Good day, everyone, and welcome to the RBB Bancorp Results for the Second Quarter of 2023. 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. Ma'am, the floor is yours.
Thank you. Good day, everyone, thank you for joining us to discuss RBB Bancorp's Results for the Second Quarter of 2023. With me today is Chief Executive Officer, David Morris, President and Chief Banking Officer, Johnny Lee, Chief Financial Officer, Alex Ko, Chief Credit Officer, Jeffrey Yeh, Chief Administrative Officer, Gary Fan, and Chief Risk Officer, Vincent Liu. David, Johnny, and Alex will briefly summarize the results, which can be found in the earnings press release and investor presentation that are available on our investor relations website, and then we'll open up the call to your questions. 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. First thing first, I would like to welcome Johnny Lee to the Royal Business Bank family as President and Chief Banking Officer and say how pleased we are to have someone with his experience and reputation join us in a leadership role. Johnny's hiring is one of the more visible steps we've taken over the past 15 months to strengthen our management team, enhance our board of directors, and adopt industry-leading corporate governance policies. These actions are summarized on page three of our earnings presentation. Since I was named CEO in February of last year, we have added a new President, Chief Financial Officer, Chief Administrative Officer, SBA Manager, Commercial Lending Manager, and an East Coast Head of Branch Banking.
These additions to the RBB team have deepened our management bench and improved our ability to run a nationwide banking franchise. In addition to the new employees, we enhanced our board of directors with six new directors with extensive regulatory, executive leadership, wealth management, risk management, and community banking experience. Of our 10 directors, nine, including our chairman, are classified as independent directors. We also adopted new corporate governance policies and standards, which include enhanced director independent standards and an independent board chair, update board committee charters, and a new code of ethics. I want to mention these actions because I think they show how serious we are about serving our community, increasing shareholder value, and preventing a repeat of the events that led to the departure of former employees and directors.
We are hopeful that folks will look at us, not as the bank we were a year ago, but as the bank we are today. With all that said, I think it's important to address a couple items in the quarter before I hand it over to Alex. First, we are aware of the increase in non-performing loans. While non-performing loans increased in the second quarter, classified, special mention, and loans delinquent between 30 and 90 days decreased from the last quarter. Specifically, special mentions of loans decreased significantly to $24 million from $89 million in the past quarter. Second, we strengthened our liquidity and are well on our way to bring the bank's loan-to-deposit ratio down to our sub-95% target.
These efforts have resulted in a decrease in loans as we have slowed our lending, tightening credit, and increased our liquidity over the past few quarters. We continue to lend to our core customers and expect Johnny's experience in C&I lending will create new opportunities to originate loans that come with significant deposits. Now I'll hand the call over to Johnny, who will make a few comments before handing it over to Alex to discuss the financial results. Johnny?
Thank you, David. I'd just like to say how excited I am to join Royal Business Bank as President and Chief Banking Officer. I've been here for a little more than a month and have been impressed by the energy and dedication of the whole team. We have a real opportunity to continue to build on the successful track record of the bank and to build share, shareholder value. As David mentioned, I believe my 33 years of experience in C&I lending will expand opportunities to diversify our loan portfolio while adding lower cost deposits. I look forward to meeting many of you in person and to reporting on our progress in the quarters to come. With that, I'll hand it over to Alex, who will discuss the financial results. Alex?
Thank you, Johnny. Slide four has a summary of second quarter results. Increasing loan yield drove another quarter of record interest income, but were offset by increasing interest expenses. As a result, net income for the quarter was stable at $10.9 million, or $0.58 per share. Non-interest income of $2.5 million increased slightly from the first quarter, as $271,000, excuse me, increase in service charges offset $125,000 decline in loan servicing fees. Non-interest expenses decreased $394,000 due to decreases in salaries and legal expenses, offset by increases in occupancy, data processing, and regulatory assessments. Second quarter net interest margin of 3.37% decreased 43 basis points from the last quarter, as deposit cost increases continued to outpace loan yield increases.
Slide five includes summary balance sheet information. You can see that the biggest change was net loans held for investment, which decreased by $146 million, as we began to see the impact from the slowdown in origination we discussed last quarter. All loan category balances declined, with the exception of residential mortgages, which increased slightly. The net loan to deposit ratio at the end of the second quarter was 99%. We were pleased with our progress on this important goal. Our yield on average earning assets increased to 6.01% in the second quarter, which was a 17 basis point increase from the last quarter and a 135 basis point increase from the second quarter of 2022.
The increase in yield from last quarter was due to increasing yield on virtually all of our interest-earning assets. Starting on slide six of the earnings presentation, we provide additional detail about our loan portfolio, which totaled $3.2 billion at the end of the second quarter, with an annualized yield of 6.23%. Commercial real estate loans comprise 45% of our loans, and slides seven and eight have some details about our exposure. Our CRE office portfolio is relatively small at $45 million and has an average weighted LTV of 57%. Our CRE loans consist of 44% of multifamily loans. Slide nine has a snapshot of our $1.55 billion residential mortgage portfolio, which mostly consists of non-QM mortgages in New York and California. Moving on to slide 11.
Our total deposit balance increased steadily for the last two quarters. Average interest-bearing deposits increased by $217 million due to increases in time deposits. Average non-interest-bearing deposits declined at a slower pace than last quarter. We have had a steady decline in uninsured deposits, which now stands at 29% of total deposits, partially due to converting to CDARS deposits. Our average cost of interest-bearing deposits for the quarter was 3.47%, up 72 basis points from the prior quarter, and a slight decline from the 82 basis point increase we saw in the first quarter. We continue to expect the pace of increases in deposit costs to slow in future quarters. Moving on to credit.
As detailed on slide 12, non-performing loans increased to $42.5 million from $26.4 million from the last quarter, due to primarily to three loans totaling $17.8 million. One of these loans is a CRE office loan, and two of them are residential mortgage loans. Also, during the second quarter, 13 loans totaling $3.5 million were removed from the non-performing category, with seven of them totaling $3.1 million paying off, and five of them totaling $100,000 being charged off. As David mentioned, and you can see on slide 14, we saw a $68.5 million decline in special mention and classified loans in the second quarter. The largest part of this improvement was an upgrade of $55 million multifamily construction loan.
The company recorded a $380,000 provision for credit losses, which when combined with a decline in loans outstanding, took our allowance for credit losses to 1.35% of total loans. As noted on slide 15, non-interest income increased slightly from the last quarter, mainly due to an increase in deposit service fees. Slide 16 shows detail of operating expenses. Our efficiency ratio slightly increased, mainly due to reduced net interest income, offset by a decrease in salary and employee benefit expenses. Non-interest expenses to average asset ratio improved slightly to 0.46%, mainly reflecting the reduction of non-interest expense quarter-over-quarter. Our capital levels remain strong, with all capital ratios well above regulatory well-capitalized ratio, which we believe is prudent given the market risks. With that, we are happy to take your questions.
Operator, please open up the call.
Certainly. Everyone at this time, we'll be conducting a question-and-answer session. 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. Please hold while we poll for questions. Your first question is coming from Kelly Motta from KBW. Your line is live.
Hi, good morning. Thanks for the questions. I think that maybe I'll kick it off with your broader comments on building the bench. I know you guys have done a tremendous job, adding independent members to the board, as well as, adding to the bench on the management team. Just wondering, as you look at what you've done and brought on, do you feel like you have the team in place now to kind of execute in terms of the next stages, or are you still looking to add executives in some areas?
Kelly, this is Dave. Good morning. I believe that as far as our executive management team, we have everybody on board. We do have some holes in, for example, we need to have a C&I lender that we would need to put on, and a couple other positions like that within the organization.
Right. Then on the loan growth front, I believe your release and commentary suggested that you're pulling back in some non-core areas, maybe non-core regions. Can you expand on kind of where you are, more specifically, where you're pulling back, as well as where you continue to see good risk-adjusted returns? Also, as we look towards the second half of the year, you know, loan balances are down. I know you've laid out where you want to get to on your loan-to-deposit ratio. How much of that comes from just pulling back on the loan growth, as we look towards the back half of the year?
Okay. I will attempt to answer the first and second part. When we say non-core growth, we're talking about customers who do not have a core relationship with us, meaning they do not have a deposit relationship with us also, or their main deposit relationship. Many of these are out of our market, okay? Maybe in the state of Washington or Oregon, Texas, and so forth. We're also paring back in some of our other areas of non-core business, like our auto lending. We have ceased auto lending, and we're bringing down mortgage a little bit also. We're not growing mortgage like we used to.
As far as, the second part of your question, most of our decrease is gonna come in both areas, but most of the decrease in our loan-to-deposit ratio, and, is going to be probably from the loans rolling off in those areas that I talked about earlier. Okay, while at the same time, we're gonna probably bring on, you know, $40 million a quarter or so in deposits. That's what's going on.
Got it. Maybe last question for me, and then I'll let others into the queue. On the non-interest-bearing deposits, I know, you know, you had some larger sort of accounts, and there's been declines over the past several quarters now, some of that letting go some of those customers that aren't core to your business. Just as we look ahead, like, where do you see non-interest-bearing settling out as a percentage of deposits? They're at 18% now. Is that pace of non-interest-bearing runoff showing any signs of slowing? Any sort of color around the details of flows would be helpful as we look ahead.
Kelly, I'm gonna have Gary answer that question for you.
Hey, Kelly. Yeah, we definitely see the trend of that slowing. I think ultimately, with Johnny coming on board and with some of the new management team, that's the primary focus of our deposit growth. You know, for the remainder of this year, we're like every other bank, trying to deal with the market shifts and the way that we're looking at our current customer base. The investments we're making in people, in systems, products, and services, that's all in line to help us grow the non-interest-bearing deposit segment of our deposit book. That's something, I don't think you'll see immediate results in the next, let say, 30, 45 days, but I would expect us to see some positive momentum before the end of this calendar year.
Great. Appreciate it. I'll step back.
Thank you. Your next question is coming from Nathan Race from Piper Sandler. Your line is live.
Yes. Hi, everyone. Good morning. Thank you for taking the questions. Question on some of the balance sheet dynamics in the quarter. Cash balances remain fairly high, but you were also able to bring down your FHLB advances in the quarter. Just curious to hear how we should kind of think about those two areas going forward.
Sure, Nathan, good to talk to you. Yes, you're correct. You know, as you know, we have a strategy to lower our loan-to-deposit ratio at a bank level, so I think we are on track. With a kind of a monitoring or controlled growth on the loan side, and also continue to increase the deposit side, we park those money in the investment security, as well as to just boosting our liquidity we parked on the cash and different banks. Compared to, you know, last year, same quarter, Q2, you know, we have about, you know, $22 million increase, and I think it is prudent to keep the cash and the liquidity being at this level.
It might go a little bit down as we kind of funding mechanism, you know, as we grow in loan side in Q4, maybe, you know, it might decrease a little bit, but I feel comfortable with, let's say, $240 million-$250 million of a cash level. I think it is adequate. investment security-wise, it did increase, you know, from last quarter, you know, quite big increase, around like close to $100 million. That is actually we are doing a barbell strategy to short-term, make sure we have liquidity matters, but also it helps us boosting our some interest income as well.
Got it. Maybe changing gears and thinking about the expense run rate. You know, I think last quarter, we were talking to getting closer to $17 in the back half of this year. Just curious, you know, with, you know, the decrease in comp that we saw this quarter relative to the still relatively elevated legal costs, how should we think about those two areas in particular relative to kind of the guidance provided last quarter?
Sure. Yeah, you know, we did say that, you know, we are expecting to the professional fee, especially legal fee, is expected to go down. Yeah, it did go down, but not to the level of the decrease that we expected actually happened this quarter. I think going forward, the run rate, we expect that will continue to go down. You know, in fact, just give you a magnitude of the legal fees and other professional fee, last six months is we incur about $3 million of legal fees, which I do not think continue going forward. It will be reduced. One thing to note is, obviously, there is just some insurance coverage. You know, they will reimburse certain expenses, which includes certain legal fees as well.
I would expect to continue to report the growth basis of a total our expenses related to legal matters. You will see some elevated level, but not to the level of a Q2 or Q1, but some expenses going forward. We, I would expect to see some sort of a reimbursement from the insurance company for that legal expenses. I hope that will help us to lower our efficiency ratio and also non-interest expense over average asset ratio. You mentioned the salary and benefit, like compensation expenses.
I think, you know, it did decrease a little bit for this quarter, but I think, you know, given we have a new key persons join the bank, and also we are strengthening certain bench. I think, you know, the salary and compensation expense might go up a little bit. That will kind of offset a little bit to the increase of legal expenses. Other kind of operating expenses, such as like assessment fee, I would expect small amount, like $100,000 or something, will decrease going forward, because I did see some one-off increase in the second quarter. Having said that, you know, I would expect like $80 million, plus, minus, might be the run rate that I can foresee for now.
There is a certain aspect that obviously some legal fees, all those kind of things, might be some out of management's control. I would feel comfortable in the neighborhood of $80 million run rate for non-interest expense, would be comfortable.
Okay, great. That's very helpful. Just any additional details you can provide on the office, commercial real estate loan that moved to nonaccrual in the quarter? I appreciate all the details in the deck, just any additional color in terms of occupancy rates and kind of how you guys are working through that credit in particular.
Yeah, maybe I can attempt. You know, Jeffrey is here with me, Jeffrey can definitely chime in. We try to have kind of a little bit more details about the CRE office portfolio. Later, actually, we provide a slide, more details on the earnings presentation, page seven, which have a LTV distribution and also by regional breakdown. The actually office exposure itself, you know, we have a very minimum, you know, $45 million total, which is a 1.5% of our total loans. That's, I believe, to start with, I said we have a small amount of exposure. However, one loan that kind of migrate into nonaccrual loan this quarter happened to be those office portfolio.
We did perform a impairment analysis, which is about 90% of net loan-to-value ratio. There is not a real reserve or loss content for now, based on the appraisal that we have. We believe that is a kind of isolated, you know, one-off office portfolio, because I don't see any other, you know, office type of a portfolio in our even small, you know, portfolio have a similar nature of a risk content. I think that is kind of isolated, but we are watching very closely because office space itself is, you know, industry-wise, it's a high-risk areas. We are watching carefully.
Just give you a little bit more color, more on the overall office portfolio, we have average weighted, you know, LTV is very low, like a 57%. One-off, 90%, that NPL is a kind of one-off item, and we have low LTV again, like a 57%. Also, you know, 80% or more, is all in the areas that we serve, you know, New York, New Jersey areas.
Okay, got it. Very helpful. If I could just ask one more on capital, management priorities. I imagine you guys want to continue to build excess capital in this type of environment, but also just curious, any updated thoughts on just when maybe share repurchases can resume, and if, you know, the ongoing SEC investigation that was indicated in the 8-K last night has any impact on, you know, your timing or ability to resume share repurchases?
We don't know the timing on the share repurchases at this time, but we want to start repurchasing as soon as we can.
Okay, great. That's all I have. I appreciate you guys taking the questions and all the color, Alex and David.
Yeah.
Thank you. Your next question is coming from Andrew Terrell from Stephens. Your line is live.
Hey, good morning.
Hey, Andrew.
Hey, if I could just follow up on the office loan, I understand that the portfolio overall is very small. It looks like very well underwritten here. For the one office loan that went nonperforming, it sound like the LTV is right around 90%, but you maybe had gotten a recent appraisal on that. I was just curious, before the updated appraisal, what was the LTV beforehand? I guess in other words, what was the kind of value degradation that the property saw?
Yeah, hi, this is Jeffrey. Before it was appraised, before it was reappraised, the LTV is about 65%. We did do a appraisal, or the new appraisal, because of the drop of the operating income. Just also let you know that, the building is 100% occupied, and it's just the reason of the drop is mainly because of the, the tenant negotiate for the low, lower rent. it actually impact the value, because if you're using the income approach to evaluate a property. And on top of it, there is a short-term rental disagreement. there's a reason why that we put it into NPL, just for your information.
Understood. That's very helpful color. I appreciate it. Maybe on the, on the other side of the credit front, I mean, it was good to see the special mention improvement this quarter. I just want to make sure I heard correctly. Was it one specific multifamily construction loan for $55 million or a handful of multifamily construction deals for that aggregate amount that drove the decrease in special mentions?
Yes, that is true. That is a big decrease of special mention because of this property. Just to give you a little color of this property, this property is 100% completed, they are breaking into two project. The Project 1 is more than 90% leased, the Project 2 is just completed, and they are doing a pre-leasing. Also, just for your information, that because we are because of the market, they are in a good market area, so actually they already received a commitment letter from the other financial institution to take them out.
Also that because, and because of, things are very clear right now, so then, that is the reason why we upgraded this loan, from, special mention.
Yep, understood. Okay, I appreciate the color and it's great to see that improvement. David, I want to go back to your comments kind of around loan growth and maybe letting some of the not what you would deem non-core maybe roll off. I know you made some comments on some kind of out-of-market lending. I was hoping you could maybe ring-fence just what within your portfolio, I guess, how much in aggregate would you deem out of market? Similar question, how much would you view as non-core? What I'm trying to get at here is, you gave us an idea of targeting kind of $40 million per quarter in deposit growth.
Just trying to get a sense on the loan growth moving forward, would you expect a similar amount of loan decreases over the next couple of quarters, or is that pool that you would deem non-core kind of mostly worked through at this point?
First of all, I don't think we'll have as much come off the books next quarter as we have today, this last past quarter. I'm going to pass this over to Jeffrey, who has the concentration report, who can tell you, what we have in different states, but I don't. How much we project to roll off. Unfortunately, Andrew, that $55 million loan we just talked about is actually a core customer of ours, but we could not compete on rate. The rate was significantly lower, so we do not play the rate game. We, unfortunately, that customer is taking one of this loan, we have other loans with him, with him to another bank.
This is Jeffrey again. Basically, out of market or out of area, a loan that we define as low as David mentioned earlier, are those loan that do not have a complete relationship, such as a lending and deposit. Those are the loan that we that is part of our risk strategy to gradually upload those loans. Just give you a little bit of color on the out-of-state lending. We used to have about $400 million of out-of-state lending in beginning of the year. Right now, we are that is already reduced to about $300 million, close to $320 million.
That happened in six months, and that tell you that when we decide to go this route, and then we actually are very serious about executing it.
Is that $320 million remaining, kind of the last of what you would deem non-core?
We would, we will most of them, we'll consider non-core as long as they do not have total relationship with us, especially the deposit relationship.
Yep. Understood. Okay, thank you for taking the questions. I'll step back in the queue.
Thank you. Your next question is coming from Tim Coffey from Janney. Your line is live.
Great. Thank you. Morning, everybody. David, Alex, do you have any kind of visibility into when margin might trough? Say, is that something a later this year event or early next year?
Well, Tim, we know that there's about $1 billion of CDs that come up for renewal in the third and fourth quarter. We also know that they're presently priced at around 4%. We don't see a huge repricing issue there. I think we're holding the rate steady from since about January or February of this year on our offering rates on CDs. I really think it's more of the end of the year, first of next year, before. If we see any decreases in rates, we'll begin seeing hopefully a little bit. You know, it takes about a year for our margin to improve if we begin to see decreases in rates and so forth. Alex, any more color than that?
Sure. You know, that's a great point. I just one point to add, you know, there's obviously a deposit lagging impact. You know, we have seen quite a big increase on the market rate, you know, beginning of the year and the last year, quarter two, three. Those were kind of repriced already, or it will continue to reprice, you know, this quarter and the next two quarters. Once that kind of repricing kind of set, I think, you know, we'll have a much more normalized the deposit cost. We will also have an increase on the asset side. Now, we, as you know, you know, we have decreased our earning assets with a good reason, strategic reason with the help from Johnny and the teams, going back to the market.
variable rate loans, and other good earning assets, it will definitely help our net interest margin going forward to increase. I would say next quarter, Q3, we'll have a compression, but again, as David kind of alluded, it's not to the level of what we have seen in this quarter. We have a 33 basis point compression. I don't think it will be that level. It will be less level, but it will continue. I'm hoping, you know, by end of the year, starting next year or something, we would like to see the kind of bouncing back our net interest margin.
Okay. Alex, do you have a spot rate for interest-bearing deposits for June?
Yes, I do have. You know, I have, you know, spot rate for money market is 2.73%. I have only breakdown of the CD for less than $20,000 is 3.83%. Deposit over $2,050,000 is 4.5%.
Okay, great. Okay, thank you very much for that. David, switching gears, do you have any visibility on when the SEC inquiry might conclude? It's not uncommon that the SEC will launch an investigation and then never close it.
I don't know if I can really answer that question, Tim, because I really don't know either. I could just tell you that it's progressing enough to where we felt very comfortable in announcing publicly in, I think, 8-K, of what's going on, or at least what.
Okay
S ay of what's going on.
Okay, that's fair. Just final question for me. On the three loans added to nonperformers in this quarter, any of them out of your primary service area?
There, the three of them, two of them are residential mortgage. They are in our area, and then just also for your information, their loan, their LTV actually is, one is by 59, one is by 67, 66, which we think is covered. The other one is the one that I mentioned about our office. That is out of state, but that is in.
It's in Springfield, Illinois.
In Illinois.
which is technically out of our market area, but we do have branches in that state.
Right.
Okay. All right, well, thank you very much. Those are my questions. Thank you.
Thank you.
Thank you. Your next question is coming from Kelly Mota from KBW. Your line is live.
Hi, thanks for the follow-up. Kind of on that note of the investigation, just wondering if there's any implications at all for the pending Gateway deal, and if you could remind us, when that deal needs to be renegotiated, when the contract's up. Thanks.
The contract expires September 30th. That's all I can say about Gateway right now.
Thank you.
Thank you. Your next question is coming from Nathan Race, from Piper Sandler. Your line is live.
Yeah, I appreciate you guys taking the follow-up as well. I just want to clarify on the margin expectations. I know there's a handful of moving parts to it, Alex, it sounds like you expect the pace of compression to slow into the next couple of quarters, or can you just kind of circle back on how you're kind of thinking about the trajectory during 3Q and 4Q this year?
Yeah, sure. You know, I would like to say one more time, yes, you know, it will compress, not to the level that we have experienced in Q2 and Q1. You know, Q2, we have a 33 basis point of margin compression, maybe half of that. I don't have a real crystal quantifying it, I would say it will be substantially lower than 33 basis point compression that we have experienced in Q2. Going forward, Q3, probably it will be compressed, Q4 maybe, I'm hoping that, you know, Q1 of next year, we might see the expansion.
Okay, great. Just lastly, on kind of the reserve outlook, you know, it sounds like you're well secure in that office, commercial real estate loan that moved to non-accrual in the quarter, and you guys obviously had a nice increase in your ACL here in 2 Q. Should we expect the reserve to continue to grow at this point? Just how are you guys kind of thinking about future provisioning in light of maybe some continued loan shrinkage near term, and then maybe a return to growth in 4 Q?
Yeah, you know, I will attempt to answer first, but Jeffrey might chime in. I would say our allowance coverage ratio as of Q2 is quite, I feel comfortable with it. Let me give you a little bit more color of $380,000 of provision for this quarter. We have $146 million of a reduction of our portfolio. That, if you kind of estimate how much of impact it would have, just multiplying 1.35% of our ACL coverage, that's a $2.1 million of the provision for credit losses. Obviously, we do have a positive, you know, $380,000 provision for credit losses this quarter.
Reason for that is, you know, considering some sort of economic macro uncertainties, and also we did see some pop-up on nonperforming loans, right? That did increase, even though other classification has improved. We want to be prudent, our ACL coverage. To answer your question, I think, you know, 1.35% allowance coverage ratio relative to our peers, I think we feel it's adequate. Going forward, I don't think, we are trying to build a reserve going forward unless it is necessary. We will monitor the credit very carefully. Given we have some, you know, maybe it might be a one-off item, that we have an increase in the nonaccrual, but we are taking serious.
Our underwriting criteria, all those kind of things, we actually, quite strengthened. We will monitor the allowance coverage ratio, but I don't anticipate we need to continue to build the reserve unless there is a macroeconomic or real credit quality further deteriorates. I think that is basically.
Yeah, I would agree with what Alex said.
Yeah.
The, um.
Okay, great. Thanks again.
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, good morning. Yeah, good morning, everyone.
Hey, Ben.
During the course of this call, there's been a rumor that two Los Angeles competitors are likely to announce a merger anytime, sometime soon. I was curious, just on overall deposit pricing within the Los Angeles area, have you seen anything material, any sort of outsized pricing where people are, for lack of a better word, kind of scrambling to retain their clients? Or is it really not that impactful to overall deposit costs?
I don't see any. We don't see anything like what you're talking about. Okay?
Gotcha. Fair enough. I mean, we've had a few different questions about the margin and potentially peaking, let's call it around the end of the year or excuse me, the margin troughing around the end of the year before rebounding higher. I'm just curious if you'd be open to sharing potentially where you think that NIM is. I get that it's a bit cloudy out there over the next six months, especially with pricing and mix shift, but I'm just curious if you'd be open to sharing where your margin potentially troughs at least in your model today.
You know, actually, to be honest, you know, there's a lot of moving component, you know, the deposit pricing. You know, again, we will continue to grow. You know, even though we will focus on the non-interest bearing deposits, but, you know, we will grow the deposit side, and it will cost us. We have a target of 95% bank-level net loan-to-deposit ratio. We have some sort of a deposit matters. You know, I would kind of difficult to give a kind of accurate, you know, NIM projection by end of the year or Q1, because I... there is so many moving parts. Also, you know, not only the deposit side, but also loan side.
You know, as David mentioned, we will compete with the deposit, I'm sorry, loan pricing, but we are not gonna just retain for the sake of the growth for by paying the by allowing the high loan rate or if they are asking for. You know, again, sorry, you know, it's too hard for me to give you a real, accurate, the NIM margin guidances at this time, other than what.
Fair enough.
Yeah.
Yeah, I figured it was worth a shot. I completely understand. I appreciate the color. That's it for me.
Any others?
Thank you. That concludes our Q&A session. I'll now hand the conference back to our host for closing remarks. Please go ahead.
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 afternoon.
Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.