RBB Bancorp (RBB) 2022 Q3 法說會逐字稿

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Third Quarter 2022. (Operator Instructions) Please note, this call is being recorded. (Operator Instructions)

And now I would like to turn the conference over to Ms. Catherine Wei. Please go ahead.

Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the third quarter of 2022. With me today are President, CEO and CFO, David Morris; EVP and Chief Credit Officer, Jeffrey Yeh; EVP, Chief Risk Officer; Vincent Liu; EVP, Chief Strategy Officer, Simon Pang; SVP and Chief Accounting Officer, Shalom Chang. David will provide a brief summary of the results, which can be found in the earnings press release that is available on our Investor Relations website, and then we'll open up the call to your questions.

During this conference call, statements made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks and uncertainties and other factors relating to 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?

Thank you, Catherine. Good day, everyone, and thank you for joining us today. Increasing rates continue to drive performance to record levels in the third quarter with net income of $16.7 million and earnings per share of $0.87. Net interest income increased to a record $37 million as loans grew and margins improved. Third quarter noninterest income decreased by $887,000 from the previous quarter due primarily to the second quarter gain of $757,000 on a corporate real estate asset that we sold. As expected, noninterest expense decreased from last quarter, primarily due to the $1.2 million decrease in expenses related to the substantially completed Board of Directors investigation.

I hope to be able to announce the conclusion and finance of the investigation during the fourth quarter. Net interest margin continued to increase during the quarter from 4.08% in the second quarter to 4.31% in the third quarter and 3.38% a year ago. We are cautiously optimistic that we'll be able to maintain an elevated NIM in the quarters to come as we anticipate that asset yields will continue to increase more quickly than deposit costs.

Annualized ROA and ROTCE increased in the third quarter to 1.72% and 16.58%, respectively. Return on equity, which excludes the impact of AOCI, also increased to 13.93% from 13.3% in the second quarter and 13.52% last year. Net loans held for investments increased by about $173 million to $3.2 billion in the third quarter with CRE and residential mortgages showing good growth and C&I construction and other loans all decreasing from the last quarter. Our yield on average earning assets increased to 5.13%, which was 47 basis point increase from the last quarter and 116 basis point increase from the prior year.

With respect to funding, commercial customer activity drove a $118 million decrease in average noninterest-bearing deposits over the quarter. Our average cost of interest-bearing deposits for the quarter was 0.82%, which was up 33 basis points from the prior quarter. As I mentioned last quarter, the increase was expected and most likely to continue for the next few quarters. We continue to be below our competitors on deposit pricing, but it has been forced to increase rates to retain deposits.

Nonperforming loans decreased to $11.5 million from $13.9 million last quarter. Loans 30 to 89 days delinquent increased -- increased to $39.9 million in the third quarter compared to $8.3 million in the second quarter. The increase was due in part to 2 loans, one was a construction loan of $11.3 million on a project that is substantially complete. That was delinquent for 52 days due to administrative delays in processing and extension and one was a commercial real estate loan of $8.8 million that was also delinquent for 52 days due to similar delays. Both extensions were planned well in advance, but unfortunately, could not be completed on schedule and so led to the increase in delinquent loans.

As of October 21, and on 30 to 89 days, delinquent had decreased to $14.5 million. So while the September 30 numbers look alarming, we do not think it is a sign of deteriorating credit. We took a provision for credit losses of $1.8 million in the third quarter, primarily attributable to loan growth. Our capital levels remain strong with all of our capital ratios well above regulatory minimums. We continue to repurchase shares in the third quarter with 95,000 shares repurchased at an average price of $20.93. We have 482,000 shares left on the buyback and intend to continue to utilize it as appropriate. With that, we are happy to take your questions. Operator, please open up the call.

(Operator Instructions)

Our first question will come from Kelly Motta with KBW.

I think maybe starting with the early-stage delinquencies and the process delays that you cited, David, your expenses are lower, too. Do you have all the people you need in place to run the operations? Are you -- was the delays -- do you have the capacity to support the business? Or are there places that you're adding people? Just trying to close the loop there.

We have plenty of staff in our credit department to do this. These delays are sometimes out of our control due to our client base and their travel schedules to Asia. So that sometimes we have this from time to time, okay, where things go delinquent because of that. I announced that we are looking for a controller in the accounting area because I expect Shalom will take over the role of Chief Financial Officer at some point in time in the next few months. So the Chief Accounting Officer position is a stepping stone for him, and I will be relinquishing that title at that time. I also said in our press release that we are looking for a President that will come in that will be the face of the bank to our local community. I will still drive strategy, and I will still be the Chief Executive Officer, managing the whole organization in total.

Got it. And I -- importantly, forgot to congratulate you on your title officially, David. So congratulations on the new role. I know you've been doing for a while. The loan growth has been really strong. It looks like there was -- a lot of that was single-family residential. Wondering if there was any portion that was purchased at all. The Fannie Mae or non-QM and just kind of any outlook for single family as well as overall kind of loan growth outlook.

Okay. Single family, let's start with Fannie Mae. Fannie Mae is close to zero production. So most of our production is non-QM. Our pricing now is approaching 7% on that product and probably soon will be over 7%. So -- and we're seeing -- I'm going to say we've seen that also coming back a little bit. We were doing in the $40 million a month that's dropping down to about $35 million. As far as commercial is concerned, or bigger problems. We have some large loans paying off, some large construction loans paying off in the fourth quarter. So having the same growth we had in the third quarter for the fourth quarter will be very difficult for us.

Got it. Understood. Maybe last question for me is on the deposits. You had the decline in noninterest-bearing, but increases in your interest-bearing deposits. Wondering if there was any migration between line items and just kind of overall outlook for funding your growth, whether you're going to be tapping more wholesale sources and just any sort of outlook on that?

I prefer to fund our loans through our customer base, but time to time, because of liquidity needs, we do use outside broker deposits. What I see is certainly people who have -- who are very extremely wealthy if they're not keeping their money aside to invest into other assets like real estate or today, we have people going into 2-year treasuries because of where the rates are today and those types of things they are slowly transforming some of the deposits over into either money markets or into CDs. Our biggest issue, we do have one customer that does trading and does trading and crypto and so forth. That customer will -- whereas they are very solid as to the financials. Their volume has shrunk tremendously because of the crypto winter, and we've gone from $300 million down to approximately $100 million in noninterest-bearing DDAs and so forth. So that's also our one customer, okay?

(Operator Instructions)

We'll go next to Nick Cucharale with Piper Sandler.

I will echo the congratulations as well.

Thank you, Nick.

I just wanted to make sure I heard your NIM commentary correctly. Are you expecting further expansion in the fourth quarter? Are you anticipating the pickup in liability costs, there'll be some compression here?

I don't think the fourth quarter will show a huge gain in NIM, okay? I think we'll still expand. But I think as we get to the end of this, and we begin to more and more CDs reprice and more and more people move out of noninterest-bearing, you're going to see that the NIM will stabilize and then eventually, as rates begin to go down, we will see in compression.

Okay. Could you update us on your expectations for the gain on sale business. You mentioned close to zero production on the Fannie side, but do you expect that to pick up in the coming quarters? And then if you could touch on the SBA front, especially in light of the lower premiums seen there.

I do not expect Fannie Mae to come back until we see pricing back down to the 4% range, okay? We are working on trying to -- for next year to sell our non-QM product. We're trying to convince the regulators of Fannie Mae that the box sales that we used to is advantageous to the minority depository institutions. So we're working on that angle to try to be able to sell our non-QM loans to Fannie Mae.

Right now, I don't see for the fourth quarter, I see our gain on sale being where it is. I -- and although we do have a few more SBA 7(a)s to sell and all, but that business itself has -- we're going into a recession. We're at the top of our -- our interest rates are coming to the top, hopefully, in the next month or 2, maybe 3, and that business has slowed down dramatically.

Do you have an updated time frame from the closing of the Gateway deal?

It will be next year. I don't have the exact month, but we're still in a deal.

Okay. And then lastly, how are you thinking about repurchase? So it looks like it's low this period relative to the second quarter, yet the average price was relatively similar. Is this just a desire to keep more dry powder for loan growth? Or how are you thinking about that?

Well, we're still going to be out of the market, but our -- we look at it where our stock price is trading on a day-to-day basis, basically. So -- and what is also the volume that's been traded. So we were out there almost a whole month of September and all of October, and that's all we were able to do mainly because of the volume.

Our next question comes from Ben Gerlinger with Hovde Group.

Yes, congratulations on the permanent job role title. I was curious if we can go back just a little bit on the kind of the inner workings and the soft process behind. I'm sure there's a lot of different avenues that you guys could take in review someone outside or potentially sell the bank. And then you just write about entering a recession, and you guys also have quite a few openings or some musical chairs that have had to be played with positioning and behind the scenes effort before you can kind of fully play 100% off loans. I was curious what the appetite is towards overall continuity as an individual firm and now you have gateway still pending, but was there ever a thought process of partnering with somebody larger?

Ben, we constantly review that the Board constantly reviews whether or not the timing is right to merge or not to merge and so forth. They specifically meet twice a year have bankers come out here and tell them about the market and so forth. So -- and I meet with bankers probably every month about the same thing. And if anything changes, I will mention that to Dr. Cal and the rest of the executive committee of the Board.

Got you. Okay. That's helpful color. And then finally, in terms of expenses, I know you still said you had the larger positions that still need to be placed. When you think about just kind of the boots on the ground blocking and tackling type lenders and all people once everybody is in place, do you think the expense base changes in any meaningful manner? Or are we just talking more kind of title changes from what occurring as her in the past quarter or two?

Clearly, the president will be hired from outside the bank. So from -- you would have to add a president's salary, however, there may be other salary, eliminations that I can't really speak about to help fund that.

Next question comes from Tim Coffey with Janney.

Congratulations on the new title. It's well deserve in a long time coming.

Okay. Thanks, Tim.

So my question are kind of on the loan-to-deposit ratio. Do you have a goal to our target for that ratio over the next 4 quarters or 5 quarters?

I think because of what's going to happen in the market, you're going to see loan growth slow, and we're seeing some of that already. So I think we're going to look at the loan-to-deposit ratio of -- we always run above 100%. Typically, we run above 100%, but I think you'll see us between 100 and 105 instead of 105 and 110, okay?

Yes, yes. I mean I asked you because -- I mean it looks like you have plenty of capacity for additional borrowings, not that they're the most cost-effective source of funding right now, but I mean you could go higher in with the loan growth, of course. And then speaking of loan growth, given the just the downturn in CREs that you're expecting from the payoffs, which tend to be bigger volume -- bigger dollar volume loans, could loan growth just be de minimis this next quarter?

No. I still think we will have when we say de minimis, I'm thinking this thing about $10 million or something like that, I think we'll still have above a $50 million quarter, okay? So overall, between the two.

Our next question comes from Andrew Terrell with Stephens.

Yes, I want to echo what others have said, Congratulations, David, on the title. Maybe just to start on the margin. Can you remind us just of the CD portfolio, what you have repricing in the fourth quarter on a scheduled basis. And then what's the roll-on roll-off dynamics look like from a cost standpoint?

Okay. For quarter 3, 4 shows that -- I can't be that quick.

I can follow up if that's easier.

Okay. I see that there would be about $200 million that will be repricing in the fourth quarter.

Okay. And kind of new CD rate? Are you offering the market right now? I know you've been able to kind of lag competitors, but curious where new CDs are pricing at for you guys?

We are close to 3%. But some of our competitors are at 3.50%.

Would you anticipate if we get incremental rate increases here in the fourth quarter, you kind of raise that 3% rate?

I believe we will have forced to have to do it. Again, like I said, we have people -- we have competitors that are over 3.50%. We have people at 3.75%. We have competitors that will give their VIP customers 3.25%, 3.50% like that. Most people are projecting that we'll be a Fed fund rate of between 4% and 4.50%, although seeing projections as high as 6% on the Fed fund rate. If we go to 6%, I think that will be catastrophic for both loans and deposits. Has stopped maybe (inaudible) of a word, but I think it would be very concerning.

Okay. Understood. If I look at your kind of deposit cost increased this quarter, interest-bearing deposit costs up, call it, 33 basis points. But my asking you to kind of a mid-20% interest-bearing deposit beta. Can you just remind us kind of your expectations through the cycle for deposit betas?

I think you're going to see deposit betas closer to 50 this go this quarter.

Okay. And then just maybe stepping back kind of bigger picture question with the announcement regarding the CEO. I know you mentioned earlier in the call kind of your focus full time on strategy at the organization holistically going forward. Just hoping you could maybe paint us a picture of as we look out over kind of next 3, 5 years, what does the strategy look like for RBB? Has anything materially changed versus previously? And then kind of where are you most focused on over the next several years as you think about kind of organically or inorganically growing the franchise?

Okay. Number 1 is I think we will continue our growth strategy that we have had. For example, we will complete our Gateway acquisition, then we will concentrate on growing in the areas that we have, either through in-market acquisitions or just de novo growth in the next -- in the near term. However, like I said prior, we're always looking for other opportunities. And if something comes up, we will do that. Does that make sense, the strategic alternative.

Yes. Makes a lot of sense. I appreciate it. If I could just sneak one more in. Do you have the balance of how much you have outstanding and SNC credits.

It's not split. What is the SNC credit.

We actually do not -- or we do not take NIM as SNC credit at this moment. Our credit is somewhere about $20 million to $25 million.

$20 million to $25 million.

(Operator Instructions)

We'll move next to Jordan Hymowitz with Philadelphia Financial. I apologize. We'll go to Kelly Motta with KBW.

I'm going to step back. My question was answered in further Q&A. I appreciate it though.

Okay. Thank you.

And with that, I do not have any other questions holding. I'll turn the conference back for any additional or closing comments.

Once again, thank you all for joining us today. We look forward to speaking to many of you in the coming days and weeks. Have a great day. Thanks.

And ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect your phone line at this time.