million that we.

<unk> talked about.

That that shouldn't be it. So I think that will give you an idea of the loan yield and the margin side of that.

Equation.

Yes.

To get to $58 million and at the most we are expecting a less than normal.

Normal right normal payoff.

They don't pay off pay okay.

Understood. Okay I appreciate it and then.

Maybe just one more question around the expenses it.

It sounds like about $17 million or so in four Q and then if I heard you right a little bit of a seasonal lift into the first quarter of next year, just wanted to get maybe a bit of expectations on and this kind of operating environment, how youre thinking about managing expense growth is that 17 million number.

Do you think you can kind of manage around throughout the balance of 2024 should we expect some expense growth off that base as you as you kind of.

To reinvest into the franchise.

Yeah, maybe I can't attempt to answer for that yet.

Base is for the 17 million.

In Q4 was a based on the fact that our legal and professional fee expenses will be much smaller than previous quarters, and even smaller than that Q4.

Unknown Executive: Good day everyone and welcome to the RBB Bancorp 3rd 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.

Given about 85% or even higher.

Catherine Wei: It is now my pleasure to turn the floor over to your host, Catherine Wei, ma'am the floor is yours. Thank you. Good day everyone and thank you for joining us and to discuss RBB Bancorp's results for the third quarter of 2023.

Those the FCC investigation investigation related expenses.

It used to be a millions of dollars will be covered by the insurance so.

That is the biggest contributor for the reduction of the legal expenses, but also as you know we did have a material weakness is that a lot of outside.

Catherine Wei: Which we today is Chief Executive Officer David Morris, President Johnny Lee, Chief Financial Officer, Alex Ko, Chief Credit Officer, Jeffrey Yeh, Chief Administrative Officer, Gary Fan, and Chief Risk Officer, Vincent Liu. David and Alex 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.

Kind of a advisory consulting services not to manage the credit related we want to make sure. The reviews by third Party C sold relate is on validation all of us in the professional fees I would expect that will go down.

So $17 million.

The one that we expect in Q4, but if you're asking me the run rate for 'twenty, four and going forward I think it can be even lower than <unk>.

Unknown Executive: During this conference call statements made by management may include four looking statements within the meaning of the private security's litigation reform act at 1995. Such four looking statements are based upon specific assumptions that may or may not prove correct. Four looking statements are also subject to known and unknown risks and uncertainties and other factors relating to RBB Bancorp's operations and business environment. All of which are difficult to predict and many of which are beyond the control of the company.

$17 million, but.

Like a salary and benefit expenses obviously.

Very careful managing the salary and benefit expenses, but if we really grow we need to have higher qualified employees.

But I think overall the run rate for Q4, I would feel comfortable about $70 million and 2024.

Unknown Executive: 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, RBB Bancorp's results could differ materially from its expectations as set forth in these statements. The company assumes no obligation to update such four looking statements unless required by the law.

It can be.

It is a lower or higher but in the neighborhood over $17 million.

Caveat is a Q1 on seasonal kind of a high expenses.

Okay understood.

Understood I really appreciate all the color and thank you all for taking the questions.

Thank you Andrew.

David Morris: Now I'd like to turn the call over to RBB's Chief Executive Officer, David Morris. Thank you, Catherine. Good day everyone and thank you for joining us today. We are pleased to be awarded a $5 million CDFI ERP award by the US Treasury in the third quarter. We believe it's a real testament to our ongoing efforts to support the communities in which we operate and we intend to use the funds to help low and moderate income communities recover from the COVID-19 pandemic by investing in their long term prosperity.

Okay.

Thank you once again, everyone. If you have any questions or comments. Please press star one on your phone you're.

Your next question is coming from Kelly Motta from K B W. Your line is live.

Hi, Good morning, Thanks for the question Hi, Kelly.

I was hoping maybe you could provide us with an update on the SEC investigation. It was nice to see the insurance kicking so it's not dropping down to expenses, but I was wondering if you.

Have you had any idea in terms of potential.

Timeline towards resolution.

Well, if you know how the FCC works.

David Morris: We were also pleased to reach our target 95% loan to deposit ratio in the third quarter. As we mentioned, this has been one of our strategic priorities and now that we have achieved it, we expect to resume deposit-supported loan growth which will enhance our profitability and margins.

They don't tell us anything.

So.

You know, we really cannot really.

Comment on.

Where where they are we just know where they are based upon.

You know if they're asking us for a bunch of information and that has significantly that's pretty much has slowed down and stopped.

David Morris: Johnny who joined us as President in the second quarter has done an excellent job developing a pipeline of high quality commercial loans that we expect to originate beginning in the fourth quarter. As part of the leveraging process, we have also taken steps to the risk of our loan portfolio by reducing our exposure to certain loan categories that we believe could be at risk in a higher for longer interest rate environment. While we believe these proactive approaches to managing our balance sheet will help protect us against potential credit losses, it also impacted our margin and interest income as the exited loans tended to carry higher interest rates.

Got it.

I know gateway.

Terminated just wondering as you look ahead.

Is that San Francisco market is still one that you're interested in getting in and.

Does this shift at all you know your appetite for M&A versus potentially.

You know did novo branches or things like that in order to try.

Drive expansion into new markets.

Okay. It depends on the type of acquisition, but yes. We are you know after a while we would be we would entertain.

And acquisition in San Francisco, and we would also look at local market here, our local markets, where we already have branches, where we can get significant cost savings.

David Morris: The decline in yield on loans held for investment during the quarter was a direct result of the reduction in high yielding loans. As we thought to the risk our balance sheet, these actions when combined with the additional pressure of deposit cost negatively impacted net interest income and net interest margin, which declined to 2.87% in the third quarter. We expect them to decline in the fourth quarter due to continue pressure on deposit cost and loan yields, but we expect the redemption of the 55 million of sub debt will benefit them in the future. Credit remained broadly stable in the third quarter, but we did take a $2.2 million charge against a specific loan that we hope to have off our books in the fourth quarter.

Much more than your typical 30% to 40% something closer to a 70 or 80% cost save.

And that would like that would make a lot of sense, because there's a lot of duplication, especially here in L. A.

There are 17 or more Chinese American banks.

And we all have branches on Valley Boulevard, maybe multiple branches on Valley Boulevard and does it make sense that we have 17 banks serving the same market.

Hum.

Yeah.

But right now.

It is not.

On the radar screen.

Okay got it and then in terms of.

Now that you're down to your targeted loan to deposit ratio I was just wondering where you're seeing the best opportunities for growth by category. If there if there was any.

David Morris: We are optimistic that our proactive loan de-risk combined with the third quarter charge-off and provisions have positioned us for improving credit over the coming quarters.

Particular industry or segment.

Segment, where you're seeing them more attractive risk adjusted returns.

Yeah go ahead, Johnny Oh, Hi, Kelly this is Johnny.

Alex Ko: With that, I'll hand it over to Alex, who will discuss the financial results. Alex. Thank you, David.

Hi, how are you.

Well, we theres no obviously, there's still a lot of demand for construction.

Alex Ko: Slide 3 has a summary of third quarter results. The decrease in loan yield that David discussed resulted in a decline in interest income while continued pressure on deposit cost led to an increase in interest expense. The decline in interest income was also by sharply higher non-interest income, which benefited from the $5 million CDFI award. Non-interest expenses decreased by 8.9%, primarily due to a reduction in legal and professional fees. As an insurance, we have a reference in the past began to cover a significant portion of investigation-related legal expenses.

Construction CRE related type of longs.

Longs and obviously.

Because.

There's not too many lenders right now are that are are very keen on wanting to do more construction loans by pool was obviously, that's an area that we still continue to look at it case by case on opportunistic basis, if there's good quality.

<unk> experience to develop a good track record so we still look at that.

On the non non construction and CRE side.

C&I types of businesses are certainly you know for example, SBA where you were.

SBA lender, who was 70 days so we see demands for you but.

Obviously, we are very selective even though it is a government guarantee.

A credit.

But for C&I.

There is certainty mandate, but at this we just.

Alex Ko: We continue to closely manage expenses and anticipate total non-interest expenses to be approximately $17 million in the fourth quarter before a temporally seasonal increase in the first quarter of next year. As David mentioned, third quarter net interest margin decreased 50 basis point to 2.87% due to the impact of decreasing loan yield, lower loan balances, and increasing deposit cost.

Reached its 95% loan to deposit ratio are you know in now obviously, we are better positioned now to soybean launch our lending so honest C&I side, certainly we will be.

Pursuing a little bit more.

All of eight basis points still very selective at this point.

Got it. Thank you so much I'll step back.

Okay.

Yeah.

Thank you there are no further questions in the queue.

Okay, I would like to thank everybody for joining us today you all have a good day. Thank you bye bye.

Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.

Alex Ko: Slide 4 includes summary balance of information, and you can see that the decline in that loan's health will invest. The net loan to deposit ratio at the bank level at the end of the third quarter was 95.4%. The life I provides additional detail about our loan portfolio, which totaled $3.1 billion at the end of the third quarter, with an annualized yield of 5.99%. Commercial Realistic Loans, which include construction and land development loans, comprise 46% of our total loans, and slide 6 and 7 have some details about our exposure.

Alex Ko: Our CRD office loan exposure stands at $45 million, and represents 1.4% of total loans, and has an average weighted LTV of 62%. Slide 8 has details about our $1.5 billion residential mortgage portfolio, which mostly consists of non-QM mortgages in New York and California, with an average LTV of 61%.

Alex Ko: Slide 10 has some details about our deposit franchise. Total deposit decreased by $21 million from the prior quarter. The decrease was mainly from a decrease in time deposits under $250,000. Dining just bearing deposit decreased slightly from the prior quarter. However, the pace of reduction of non-interest bearing deposit significantly slowed in Q3 compared to Q2. Our average cost of interest bearing deposit for the quarter was 3.83%. Up to 36 basis points from the last quarter.

Alex Ko: It's worth noting that the pace of increase has slowed significantly from 72 basis points in the second quarter and 82 basis points in the first quarter. We continue to expect the pace of increases in deposit costs to slow in future quarters.

Alex Ko: Slide 12 provides some details on credit. Non-performing loans decreased to $40.1 million from $41.6 million from the last quarter, due to $2.2 million partial charge of one large loan. We are cautiously optimistic that the remaining balance of this loan will be resolved in the fourth quarter with no additional losses. Delinquent loan increased by $12 million from the prior quarter, mainly due to one large delinquent loan.

Alex Ko: However, after the end of the quarter, the delinquent loan balance decreased by $16 million after a non-credit-related temporary delay in payment of the large loan was corrected. State. Apart from the $2.2 million charge-off, credit-quality remains stable. Our allows for credit losses remained stable at 1.36% of total loans.

Alex Ko: Our capital levels remain strong with all capital ratios well above regulatory well-capitalized ratios.

Unknown Executive: With that, we are happy to take your questions, operator, please open up the call. Certainly, everyone at this time will be conducting a question-and-answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask them while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone.

Nathan Race: Please your first question is coming from Nathan Race from Piper Sandler. Your line is live. Yes, hi everyone, good morning. Good morning, Nathan. I appreciate the commentary on the pressure to the margin in the quarter, and it sounds like you guys are expecting additional compression at least in the fourth quarter as well. I was kind of wondering if you can kind of just frame up the magnitude of pressure that you're expecting into the fourth quarter and early next year, assuming the rate is stopped from here?

Unknown Executive: Sure, I'd be happy to do that, Nathan. As you mentioned, our net interest margin actually compressed this quarter, actually more than what we expected in the second quarter. The reason for the larger compression was due to our risking strategy, as David mentioned. There was a large amount of pay off and pay down, especially pay off for the second quarter, but the level of the pay off came down in the third quarter.

Unknown Executive: As an example, $165 million paid off in Q2, now it's $36 million paid off and the third quarter, and I would expect there is one large loan that will be paid off in the fourth quarter. That will have a higher interest rate. It will maybe impact a little bit negatively to further compress loan yield and net interest margin, but that's the only one that I think will have a negatively impact on the loan yield and the margin.

Unknown Executive: Related deposit cost, as I mentioned, not just bearing deposit, didn't decrease that much, and also time deposit on the 2050K increase. But I think the level of the increase on the deposit cost will slow down in Q4 and more flow down or even stabilize next year. That's the two net interest income main margin impact.

Unknown Executive: Also, as David mentioned, we are expecting to redeem our sub-dat total of $55 million on December 1st. So, Q4 impact, it will be minimum, but it will more positively impact in Q4 as well as next year, because the rate was 6.18%, and quarterly or annually, actually, about $80,000 to $50,000, we could have said, is going forward. But anyhow, with all those combinations of the loan deposit and redemption of the sub-dat, we will expect to compress in Q4, a little bit more, but not to the extent that we have seen 50 basis point reduction in Q3.

Unknown Executive: I guess I think it depends on what the Fed does. If the Fed increases rates now or in the November which most of us do not believe anymore, we would have probably less compression on the loan side than we'll see if they do not increase rates. Got it. Understood.

Unknown Executive: And Alex, I couldn't quite catch in terms of the amount of kind of non-core runoff that you had in 3Q and subsequent. I think it's about 320 million and kind of non-core loans that you guys are looking to run off going forward. So I guess I'm just curious where those balances stand going forward.

Unknown Executive: I am referring to the Q4 loan expected pay off. I just want to make sure I hear correct. Yeah, I'm just trying to understand how much more and kind of non-core loans you guys have remaining as of today. Yeah, I believe we are talking about a $57 million. If you ask me the dollar amount. I think that's the only loan that we are aware that we strategically decided to let go or refinance by other our competitors. Okay, got it.

Unknown Executive: And then just curious around any additional color you can provide on the charge off in the quarter. It sounded like it came from one loan in particular. So any other color on that would be helpful.

Unknown Executive: Okay, yes, I'll talk about it first with other people can chime in. It was a $12 million loan on our books that we've charged off $2.2 million. The reason for the collateral value decreases. And at least according to the appraisal is due to this millionaire stacks where it is in the city of LA and it's a block away from Bradley Hills, which does not have a millionaire stacks. So with the new appraisal we touched off, they do have offer on the place that would get us out a hole right at the moment. And we'll see if that can be closed by the end of the year. Got it.

Unknown Executive: If I could just ask one more on kind of the expectations for Sherry purchases continuing any thoughts on perhaps when that could occur in any governor that we should be monitoring in terms of perhaps resuming Sherry purchases going forward. We're very optimistic that we'll be able to resume our repurchase in the November timeframe. We're hoping mid November. Okay. Great. That's perfect. We're 133,000 shares left. Understood. Appreciate all the color. Thank you.

Andrew Terrell: Your next question is coming from Andrew Terrell from Stevens. Your line is live. Hey, good afternoon. Hey, Andrew. How are you? Good. How are you guys? Good. Thanks for the questions.

Unknown Executive: I wanted to follow up on some of the questions around the margin, just to make sure I understand maybe the magnitude, how we should think about the move into fourth quarter. Do you have the spot cost of deposits at the end of the quarter, either total or intersparing? Yes, Andrew. Let me give you a breakdown of the spot raise for the deposit. Now, and the MMA account, we have about 2.5 percent combined.

Unknown Executive: And the savings account, we have about $134 million. The spot rate for that is 1.15%. And CD, let me break it down between those two under 250 and over 250. Under 250,000 dollar CD, the spot rate is 4.43%. And the CD, over 250,000, the spot rate is 4.5%. Okay, that's incredibly helpful. I really appreciate it.

Unknown Executive: And then, similar question, just on loans as well.

Unknown Executive: I'm trying to understand the timing throughout the quarter of when the pay down occurred, the weight on the loan yields, it might be just if you have the exit spot, spot loan yield on the loan portfolio or how it's trending so far in the fourth quarter. Well, right now, for the fourth quarter, we haven't had significant runoff at all in the fourth quarter. We expect we have a $20 million mortgage loan sale that's closing today.

Unknown Executive: And they're about a $675 coupon. And then we have this $1.57 million, which is at 9.5. 9.5. And we don't know exactly when that's going to roll off. It's currently on our books today. We expect that it would be rolling off by November 15th. It's supposed to go by the end of this month, but it's only a week away.

Unknown Executive: Yeah, Andrew, let me give you a little bit more color if that will be helpful on your model of the origin. We had about $45 million loan originating for the Q3. We've been talking about the pay off and pay down, but the rate was not bad. The average rate of 9.75%. And we would continue to originate our loans.

Unknown Executive: Obviously, we're delivering the high risk loans. That's the one point. The second point, the margin compression for the quarter was due to the pay off pay down. And I did mention $165 million Q2 and $36 million Q3. And other than that, no $57 million that we talked about, that that should be it. So I think that will give you an idea of the loan yield and the margin side of the...

Unknown Executive: I appreciate it. And then maybe just one more question around the expenses. Sounds like about 17 million or so and 4Q, and then if I heard you ride a little bit of a seasonal lift into the first quarter of next year, just wanted to get maybe a bit of expectations on in this kind of operating environment, how you're thinking about managing expense growth is that 17 million number, something you think you can kind of manage around throughout the balance of 2024. Should we expect some expense growth off that base as you as you kind of continue to reinvest into the franchise?

Unknown Executive: Yeah, maybe I can't attempt to answer for that. Yeah, the basis for the 17 million in Q4 was based on the fact that our legal and the professional fee expense will be much smaller than previous quarters and even smaller than the Q4 given about 85% or even higher of those as it's the investigation will investigation related expenses, it used to be a million dollars will be covered by the insurance. So that is the biggest contributor for the reduction of the legal expenses, but also as you know, we did have some mature weaknesses and a lot of outside.

Unknown Executive: Kind of advisor of consulting services, not to mention the credit related, we want to make sure the reviews by third party and see some related some validation, all those professional fees, I would expect that will go down. So 17 million dollars is the one that we expect in Q4, but if you're asking me the run rate for 24 and going for, I think it can be even lower than 17 million. But you know, the like salary and benefit expenses obviously we are very careful managing the salary and benefit expenses, but if we really grow, we need to hire the qualified employees.

Unknown Executive: But I think overall the run rate for Q4, I would feel comfortable about 17 million dollars and 2024. It can be, you know, even more for higher, but in the neighborhood of 17 million dollars, caveat is a Q1 on seasonal kind of a high expenses.

Unknown Executive: Okay, understood I really appreciate all of the color and thank you all for taking the questions. Thank you Andrew. Thank you.

Unknown Executive: Once again everyone, if you have any questions or comments, please press store one on your phone.

Kelly Motta: Your next question is coming from Kelly Motta from KBW, your line is live. Hi, good morning. Thanks for the question. Hi Kelly.

Unknown Executive: I was hoping maybe you could provide us with an update on the SEC investigation. It was nice to see the insurance kick in, so it's not dropping down to expenses, but I was wondering if... You had any idea in terms of potential timeline towards resolution? Well, if you know how the SEC works, they don't tell us anything. They're giving us for a bunch of information. And that has significantly, that that pretty much has slowed down and stopped.

Unknown Executive: Got it. And I know Gateway was terminated, just wondering if you look ahead. Is that Tampa fiscal market, so one that you're interested in getting in? And does this shift at all, you know, your appetite for M&A versus potentially, you know, do novo branches or things like that in order to drive, drive expansion into new markets as you've done in the past. Okay, it depends on the type of acquisition, but yes, we are, you know, after a while, we would be, we would entertain an acquisition in San Francisco.

Unknown Executive: And we would also look at local market here or local markets where we already have branches, where we can get significant cost savings much more than your typical 30 to 40%. Something closer to a 70 or 80% cost save. And that would like, that would make a lot of sense because there's a lot of duplication, especially here in LA, there's 17 or more Chinese American banks. And we all have branches on Valley Boulevard, maybe multiple branches on Valley Boulevard, and doesn't make sense that we have 17 banks serving the same market.

Unknown Executive: So, but right now, it is not on the radar screen, okay?

Unknown Executive: Got it. And then in terms of now that you're down to your targeted loan to deposit ratio, just wondering where you're seeing the best opportunities for growth by category. If there's any, you know, particular industry or segment where you're seeing more attractive risk adjusted returns.

Johnny Lee: Yeah, Phil, hit Johnny. Oh, hi, Kelly, there's Johnny. Hi, how are you?

Johnny Lee: Well, we, there's no, you know, obviously there's still a lot of demand for construction, see, are you related type of loans? And obviously, and probably because there's not too many lenders right now, our data are very keen on wanting to do more construction loans. But for us, obviously, that's an area that was still continued to look at case by case on, you know, opportunistic basis. If there's good quality, you know, experience development with track records, certainly, we still look at that.

Johnny Lee: On the non, non-construction, say, all you say on a CNI types of businesses. Certainly, you know, for example, SBA, where you were, you know, SBA lender, certainly there is that we see demands here. But obviously, we, you know, very selective even though these are government guarantee types of credits. But for CNI, there's certainly demand there, but at this, you know, we just reach that 95% on to deposit ratio. You know, and now, obviously, we, you know, better precision now to sort of relaunch our lending. So, on the CNI side, certainly, we will be pursuing it a little bit more on all of the basis, but still very selective. Got it.

Unknown Executive: Thank you so much. I'll step back. Thank you.

Unknown Executive: There are no further questions in the queue.

Unknown Executive: Okay, I would like to thank everybody for joining us today. You all have a good day. Thank you. Bye-bye. Thank you, everyone.

Unknown Executive: This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.