RBB Bancorp Q3 FY2024 Earnings Call

Thank you, Kelly. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the third quarter of 2024.

Thank you, Rebecca. Good day, everyone, and thank you for joining us today. We reported third quarter net income of $7 million, or $0.39 per share, with results including a pre-tax $2.8 million recovery on a fully charged-off loan and a $3.3 million credit provision. Net interest margin increased by 1 basis point, which was less than we expected, but we remain optimistic that it will have the opportunity to expand over the next few quarters with the expected decline in short-term market interest rates. We began to see some of the deposit funded loan growth we referenced last quarter. Loans increased by $44 million in the third quarter, supported by $175 million of loan production at a weighted average rate of 7.26%. Johnny will talk more about our expectations for loan growth over the next few quarters. Deposits increased by $69 million from the last quarter with non-interest bearing deposits remaining stable. We continue to focus on attracting and retaining core deposits to fund our loan growth. We did increase wholesale deposits in the third quarter as they were less expensive than retail deposits. But at 4.8% of total deposits, we are significantly less reliant on them than a year ago when they were at 13.9% of total deposits. Non-performing loans increased in the third quarter and Johnny will share more information about that. But we continue to work through these loans and believe we will be able to resolve the majority of them by mid next year. We were pleased to announce the resolution and termination of our Consent Order in August. Our directors and staff worked very hard to address our regulatory concerns and to strengthen our compliance programs. With this hard work behind us, we believe we have the opportunity to focus on growth and other value-creating opportunities for the bank. With that, I hand it over to Johnny.

Thank you, David. As David mentioned, loans grew at a 5.8% annualized rate in the third quarter. Supporting this growth was a very robust $175 million of loan production, which comes after strong second quarter loan production of $117 million. Net loan growth has been tempered by payoffs and paydowns due primarily to borrowers' lack of further need for loans or their desire to wait until rates come down further before refinancing. Payoffs also included loans with higher potential credit risk that RBB wanted to exit and loans that were refinanced by other banks that offer aggressive rates and credit terms that we were not willing to match. Absent a change in this dynamic, we expect our loan balances to continue to grow at a moderate pace, which will gradually accelerate as we continue to hire more seasoned commercial lenders. We intend to continue growing loans in a prudent manner by focusing on credit quality and relationships that will generate reasonable and sustainable returns for RBB. Starting on Slide 9 of the Investor Presentation, we provide some additional details on credit. Non-performing loans totaled $60.7 million or 1.52% of total assets at the end of the third quarter. The $6.1 million increase on the second quarter was mainly due to loans totaling $13.3 million that migrated to non-accrual status, offset by $6.1 million in full payoffs and $1.2 million in partial charge-offs. 99% of our non-performing loans are in our operating market, so we feel comfortable that we have a good handle on them and can work effectively to resolve them. However, it will take a little time. Slide 10 has details about our nine non-performing loans that are greater than $1 million. The two new non-performing loans are a $10 million C&D loan and a $3.3 million CRE loan. The C&D loan is on a completed mixed-use commercial property that has a pending certificate of occupancy and remains well secured. The CRE loan is well-collateralized based on a recent appraisal. However, there is an environmental issue and the borrower has stopped making payments as an action plan for remediation efforts is put in place. With respect to the increase in special mention and substandard loans, we are closely monitoring our borrowers' performance, including the status of unpaid property taxes to ensure we are capturing and measuring the risk in our loan portfolio. This includes reporting, special asset meetings, external credit review, and active engagement with our borrowers. Our special mentioned loans increased $58 million in total of $77.5 million at the end of the third quarter. The increase was primarily due to a $43.6 million C&D loan for a completed hotel construction project and five CRE loans that totaled $25.2 million. All of these loans are current, but they have unpaid property taxes which trigger the downgrades. We are working with borrowers to resolve the delinquent property taxes. In addition, an $11.7 million C&D loan migrates to substandard. It is on a completed apartment project that is in the process of stabilization and transitioning to bridge financing. However, the process has taken longer than anticipated and there are also delinquent property taxes. Nonetheless, this loan remains current on its payments. Substandard loans totaled $79.8 million at the end of the third quarter. The $16.8 million increase from the second quarter was primarily due to downgrades of three loans totaling $25 million. An $11.7 million C&D loan with payments current as previously described, the $10 million C&D loan and $3.3 million CRE loan, which migrated to non-accrual status. This increase was offset by loan payoffs of $6.7 million, charge-offs of $1.2 million, and upgrades and paydowns totaling $884,000. With that, I will hand it over to Lynn, who can go into some more financial details about the quarter.

Thanks, Johnny. Please feel free to refer to the Investor Presentation we have provided as I continue to share comments on the company's third quarter of 2024 financial performance. Slide 3 of our Investor Presentation has a summary of our third quarter results. As David mentioned, net income was $7 million, or $0.39 per diluted share, which matches last quarter's EPS. The 1 basis point increase in net interest margin to 2.68 was less than we had expected, but the loan production combined with stabilizing funding costs should support continued expansion over the next few quarters. Interest income increased $1.5 million with growth in loan interest income, making up for a decline in interest earned on securities. Non-interest income increased by $2.3 million to $5.7 million due mostly to a $2.8 million recovery on a fully charged-off loan from an acquired bank. Non-interest expenses increased by $297,000 to $17.4 million due to higher salaries and other expenses which were partially offset by lower insurance, regulatory and legal expenses. Slides 5 and 6 have additional details about our loan portfolio and yields. Commercial real estate loans as a percentage of total loans expanded modestly to 41%, while C&D loans decreased to 6%. Slide 7 has details about our $1.5 billion residential mortgage portfolio, which consists of well-secured non-QM mortgages primarily in New York and California with an average LTV of 56%. Following up on Johnny's comments about credit, Slide 12 walks through our allowance for credit losses, which increased to $2.1 million in the third quarter. The increase was due to a $3.3 million provision for credit losses, including higher specific reserves of $2.5 million offset by net charge-offs of $1.2 million. Specific reserves increased based on the decrease in the fair value collateral for two properties related to one relationship. The charge-offs were primarily related to a C&D loan and a CRE loan, which were written down to their estimated fair value and included in our largest non-performing loan table on Page 10 of the investor deck. The CRE loan had a carrying balance of $1.2 million at the end of the third quarter and has since been paid off with no further loss in early October. The ratio of our allowance to credit losses or ACL to total loans increased to 1.41%, inclusive of the specific reserves of a coverage ratio of our ACL to non-performing assets decreased to 72% and 76%. This decrease was due in part to an increase in individually evaluated loans, which did not require an additional allowance for loan losses offset in part by higher specific reserves. Slide 13 has details about our deposit franchise. Total deposits increased from the second quarter to $3.1 billion, with growth in all deposit types while non-interest bearing deposits remain stable. Our average all-in cost of deposits increased by 4 basis points from the second quarter to 3.63% in the third quarter, including an estimated quarter-end spot rate of 3.53%. Tangible book value per share increased to 24.64 due to earnings, accretive share repurchases, and a recovery of AOCI offset by dividends of about $3 million. We repurchased about 508,000 shares at an average price per share of $21.53 in the third quarter, which completed the program authorized in February of this year. Our capital levels remain strong with all capital ratios above regulatory well-capitalized levels. With that, we are happy to take your questions.

Thanks. Good morning, folks. Hope you're doing well. I just want to start off on the margin here a little bit. I appreciate …

We lost you.

Did we lose the whole line?

Per se.

We didn’t hear that. Can you say that over again, please.

Yes. Am I coming through now.

Yes.

Okay. Sorry about that. I just want to dig into the margin a little bit more, given your comments for some expansion over the next few quarters. I'm just kind of curious, what sort of magnitude are you thinking as we kind of move into 2025 on those dynamics?

Sure. I can make a couple additional comments about our NIM. So we are still positioned as a liability-sensitive bank. I think that our spot rate at the end of the quarter being at three deposit rates, being at 3.53 is an indication that our cost of deposits are going to trend downward. I think the key drivers for any NIM expansion relate to the repricing of our CD portfolio. The majority of it reprices over the next 12 months, and over the next quarter, $800 million has the opportunity to reprice, and it has an average rate of just under 5%. I think on the earning asset side, we've indicated that our loan production is coming in higher than our overall average loan rate. Plus, we have a large portion of our loan portfolio that's fixed or variable or hybrid that are sitting on their floors or not eligible to reprice yet. And that's 60% or about two-thirds of the portfolio. So in a declining rate environment, I think as far as expansion, I don't know if I can comment exactly the magnitude, but I think that deposit spot cost is probably a good indication of the minimum amount. And then I think we would be cautiously optimistic there would be room for more.

Okay. That's helpful, color. Thank you. Maybe pivoting to gain on sale of loans, just kind of curious if you've seen any signs of life in the secondary market for that paper that would allow originations and production to increase and flow through fee income?

Sure. So I'll start and Johnny can add some additional color. So, I think the SBA premiums have been relatively consistent in the third quarter compared to the second quarter. Our volume was a little bit lower, and he can comment on the premiums. And then, on our mortgage banking product, those have been, I think, relatively thin margins and the competition been there as well. So, I think, Johnny, if you want to add color on that.

Yes, well on the SBA side, again, the gross premiums have been averaging about 8% to 9% on average. So obviously that's a segment where we continuously want to drive more businesses and our pipeline actually still looking relatively healthy at this stage.

I think on the mortgage side, they've been 101, maybe 102.

Okay, fantastic. Thank you for taking the questions.

Hey, good morning, everyone. How are you doing? Yes, a few for me. Maybe just rounding out the margin conversation. Do you have the average margin in the month of September, Lynn?

I thought you might ask that question. So we would estimate our margin was moving up during the quarter and ending the last month. I would say that because we placed some loans on non-accrual and that occurred in September, kind of normalizing for that, we were probably close to a 2.75.

Okay, I understand. You mentioned having $800 million in CDs maturing at just under 5%. What do you expect your new offer rates to be? With the Fed reducing rates, we've observed that the 12-month CD rates in both wholesale and retail markets are currently between 50 and 70 basis points lower than the average rates that are expiring.

Yes. So, during the quarter, we had some commercial paper that we allowed for it to mature. We invested some of it in longer duration securities, and then a portion moved over to the loan portfolio, and then a little piece left in cash. So mostly commercial paper that was rolling over and with rates coming down, those returns also came down. So we were pivoting to other opportunities.

Okay. And then lastly, on the buyback, you just completed it, any expectation to re-up the buyback?

I think we're considering it after taking down about $20 million this year so far. So we're seriously looking at it.

Good morning. Thank you for the question. Starting with expenses, I noticed that your insurance and regulatory assessments went down significantly. I'm curious if that amount of about $650,000 is a sustainable rate or if there are any specific factors influencing this change, particularly in relation to the resolution of the regulatory order during your quarter.

Sure, Kelly. Thanks for the question. I think for that particular line item, we've reached the place where that might be a good indication of our near-term run rate.

Got it. Helpful. And then the salaries and benefits ticked up. I know you had some greater production. Wondering if you could provide any color as to what drove that if you’ve been adding new producers and any thoughts on how that could trend here in the next couple of quarters as you balance profitability and supporting the growth you see?

Sure. So I think the higher salary and benefits is reflective of the higher loan production. It was mostly associated with incentives as we come down to the last part of the year. I think without commenting necessarily on that single line item, I think overall expenses have been trending between $17 million and $17.5 million. So I'd expect kind of going forward, given ongoing investment in supporting, including higher production, maybe we would trend at the higher end of the range, but I expect our overhead range to stay there.

Got it. That's really helpful. I appreciate the information regarding the credit migration. The release indicates that you anticipate some resolution of this migration by mid next year. Can you elaborate on your actions in this area? MPAs are somewhat elevated, around 2% of the low scenario. What are you focusing on in this situation, your expectations for charge-offs, and what does a more normalized credit range look like for you?

Hi, Kelly. This is Johnny. Right now, we are addressing the nine non-performing loans that exceed $1 million, and we anticipate that about 70% of them will be resolved by mid-next year. We have a clear understanding of how these will be processed, either through trustee sales or if the investors decide to pay off or refinance these loans.

I would just add, Kelly, to Johnny's comment regarding any expectations of additional charge-offs. Currently, we are not seeing charge-offs in this area, but it will take some time.

Got it. Got it. That's helpful. And then it was nice to see some loan production pickup. Your commentary said moderate amount of growth ahead and accelerating thereafter. Where are you still seeing good opportunities, and how are you guys thinking about what's in the pipeline and kind of the outlook for growth as you manage that versus maybe it sounds like still working off some weaker borrowers out of the bank?

We are definitely looking to manage opportunities with the weaker borrowers. Regarding new production, our pipeline has remained strong since the beginning of this year. We are selective about where to focus our efforts since certain market segments remain highly competitive. We prioritize maintaining our credit quality and ensuring that any new processes align with our credit and underwriting standards, as well as pricing. In the third quarter, our growth primarily came from the commercial real estate and multifamily residential sectors. We also observed some growth in non-QM products and are seeing a decent pickup in the SBA area, which has resulted in a healthy pipeline there.

Probably one just additional comment, Kelly. For the fourth quarter, our annualized growth rate was about 6% overall, supported by the $175 million of new production. So I think our comment about modest growth and kind of opportunities that we're seeing in our marketplace, I think it follows that trend. I think our general view.

Hey, good morning.

Hi, there.

I just wanted to follow up on the margin discussion briefly. Lynn, regarding your comments about the actions taken after the Fed's decision, you mentioned observing a 100% beta or a 50 basis point reduction on some interest-bearing deposits. Could you elaborate on that a bit more? I’m trying to compare that with the 3.53 spot rate you disclosed for total deposits. It appears that if most interest-bearing accounts, excluding CDs, dropped by 50 basis points following the Fed's move, the spot rate number should be lower. I would appreciate any further details you can provide on this.

Sure. I mean, so the Fed moved in September, and we took our measurement on September 30th. So remember, 60% of our funding base is CDs. So we do have to wait for the CDs to mature before we can reprice them. So our current offering rates plus the opportunities as they come off are now 50 to 70 basis points lower than the rate that's there at September 30th. So while we already saw 10 basis points in the spot rate at the end of the quarter, I think there's opportunity for larger change in the fourth quarter. Does that help?

Yes. Okay. So maybe just …

Yes, we wouldn't have seen it reflected as of September 30th, and then the non-maturity deposits, it's about 20% of our funding base, those came down modestly, but probably not at 100% beta. I think the CD is our biggest opportunity.

Yes, okay.

So I should think about maybe the rate as inclusive of the actions you took on, like the non-maturity deposit side, and then you will get a more material impact from the time deposit repricing and the actions you took there in the fourth quarter? Yes. And as rates continue to come down, or if we expect them to, we have a CD ladder that matures over the next 12 months. So I called out the fourth quarter, there's an equal amount maturing kind of in the first and second quarters next year. And I would just say in the first quarter next year, the average rate coming off is still in the high 4s. So, that is a big opportunity to move as well. Thanks, Matthew. I can start. So we have $150 million of FHLB advances priced at around 120 that are coming due in March of next year. I think for plans to reprice given we're in a declining rate environment, we should be able to take advantage of that. However, at the same time, we did put on a $50 million advance at the end of September. We were able to price that around $340, $345, and it has a final for 4 years is the structure. There is a one-time call. And again, we would look to something like that to help, I think, refinance the $150 million. Plus, we'll be looking at our own loan growth and opportunities to grow deposits. So as of now, I think we're feeling pretty comfortable with the maturity of the $150 million advance. Obviously, 120 is a very attractive rate, so we'll work hard to get more cost-effective funding.

Great. Thank you.

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

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.