Good day, everyone. Welcome to the RBB Bancorp first quarter 2023 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Catherine Wei, Investor Relations Officer at RBB Bancorp. Ma'am, the floor is yours.
Thank you. Hello, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the first quarter of 2023. With me today are President and Chief Executive Officer, David Morris, Chief Financial Officer, Alex Ko, 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 that is available on our investor relations website. 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. I'd like to turn the call over to David Morris. David?
Thank you, Catherine. Good day, everyone, and thank you for joining us. Despite the industry challenges of the first quarter, Royal Business Bank continued to make progress on the organizational realignment we began a year ago. Since the start of the year, we brought on Alex Ko, our new Chief Financial Officer, and we recently added Robert Franko and Scott Polakoff to the board of directors. We believe these actions, taken after many productive discussions with our shareholders, will allow us to turn the page on the events of last year and build shareholder value. In a quarter which saw multiple bank failures, we also increased our deposits. For that, we have our loyal customers to thank.
We work every day to serve this country's vibrant Chinese American community, it is gratifying to see the strength of those relationships in a time of stress. I'd like to take a moment to discuss our strategic priorities for 2023 before handing it over to Alex. First, we are focused on resolving all outstanding matters related to the events of last year. I can assure you that management and the board are focused on putting these events and the related expenses behind us. Second, we are focused on liquidity and intend to reduce our leverage this year. As a precaution following the bank failures in March, we increased our time deposit financing to ensure we had sufficient liquidity on hand.
We expect we will maintain a higher level of liquidity and plan to reduce the loan-to-deposit ratio to 95% by the end of the year. Given the volatility in the market and the economic uncertainty, we believe this is the best strategy to protect long-term shareholder value. Third, we intend to focus on supporting core existing customer relationships. Prioritizing these relationships will allow us to reduce our leverage while enhancing our deposit franchise. With that, I am pleased to hand it over to Alex, who will discuss the financial results before we open the call up to questions. Alex?
Thank you, David. Increasing loan yields and a stable loan portfolio balance drove record revenues in the first quarter but were offset by increasing interest expense, legal expenses, and other professional fees mainly related to our transition to a new external auditor. Due to these expenses, net income for the quarter declined to $11.1 million or $0.58 per share. Net interest income for the quarter also declined to $34.1 million, mainly due to increased deposit costs. First quarter non-interest income of $2.5 million was stable from the fourth quarter. The increase in loan servicing fee income was partially offset by the decrease in gain on sale of loans. Core non-interest expenses returned to the normalized run rate, however, were impacted by the legal and other professional expenses, which increased by approximately $2 million compared to the prior quarter.
We expect the legal and other professional expenses to decrease going forward. First quarter net interest margin of 3.7% was down 56 basis points from the last quarter, but up from 3.5% a year ago. The decrease from the last quarter was mainly due to deposit cost increase, which outpaced loan yield increase. Net loans held for investment increased by $4 million from the last quarter. The small increase is mainly due to the increase in single-family residential mortgage loans, offset by the decreases in other loans. Our yield on average earning assets increased to 5.84% in the first quarter, which was a 9 basis point increase from the last quarter and a 184 basis point increase from the first quarter of 2022.
Continued commercial customer activity and rising interest rates drove a $159 million decrease in average non-interest-bearing deposits and a $327 million increase in time deposits over the quarter. Our average cost of interest-bearing deposits for the quarter was 2.75%, which was up 82 basis points from the prior quarter. In addition to the impact of increasing interest rates, part of this increase in deposit costs was driven by a fourth quarter decision to begin reducing deposit concentrations. We are cautiously optimistic that the pace of increases in deposit costs should slow in future quarters. Moving on to the credit quality. Non-performing loans increased to $26.4 million from $23.5 million from the last quarter due to an increase in single-family residential loans of $4.7 million.
Delinquent loans decreased by $961,000 compared to the prior quarter. The company recorded $2 million of provision for credit losses related primarily to qualitative factors in light of an anticipated increase in classified loans as the company finalized its loan risk ratings for the quarter. With $2 million of provision for credit losses and minimum net charge-offs, the allowance for credit losses coverage ratio increased to 1.29% as of March 31, 2023, compared to 1.23% in the prior quarter. Our capital levels remain strong with all capital ratios well above regulatory well-capitalized ratios, which we believe is prudent given the market risks. We are happy to take your questions. Operator, please open up the call.
Certainly. At this time, we'll be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing 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 one on your phone. Your first question is coming from Kelly Motta from KBW. Your line is live.
Hi, Kelly.
Hi. Good morning over there. I thought maybe we could start with what you're doing with the balance sheet, kind of taking leverage down. And part of those prepared comments you had were that you were gonna focus on what you view as core relationships. Can you kind of dig in a bit more on how you intend to bring leverage down? Is it going to be through loan sales? Are you going to be de-emphasizing certain areas of lending? Just curious whatever kind of commentary and color you can fill in around that.
We will be tightening our underwriting guidelines in CRE, in construction lending. More particularly, Kelly, we are pulling back from out of area lending, and we're also pulling back on bridge loans in out of area. Okay? We're still gonna lend in our areas, pretty much all factors, all loan types, to our customers and to within our area, but we're going to decrease out-of-area market and let those loans roll off the books between now and then.
Got it.
Okay.
Okay. Okay. Considering that, I mean, last year, loan growth had been, fairly quite strong. Yeah, you were at about 1% annualized growth this year. Is that kind of when factoring in, the roll-off of some of these, like, non-core types of lending, is that kind of what we should be expecting, on the loan side?
I think it's gonna be between, you know, the low single-digits loan growth. Okay? Low single digits. We're hoping that deposit growth will be i n the upper single digits.
Got it. Okay. With, to non-interest-bearing declines, I know we've been talking about the past couple quarters of some larger relationships that you decided to let go for concentration considerations. Obviously, deposit growth is the source of emphasis now, especially getting the loan-to-deposit ratio down. About how much more related to kind of these larger accounts might be part of, I guess, left to go and, just trying to get a sense of when this deposit base can kind of stabilize, especially the non-interest-bearing portion.
We only have one customer that's over 2% of our total deposit base, and that would be about another $25 million where we would expect it to roll off between now and year-end to get it down to our 2% level. Okay?
Okay.
We did most of it last year, Kelly.
Got it. Okay.
I mean, I did the big majority of it last year.
On, on the expense side, you called out the $2 million of higher professional fees in part with the auditor change. You were at about $19 million of expenses this quarter. Understanding there were some moving parts in Q1 is kind of been a $17 million run rate, the right way to look at it. I know you guys have added to the team and to the board and are doing several things. I'm just trying to understand since that expense have bounced around a little, what kind of a good core run rate we can expect with all the changes that you've been making recently.
We hope to get it below $17 million, let's start conservatively and be at $17 million and then, you know, go from there next quarter. Okay?
Okay, great. I will step back. Thanks so much for the questions.
My pleasure.
Yeah. You know, Kelly, can I actually add a little bit more color?
Great.
We do have some increase on the professional fees and the legal fees. I'm not gonna go over too much of the details for that, but I just wanna add a comment that, you know, that going forward, as we indicated in the prepared remark, I would expect that will go down. Most of majority that we know have expensed throughout the quarter and the last year as well, but who knows how much it will come in. As of now, I would expect that legal and professional fee, which increased $2 million this quarter, I don't think we will repeat that. Going forward, it will be smaller. I just wanna add on that.
Great. Thank you.
Thank you. Your next question's coming from Ben Gerlinger from Hovde Group. Your line is live.
Hey, Ben.
Hey. Appreciate you guys taking the time. It seems like obviously you guys got in front of a lot of the deposit pressures and overall deposit growth was pretty sizable this quarter. I was curious what was the margin yesterday or the spot rate at the end of the quarter? Just trying to get a sense of kind of where we are today, given that the margin kind of fell pretty precipitously in the first quarter.
Yeah, you're correct. You know, we had a compression of the margin for this quarter, given our deposit pricing has gone up so much dramatically. Going forward, margin forecast, to be honest, it's very hard to have accurate margin guidances for now given the volatility. However, in response to your spot rate question, we do have a CD spot rate about 3.8% as of March 31st.
Okay. I was looking more so for the margin, not a CD, but anyways.
Yeah. Margin is a very difficult. You know, I would expect that it will continue to compress, but not to the level that we have experienced in Q1. Given the deposit side, I would expect that increase will slow down, as we said in the prepared remark. It will continue to compress, but again, you know, not to the level that we have experienced in the Q1.
Gotcha. Okay. Yesterday I saw you added two board members, more so, thinking about initiatives. Are they brought on for expertise, more consultancy or, just kind of thinking the addition of board members, what we should expect in terms of their addition for RBB as a whole?
Okay. Scott was brought on because Scott was a Regional Director of the FDIC. He will bring on great knowledge of how our regulatory environment and regulatory agencies work. We'll be able to assist the board in helping them learn all about those things. Bob was brought on because of his past experience as running a bank. The only other person who has run a bank before that's on the board is myself. We believe having Bob on board, his connections locally to, you know, deposit gathering to, you know, investors and to real estate market, I think is invaluable to the bank. Okay?
Got you. That's helpful color. Thanks. I'll step back.
Thank you. Your next question's coming from Andrew Terrell from Stephens Inc. Your line is live.
Hey, Andrew.
Hey, good morning. Maybe just to follow up on one of Ben's questions. Just to clarify, the CD spot rate at 3.8% at March 31, just making sure, does that include the broker time deposits, or is that just retail customer? Is that an all-in number, the 3.8%?
Yes, it's all in, the CD rate, 3.8%.
Okay. Got it. Then how does that compare to rates, from a retail perspective that you're offering in the market right now?
You know, we are offering a little bit higher than that. We used to have a deposit campaign, but we don't do that anymore now, but we just do it in our pocket rate, which is more selective to the customers. It's a little bit higher than the spot rate that we just discussed.
Okay.
Hey, Gary, are you there? Can you add any other color of what you're doing with all the promotions and so forth?
Sure. I think, you know, moving forward, obviously, you know, deposit cost is a priority for RBB, both total number of deposits and then the cost of what we're trying to get. So the lot of the promotions we've been considering, we're doing sort of on a quarterly basis, and we're tailoring those to each specific market. For example, something in New York that may work better for that customer base is something different than what we'll be running in California. That's a sort of shift in strategy versus what RBB used to do.
Generally, I think due to our customer relationships and the kind of the existing customer base as well as the new customers that we have in and around our geographic presence, we're seeing about 25-50 basis points better than our other competitors. You know, although the overall cost of deposits has been rising, I think we're still doing a little bit better than our competitors, and a lot of that has to do with the way we position some of the products and services as well as some of the customer relationships we have with our bankers that are on the ground meeting with those customers.
Yep. Okay. I appreciate all the added color there. If I could go back to some of the commentary around the loans and deposits. On the loans specifically, how much in loans do you have that you would classify as out of market loans? Then further, how much would you consider out of market bridge lending?
Our classified loan.
No, no. Out of market.
Out of market?
Out of market.
Out of market. Out of market. We have total about $410 million of out of market. That is considered out of state, or out of market lending. Our policy limit is about a little bit higher than that. That, as David mentioned earlier, that is our main focus to de-risk our out of market lending.
Yeah. Now, Andrew, I do wanna step back and tell you that we do have mobile home parks out of market. That's part of our core business. That's slightly different, but that's in that $410 million.
That is included. Yes, that's correct.
Okay.
Thank you.
The number is probably closer to $250 million that we're targeting to get off the books.
Yes.
Okay.
Actually, a lot, a little bit less than that.
A little bit less than that, yeah.
Got you. Okay. Could you maybe give some just color on what types of relationships those are? Just given they are out of market, how are they sourced? Are they primarily syndications?
Out of market are mainly, they range from multifamily, term loan to bridge loan. Those are relatively short-term. Originally, the term is about 1-3 years.
Yeah. Most of these were originated in 2020.
Right.
2019 , 2020 .
We basically.
Then 2021.
We start to de-risk this sector, starting from last year.
Okay. Just to clarify, there's around $250 million, maybe not all of that runs off this year, but that's kind of the portion that you might look to of out of market that you might look to run off the balance sheet. You think you can still grow loans in the low single digit range in 2023 despite that call it $250 million headwind?
Yes, I think so. You know, it's, we may not have stellar growth. We may have a quarter with declining loan growth, but I think overall, we could do that.
Okay.
Actually, the loan payment which is actually high. It is the thing that is we are very cautious in underwriting and also very cautious in do our due diligence in this market.
Okay. understood. Last one for me, and then I'll step back. Can you just remind us what the exposure is to office commercial real estate?
It's about $50 million.
Okay.
Yes. About $50 million. It's not very much.
Yeah. just a really small portion. Okay. well, very good. Thank you for taking the questions.
Thank you. Your next question is coming from Kelly Motta from KBW. Your line is live.
Hi, thanks for letting me ask the follow-up. I have here that one of the things you're looking to do is keep liquidity higher on balance sheet. I saw you build cash by about $150 million, at least on an end of period to about $200 million. Is this a good level of cash you like to run with or any excess in that? Just trying to get a sense of that as we work through the size of the balance sheet.
Sure. Kelly, you know, as you noted, you know, we have a cash, including due from banks. We have $31 million as opposed to last quarter, December year-end, it was only $83 million. Intentionally we increase. Given the market volatility, I would expect to continue to maintain this level or even higher as it deems necessary. I think this quarter, the management top priority is, given what's happening, it was a liquidity management. I believe we did a good job in terms of liquidity, including this available cash to be sufficient enough to weather through these liquidity challenges.
Thank you. Maybe last one for me is your pending deal. Just wondering if that Gateway, if that's something you're still looking towards doing or any changes in thoughts around that with the market volatility and it I know got extended a couple of times now?
We continue to have discussions with all the relevant parties. You know, no decision has been made at this time, Kelly.
Thank you.
Thank you. Once again, everyone, if you have any questions or comments, please press star, then one on your phone. Your next question is coming from Ben Gerlinger from Hovde Group. Your line is live.
Hey, guys. Appreciate the follow-up. I was curious, just on the deposit mix shift, obviously, time deposits increase for you and every other bank when rates go up. I was just kind of, do you have any internal guardrails? I'm looking back over relatively short couple-year history, and I see something close to 70% total of funding. I was just curious if you have any sort of red lines that you won't exceed?
Oh, of CDs?
Yeah, relative to total. I know you guys wanna get the loan-to-deposit ratio lower, so it means you either got to reduce them that denominator or reduce the numerator, increase the denominator. CDs are the only thing that's really kind of working in this market for any bank. I'm just kind of curious.
Right now, we do have under our ALCO guidelines, we do have policy limits, yes. I can't recall what they are, but we do have them. Okay?
Gotcha.
They're like, I think it's something like 66% or 65%, but I got to go back and check. It may be less, it may be 60% now. Okay?
Gotcha. Then just wanted to follow up on a quick.
Just, let me add a little bit more color on that. You know, we intentionally increased the CD proportion. You know, we did see the non-interest bearing deposit decrease, given what happened, that reduced the concentration. I think that it really benefits to increase the CD to secure those funding sources, you know, for certain periods of time. You know, we are not offering two years or three years of CD. It's more nine months or at the most one year, so that we can actually secure our funding sources for that regard. I don't really view this increase on the CD side as a negative. It is more secure. Even the cost was relatively higher than others, but I think it was worth for us to increase those CD deposits.
There is a broker deposit, but there was a quite success on the retail deposit from the CD side as well. So...
Okay. Are there any other-
Yeah, no, I get it. Thanks. Appreciate the color.
Sure.
Thank you. Your next question is coming from Andrew Terrell from Stephens Inc. Your line is live.
Hi, Andrew.
Hey, thanks for the thanks for the follow-up. I was hoping to get maybe a better sense of the non-interest bearing deposit flows in the quarter. Can you help us think about the cadence throughout the quarter on a monthly basis, just how the non-interest bearing balance has progressed? So far, quarter to date in April, have you seen any kind of stabilization in non-interest bearing deposit balances?
Yeah, you know, I will attempt to answer that. I don't have that monthly breakdown in front of me, but, you know, as I said earlier, those decrease of the non-interest bearing demand deposit was due to one large relationship, we strategically let go starting last year. That is continued into Q1. That's the reason why we have a decrease. Also, you know, given the interest rate market, you know, those non-interest bearing, they migrated to CD or higher earning methods. That will continue, but not to the level that we have experienced. Given the market expectation for the interest rate for, you know, May is a minimum, let's say 25 days or even it decreases, I would expect that runoff of the non-interest bearing deposit will slow down going forward.
I think again, I don't have the monthly breakdown, but, you know, it got stabilized since the March 31st or the liquidity crisis. I didn't see much acceleration of those non-interest-bearing runoff.
Yeah. Okay. Do you have how much of the decline in the quarter was related to that one relationship?
That one relationship was $26 million.
Okay.
Okay. We already reduced it significantly, throughout 2022.
Yep. Okay. Last for me, just on buyback. I didn't see any this quarter. Just updated thoughts, I mean, with a slower level of balance sheet growth, you guys sit in a really strong capital position right now. Just love to hear your thoughts on whether buyback is of interest.
The board is still discussing it at this time.
Okay. Thanks. Second follow-ups.
Thank you. Once again, everyone, if you have any questions or comments, please press star then one on your phone. Your next question is coming from Joseph Macondo from Finance Investment Society. Your line is live.
Hi. First, I wanna thank you guys for handling liquidity crisis very well as a shareholder. Just thank you for being pretty good management over this last quarter. I was wanting to ask more questions about the buybacks that we're just asking about. I understand that you guys have a create a good liquidity level to navigate throughout this crisis, there's a lot of opportunities to repurchase shares at what may seem like to be an accretive value going forward. Due to your high liquidity position in the market, would potential mergers and acquisitions activities be something that you would consider above a buyback or just overall when you're redeploying your earnings?
Right now, I think doing any merger and acquisition, in addition to what has already been announced, would be, it's too early for us to be comfortable in doing that. We don't know. I personally believe that the banking system is very sound and we're very sound. If we could have what happened in March 10th happen again overnight, with a number of these larger banks. I don't think M&A is wise right at the moment for us. I do prefer, you know, the board is more interested in giving back capital through the dividend process right now. That's, I think, number one.
I think number two is they are looking at reinstituting the buyback, but that will be probably a month or two or so down the road.
All right. Thank you for clarifying that .
Thank you. As a final reminder, everyone, if you have any questions or comments, please press star then one on your phone. There are no further questions in the queue.
Once again, I really wanna thank our customer base who stuck with us during March where everything was going crazy, and appreciate them very much. Just so that you know, most of our customer base that has multiple millions of dollars with us are also investors in this bank. We wanna thank them and so forth. I also wanna thank you for who have joined us today. We look forward to speaking to many of you in the coming days and weeks. Have a great day. Thank you.
Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.