RBB Bancorp (NASDAQ:RBB) Q4 2022 Earnings Conference Call January 24, 2023 2:00 PM ET
Company Participants
Catherine Wei – Investor Relations
David Morris – President, Chief Executive Officer and CFO
Shalom Chang – Senior Vice President and CAO
Gary Fan – Executive Vice President and CAO
Vincent Liu – Executive Vice President and CRO
Jeffrey Yeh – Executive Vice President and CCO
Conference Call Participants
Kelly Motta – KBW
Nick Cucharale – Piper Sandler
Tim Coffey – Janney
Ben Gerlinger – Hovde Group
Andrew Terrell – Stephens
Operator
Good day, everyone. And welcome to the RBB 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 open 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, Ms. Catherine Wei. Ma’am, the floor is yours.
Catherine Wei
Thank you. Good day, everyone. And thank you for joining us to discuss RBB Bancorp’s financial results for the fourth quarter of 2022. With me today are President, CEO and CFO, David Morris; SVP and Chief Accounting Officer, Shalom Chang; 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 will 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 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.
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 forward-looking statements unless required by law.
Now I’d like to turn the call over to David Morris. David?
David Morris
Thank you, Catherine. Good day, everyone, and thank you for joining us today. Loan 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 $0.92, and an 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 as 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 bonus reversal of $2 million and lower loan origination commissions of about $6 million, sorry, $5 million — $500,000 as new compensation guidelines took effect. Basically, the team, myself included, miss Board established goals 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 3.43% a year ago. We remain cautiously optimistic that we will be able to maintain our NIM around 4 in the first quarter, but expect that it will likely — that it likely peaked in the third quarter of last year.
Annualized return on average asset and return of total common equity were 1.8% and 14.59%, respectively, in the fourth quarter. 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 and construction and other decreasing for the last quarter. Our yield on average earning assets increased to 5.75% in the fourth quarter, which was a 62 basis point increase from last quarter and 178 basis point increase from the prior year.
Continued commercial customer activity and rising rates drove $108 million decrease in average non-interest-bearing deposits over the quarter. Our average cost of interest-bearing deposits for the quarter was 1.93%, which was up 111 basis points from the prior quarter as the expected catch up in deposit costs materialized. We continue to be below our competitors on deposit pricing, but have been forced to increase rates to retain deposits.
Non-performing loans were stable at $11.5 million from last quarter and loans 30 days to 89 days past due returned to a normalized level after a temporary increase in the third quarter.
Subsequent to our adoption of CECL, 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 of 2022. We also recorded a reversal of provision for off-balance sheet commitments of $930,000 in the fourth quarter of 2022, compared to a reversal of $28,000 in the third quarter of 2022.
Our capital levels remain strong with all of our capital ratios well above regulatory minimums. We purchased 49,000 shares in the fourth quarter at an average price of $20.77. We have 433,000 shares left on the buyback.
Finally, we are saddened by the tragic loss of life in the three recent shootings in California, including the one last Saturday in Monterrey Park. All of our employees are safe, but are understandably upset by such a horrific event that occurred so close to one of our branches. In response to this tragedy, we made a $20,000 donation to Asian Pacific Community Fund, of which 100% of the donation will be going to victims families in an effort to help the community recover.
With that, we are happy to take your questions. Operator, please open up the call.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Thank you. Our first question is coming from Kelly Motta with KBW. Please go ahead.
Kelly Motta
Hi, David.
David Morris
Hi, Kelly.
Kelly Motta
Thank you. Thanks for the question. Can start off with expenses, you noted in your prepared remarks that there was some reversals in there. Just trying to get a sense of what actually fell out of the run rate, as well as what’s a good kind of go-forward outlook and starting point given the movement that occurred this quarter?
David Morris
Our policies to accrue — has been to accrue at 6% of pre-tax and pre — and pre-tax bank earnings. We are changing that to accruals to pre-tax Bancorp earnings right now. But really changed is the amount that we have conformed our bonus structure to that of our peers.
So for example, I am eligible to get received up to a 150% of my salary versus before the President and CEO was eligible to get 2.5% of our pre-tax earnings. So that is really the biggest number there and that’s the biggest change, okay. I don’t — 2.5% of our pre-tax earnings would have been like $2.5 million for me. So that would just not — but that’s not 1.5 times my salary, okay.
Kelly Motta
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 reversal perhaps in 4Q for what…
David Morris
Yeah.
Kelly Motta
… was the crude on a go-forward basis, if we were to kind of back out how the reversal, maybe that’s a different way of asking what a number we can build off of, because $13 million after the prior three quarters feels low, but again, you also had the wrap-up of the investigations and things like that. So I am just trying to understand when you take out kind of reversals in 4Q, what would be more normal had you have been accruing under how you anticipate to do so going forward?
David Morris
So, I think, again, if you look at it in 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 and taking us up to the holding company level instead of the bank level of pre-tax income.
I think you will — we will get a very much closer number for what we will actually spend, okay, because we base our bonuses on Bancorp numbers in all. As far as the legal expense is concerned, this year, I think, you will have significant — we will have less expense to the tune of up — well, our legal is going to go down, but our auditing expense is going to go up, because we went accrual, who was significantly more expensive than our — than EV is.
So I do think legal will be going down, not quite sure, okay, we put all of that here. I am just checking some numbers. Yes, those fees should be going down by a couple of million dollars actually on an annualized basis, okay?
Kelly Motta
Okay. Got it. I assume excluding gateway, which…
David Morris
Right.
Kelly Motta
…can you and is the close of that still 2Q, how are things progressing with that acquisition?
David Morris
We will know come March 1st I would hope, okay.
Kelly Motta
Got it. That’s helpful. Maybe last for me and then I will step back and let some more into the queue, but just wanted to ask on the deposit side. There’s been some pressure on non-interest-bearing over the past year after increases during COVID. I am wondering kind of the cadence of deposit flows when you anticipate to starting to slow down and it looks like the gap was funded with time deposits, was any of that brokered funding? Just any color as to the cadence of mix shift and…
David Morris
Okay.
Kelly Motta
… what your funding was?
David Morris
Okay. Our biggest issue has been, we have these couple of trust accounts, which I have talked about in the past, which we asked to have moved last year December had about $550 million with us and we asked them to move it down between $250 million and $300 million, of which they did.
But one of them is a crypto company exchange and that went again with crypto winner from $250 million down to 1 — approximately, I mean, $150 million at the end of the third quarter and then in the fourth quarter, we decided to have one of the customers we sub — one of our — the sub customers. We had a discussion that I didn’t really like that customer and two weeks later, they moved that customer out of our book, we went from $150 million down to $25 million, okay?
So that’s the big issue with the demand deposits. $300 million was planned to go off, then we had the crypto winner with the one that went from $250 million to $150 million and then we asked — we are still banking this customer, we asked that one big customer, we didn’t really like them and we asked them to move away, okay? And that is not FDX or anybody else that’s headlined in the news, just so that you know.
Kelly Motta
Got it. That’s helpful, David. If I could just sneak in a follow-up to that real quickly. Those are quite large accounts. Just wondering now that you have taken those levels down, what is — any color as to kind of what the largest account sizes are at the bank? I am not sure if you want to frame it as top 10 accounts or however you look at it, but just curious as to any…
David Morris
We have.
Kelly Motta
…sort of large customers that…
David Morris
Okay.
Kelly Motta
… could add to the pressure?
David Morris
Yeah. We have — our policy now is no customer over $100 million, okay. No single customer. Well, when I say single, single relationship over $100 million with the bank anymore, okay? And we do have some…
Kelly Motta
Got it.
David Morris
… we have most of our high are — most of our people that have deposits over $25 million are either directors or former directors or also our former Presidents of banks that who left companies of banks that we have purchased, okay.
So when you look at that, we have a good number, we have retained a good number of the deposits from the either the chairperson or the President of the banks that we have purchased in the LA region, okay.
Kelly Motta
Awesome. Thanks for all the color today, David. I will step back.
David Morris
Okay.
Operator
Thank you. Our next question is coming from Nick Cucharale with Piper Sandler. Please go ahead.
David Morris
Hey. Hey, Nick.
Nick Cucharale
Good day, everyone. How are you?
David Morris
We are great.
Nick Cucharale
Good. I just wanted to make sure I heard your NIM commentary correctly. You are expecting a 4% in the first quarter and do you have any color on that — on the trajectory throughout the year or just sense of magnitude at this point?
David Morris
I think our NIM will contingent as — I think the history of rates going up and up and up has ceased. So most of our competitors are in the 4.25% range on CDs. For us to attract CDs we have to be around 4%, okay, about 4%.
So you are going to see everything re-price to about 4% if we want to retain those depositors, okay, for the remainder of the year. So I think you are 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 they are supposed to be — they haven’t really with the last rate increase at an increase, okay. The community priced everything starting September and early October at 4%, 4.25%, 4.5%, 4.75%. That’s where they have been people have been pricing stuff. So we have has taken a conscious effort to keep everything between 4% and 4.25%, okay.
Nick Cucharale
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 or just any sort of quantification would help there?
David Morris
Well, I think, like I said, I said about 4% first quarter, we are optimistic on that. The second quarter, I think, will be around 3.75%. I think it will be about 25 bps for the next couple of quarters, okay.
Nick Cucharale
That’s helpful. Okay. Thank you. 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?
David Morris
We are hoping to be — that will be the case, okay.
Nick Cucharale
Okay. Thank you for taking my questions.
Operator
Thank you. Our next question is coming from Tim Coffey with Janney. Please go ahead.
Tim Coffey
Hey. Good morning, David.
David Morris
Hi, Tim.
Tim Coffey
Hey.
David Morris
Hi.
Tim Coffey
Just a follow-up on the deposit cost questions there. What were or what was your spot rate on deposits at the end of December?
David Morris
What do you mean by spot rate? What’s our offering rate?
Tim Coffey
Yeah. What was the rate of interest-bearing deposits at December 31st?
David Morris
What we were offering was around 4.18%, okay.
Tim Coffey
Okay. Yeah. Okay.
David Morris
Yeah. Yeah. Yeah.
Tim Coffey
Okay. So we are talking about a sizable step-up in the cost of your interest-bearing deposits from where you…
David Morris
Yeah.
Tim Coffey
… ended what the average rate was, okay.
David Morris
Yeah.
Tim Coffey
If we kind of flip 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 the many kind of hesitation?
David Morris
Well, everybody that has a floating rate loan wants to try to fix it at 7.5%, which we are not doing and if they pay off the loan, we get the prepayment fee. So loans in general commercial lending has slowed down greatly, okay, in the last two months, greatly in the last two months and I think it’s all rate driven.
Tim Coffey
Okay. Okay. And then what’s the — I mean 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?
David Morris
I haven’t done any modeling of that, Tim. I think we will be — I haven’t done any modeling so I can’t answer that question on that.
Tim Coffey
Okay. Okay. And then, sorry if I missed this, I might have already been asked, but do you have any sense of where your non-interest-bearing deposits as a percentage of total deposits might exit this year at?
David Morris
I think our non-interest-bearing deposits regard. I think the run-off has happened for us. I mean we still have some customers who want to go, everybody wants once their DDAs to become interest, but when you are a business that’s kind of hard to do because you need to have the cash flow and we are still a bank that require — follows Reg D on all the interest-bearing stuff. So we still count six transactions. So I think it’s going to be relatively the same.
Tim Coffey
Okay. Okay. Great. Yeah. All right. Those are my questions. Thank you very much.
Operator
Thank you. Our next question is coming from Ben Gerlinger with Hovde Group. Please go ahead.
Ben Gerlinger
Okay. You will have to…
David Morris
Hi, Ben.
Ben Gerlinger
Oh! Good morning. I guess [inaudible]. I apologize just if it’s belaboring the point on expenses, but kind of that gives puts and takes here, is it fair to say once you have the hires excluding gateway into the fold, something around 16 per quarter as a good run rate throughout the rest of the year, so 32.64 total on the year or am I thinking about it incorrectly?
David Morris
Total expenses should be in the 16.2 range something like that, okay.
Ben Gerlinger
Okay. Yeah. That’s fair. Okay. I had pretty close. I am sorry. It’s just a lot of puts and takes, so forgive me on that. And then kind of just more diligence perspective, just sort of curiosity, do you have any other crypto related clients either lending or deposits?
David Morris
Well, we only have the two. The one is active. The other one is in CDs. So we don’t worry about it, okay.
Ben Gerlinger
Yeah. No.
David Morris
If we have their Series B funds, okay. So we don’t worry about that so much.
Ben Gerlinger
Got you. And then my last question is kind of more of a philosophical a 10,000-foot view. You just said that lending demand has come down and overall customer deposit rates have continued to go up. Is there any source of new deposit kind of initiatives that could be used rather than going to market at a high CD rate? I am just — I know you are not going to have as much loan demand to match again, so just curious if there’s different avenues of funding outside of CD or broker deposits. .
David Morris
Well, we hired Gary. One of the things he’s 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 won’t really see much of that probably until the third quarter or fourth quarter of this year, but we are going to implement a lot of things in New York that may be slightly different than what we do here in California.
At least I think here in California, we are a completely a relationship bank and once you contact all your relationships you only grow as your relationships grow. So we could bought — bring in additional relationship officers to help grow faster here in California and so forth also. But that would be adding to the expense side and/or we would have to reallocate headcount to do such, okay.
Ben Gerlinger
Got you. So kind of sit tight. If there’s a result, it’s more so latter six months of the year…
David Morris
Yeah.
Ben Gerlinger
… if there’s anything this year.
David Morris
Yeah.
Ben Gerlinger
But if there is expenses probably ramp?
David Morris
Yeah. We have things in our strategic plan that we are looking at, but we are not ready to announce any of those things at this time. So there are some things that we are planning to do that could really help on the deposit side. And one of them…
Ben Gerlinger
Got you.
David Morris
Well, one of them I could tell you is we don’t really do C&I variable and we are putting in a C&I platform that will hopefully be able to attract depositors and the C&I customer to the bank, okay.
Ben Gerlinger
Sure. Yeah. No. I really appreciate the color over there. Thank you.
Operator
[Operator Instructions] Our next question is coming from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell
Hey. Good morning.
David Morris
Good morning.
Andrew Terrell
David, maybe just on the last point first, getting into maybe a little more C&I type lending that could 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?
David Morris
Well, let me step back for a second, Andrew. We already do C&I and we already have the risk parameter set, okay. They haven’t changed. The issue is it takes us two weeks to do alone. It needs to be done within a day. On a C&I loan you have to be able to have this loan done within a day and it takes us two weeks, okay. So that’s what we are really doing.
Andrew Terrell
Okay. Got it.
David Morris
Okay. And just so you know, on the rest of our book, we have either decreased or have loan-to-value on almost every product twice, okay. So by 5 basis points each time and we have increased our DCF — DFCR wise by 5 basis points also on every product type. So we did that over the year too. But that isn’t — we are not even seeing loans that fall out of those boxes even right at the moment.
Andrew Terrell
And what are aggregate across CRE portfolio aggregate loan to values and debt service coverage rate at?
David Morris
I would say aggregate would be the policy, probably, the aggregate is 125, actuals will probably be north of 130 and loan-to-value is around 60 now and I would say actual would be probably in the 50s.
Andrew Terrell
Okay.
David Morris
Now mortgage is slightly different. Mortgage is still — we haven’t — we are still max, max is 70% loan-to-value, but most of our average loan to value on mortgage is around 60%,okay.
Andrew Terrell
Okay. And if I could shift over to the fee income side, can you just maybe provide some expectations for gain on sale and then overall fee income as we move into 2023?
David Morris
Well, we are seeing the New York that investors come down from their 8.5%, they are in the 7.5% range now. We are still not producing loans at 7.5% and mortgage we are around the 7% rate. So if they could get that — if we can get it down a little bit further, we could be selling some.
We do have two $30 million pools out to a local — not a local bank, but to a bank, another Chinese-American bank that’s on the East Coast that they would want to possibly purchase. So we are looking at that also. Our 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.
Andrew Terrell
Okay. And then last one for me is just kind of a point of clarification 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 want to make sure I am hearing you right, but the full quarter average for interest-bearing costs was 1.93%…
David Morris
Right.
Andrew Terrell
… what that cost was at the end of December?
David Morris
Right. That’s what that is.
Andrew Terrell
Okay. That it was low.
David Morris
Now the spot — the cost that I am talking about is the — our offering rate what we offer to our customers.
Andrew Terrell
Okay. So the incremental funds as opposed to make…
David Morris
Yeah.
Andrew Terrell
… was already on the balance sheet?
David Morris
Yeah.
Andrew Terrell
Okay. Understood. Thanks for taking the questions.
David Morris
Okay.
Operator
Thank you. Our next question is coming from Kelly Motta with KBW. Please go ahead.
Kelly Motta
Hey. Thanks for having me step back in the queue. Just know we spent a lot of time on the deposit side and your loan growth was really strong this quarter. I know you have to balance what’s going on in your markets, in the economy, as well as pressure on funding. But just wondering on kind of what your broader outlook is for loans as we look throughout 2023. Is it mostly going to be CRE and resi driven, I know you spoke about C&I as something potentially to ramp up over time, but just generally wondering what your thoughts are for this upcoming year?
David Morris
I see what we are hoping is mortgage will take a back seat, because we have already put our mortgage portfolios now about 40%, 43% of our total portfolio, which really, if you think about it is the safest loan you can do, okay, especially at a loan-to-value of 60%. So we don’t really want to grow that.
With the rest, we want to grow CRE and C&I. C&I is not going to be a huge growth number this year and so forth. We will see how well it does and then take time to roll it out probably by 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 of $500,000 type of C&I loan that we just can’t really do, because it takes too long.
So, right, most of our growth will be in the commercial real estate side. We are looking at rates most, well, not all. We have rates anywhere from like 6% and 3% — 7%, 8% up to 10% right now on that — on those products.
So I see maybe in the summer time, you may see a little bit more construction out there because of they can build. We have had a month of rain. So nobody is drawing down on their construction loans. So, but we are not going out and particularly stressing any one category, okay.
Kelly Motta
Thanks, David.
David Morris
Hi. Just to answer you — really answer your question. I do see production to be below — significantly below 10%. I would say mid single digits this year, okay, on loan growth.
Kelly Motta
Thank you.
Operator
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 you have.
David Morris
Once again thank you all for joining us today. We look forward to speaking to many of you in the coming days and weeks. Happy New Year. Go and sleep far south [ph].
Operator
Thank you. And this does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. And we thank you for your participation.
Be the first to comment