Good day, everyone, and welcome to the RBB Bancorp Third 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. Ma'am, the floor is yours.
Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the third quarter of 2023. With me today is Chief Executive Officer, David Morris; President, Johnny Lee; 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 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 the law. Now, I'd like to turn the call over to RBB's Chief Executive Officer, David Morris. David?
Thank you, Catherine. Good day, everyone, and thank you for joining us today. We are pleased to be awarded a $5 million CDFI ERP award by the U.S. Treasury in the third quarter. We believe it's a real testament to our ongoing efforts to support the communities in which we operate, and we intend to use the funds to help low and moderate-income communities recover from the COVID-19 pandemic by investing in their long-term prosperity. We were also pleased to reach our target 95% loan-to-deposit ratio in the third quarter. As we mentioned, this has been one of our strategic priorities, and now that we have achieved it, we expect to resume deposit-supported loan growth, which will enhance our profitability and margins.
Johnny, who joined us as president in the second quarter, has done an excellent job developing a pipeline of high-quality commercial loans that we expect to originate beginning in the fourth quarter. As part of the deleveraging process, we have also taken steps to de-risk our loan portfolio by reducing our exposure to certain loan categories that we believe could be at risk in a higher for longer interest rate environment. While we believe these proactive approaches to managing our balance sheet will help protect us against potential credit losses, it also impacted our margin and interest income as the exited loans tended to carry higher interest rates. The decline in yield on loans held for investment during the quarter was a direct result of the reduction in high-yielding loans as we sought to de-risk our balance sheet.
These actions, when combined with the additional pressure of deposit costs, negatively impacted net interest income and net interest margin, which declined to 2.87% in the third quarter. We expect NIM to decline in the fourth quarter due to continued pressure on deposit costs and loan yields, but we expect the redemption of the $55 million of sub-debt will benefit NIM in the future. Credit remained broadly stable in the third quarter, but we did take a $2.2 million charge against a specific loan that we hope to have off our books in the fourth quarter. We are optimistic that our proactive loan de-risking, combined with the third quarter charge-off and provisions, have positioned us for improving credit over the coming quarters. With that, I'll hand it over to Alex, who will discuss the financial results. Alex?
Thank you, David. Slide 3 has a summary of third quarter results. The decrease in loan yield that David discussed resulted in a decline in interest income, while continued pressure on deposit costs led to an increase in interest expense. The decline in net interest income was offset by sharply higher non-interest income, which benefited from the $5 million CDFI award. Non-interest expenses decreased by 8.9%, primarily due to a reduction in legal and professional fees as the insurance we have referenced in the past began to cover a significant portion of investigation-related legal expenses. We continue to closely manage expenses and anticipate total non-interest expenses to be approximately $70 million in the fourth quarter, before a temporarily seasonal increase in the first quarter of next year.
As David mentioned, third quarter net interest margin decreased 50 basis points to 2.87% due to the impact of decreasing loan yield, lower loan balances, and increasing deposit cost. Slide 4 includes summary balance sheet information, and you can see that the decline in net loans held for investment. The net loan-to-deposit ratio at the bank level at the end of the third quarter was 95.4%. Slide 5 provides additional detail about our loan portfolio, which totaled $3.1 billion at the end of the third quarter, with an annualized yield of 5.99%. Commercial real estate loans, which include construction and land development loans, comprise 46% of our total loans, and Slides 6 and 7 have some details about our exposure.
Our CRE office loan exposure stands at $45 million and represents 1.4% of total loans and has an average weighted LTV of 62%. Slide eight has details about our $1.5 billion residential mortgage portfolio, which mostly consists of non-QM mortgages in New York and California, with an average LTV of 61%. Slide ten has some details about our deposit franchise. Total deposits decreased by $21 million from the prior quarter. The decrease was mainly from a decrease in time deposits under $250,000. Non-interest-bearing deposits decreased slightly from the prior quarter. However, the pace of reduction of non-interest-bearing deposits significantly slowed in Q3 compared to Q2. Our average cost of interest-bearing deposits for the quarter was 3.83%, up 36 basis points from the last quarter.
It's worth noting that the pace of increase has slowed significantly from 72 basis points in the second quarter and 82 basis point in the first quarter. We continue to expect the pace of increases in deposit costs to slow in future quarters. Slide 12 provides some details on credit. Non-performing loans decreased to $40.1 million from $41.6 million from the last quarter, due to $2.2 million partial charge-off of one large loan. We are cautiously optimistic that the remaining balance of this loan will be resolved in the fourth quarter with no additional losses. Delinquent loan increased by $12 million from the prior quarter, mainly due to one large delinquent loan.
However, after the end of the quarter, the delinquent loan balance decreased by $16 million after a non-credit related temporary delay in payment of the large loan was corrected. Apart from the $2.2 million charge-off, credit quality remained stable. Our allowance for credit losses remained stable at 1.36% of total loans. Our capital levels remain strong, with all capital ratios well above regulatory well-capitalized ratios. 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 Nathan Race from Piper Sandler. Your line is live.
Yes. Hi, everyone. Good morning.
Good morning, Nathan.
Appreciate the commentary on the pressure to the margin in the quarter, and it sounds like you guys are expecting additional compression, at least in the fourth quarter as well. I was kind of wondering if you can kind of just frame up the magnitude of pressure that you're expecting into the fourth quarter and early next year, assuming the rate hikes stop from here?
Sure, I'd be happy to do that, Nathan. As you mentioned, our net interest margin actually compressed this quarter, actually more than what we expected in the second quarter. And the reason for the larger compression was due to our de-risking strategy, as David mentioned. There was a large amount of payoff and pay down, especially payoff, for the second quarter. But the level of the payoff came down in the third quarter. As an example, $165 million paid off in Q2. Now we saw $36 million pay off in the third quarter. And I would expect there is one large loan that will be paid off in the fourth quarter. That will have a higher interest rate.
It will maybe impact a little bit negatively to further compress loan yield and net interest margin, but that's the only one that I think will have a negatively impact on the loan yield and the margin. Related to deposit cost, as I mentioned, non-interest-bearing deposit didn't decrease that much, and also time deposit under 250K increased. But I think, you know, the level of the increase on the deposit cost will slow down in Q4 and more slow down or even stabilize next year. So that's the two net interest income main margin impact. Also, as David mentioned, we are expecting to redeem our subdebt total $55 million on December first.
So Q4 impact, it will be minimum, but it will, more positively impact in Q4 as well as next year, because the rate was, 6.18% and quarterly, or annually, actually, about $850,000 we could have saved, in the going forward. But anyhow, so with all those, in the combination of the, loan deposit and, redemption of the sub-debt, we would expect to, compress in Q4, a little bit more, but not to the extent that we have seen a 50 basis point reduction in Q3.
Got it. That's very helpful.
I also think it depends on what the Fed does. If the Fed increases rates, now or in the November, which most of us do not believe anymore, we would have, probably less compression in, on the loan side than, we'll see if they do not increase rates. Okay?
Got it. Understood. And Alex, I couldn't quite catch in terms of the amount of kind of non-core runoff that you had in 3Q and subsequent. I think you guys had about $320 million in kind of non-core loans that you guys were looking to run off going forward. So I guess I'm just curious where those balances stand going forward.
Are you referring to the Q4 loan expected payoff? I just wanna make sure I hear correct.
Yeah. Yeah, I'm just trying to understand how much more in kind of non-core loans you guys have remaining, as of today.
Yeah, I believe we are talking about a $57 million dollar, if you ask me the dollar amount. And I think that's the only loan that we are aware that we strategically decided to let go or refinance by other, our competitors.
Okay, got it. And then, just curious around any additional color you can provide on the charge-off in the quarter. It sounded like it came from one loan in particular, so any other color on that would be helpful.
Okay, yes, I'll talk about it first, and other people can chime in. It's, it was, it was a $12 million loan on our books that we've charged off $2.2 million. The reason for the collateral value decreases, at least according to the appraisal, is due to this millionaire's tax, where it is in the city of L.A. and it's a block away from Beverly Hills, which does not have a millionaire's tax. So, with the new appraisal, we charged off. They do have a offer on the place that would get us out whole, right at the moment, and we'll see if that can be closed by the end of the year.
Got it. If I could just ask one more on kind of the expectations for share repurchases continuing. Any thoughts on perhaps when that could occur and any governors that we should be monitoring in terms of perhaps resuming share repurchases going forward?
We're very optimistic that we'll be able to resume our repurchase in the November timeframe, we're hoping. Mid-November. Okay?
Great. That's perfect.
We have 433,000 shares left.
Understood. I appreciate all the color. Thank you.
Thank you. Your next question is coming from Andrew Terrell from Stephens. Your line is live.
Hey, good afternoon.
Hey, Andrew. How are you?
Good. How are you guys?
Um, good.
Good. Thanks for taking the questions. I wanted to follow up on some of the questions around the margin, just to make sure I understand maybe the magnitude of how we should think about the move into fourth quarter. Do you have the spot cost of deposits at the end of the quarter, either total or interest bearing?
Yes, Andrew. Let me give you a breakdown of the spot rates for the deposit now and MMA account. We have about 2.5% combined. And the savings account, we have about $134 million. The spot rate for that is 1.15%. And CD, let me break it down between those two, under 250 and over 250. Under $250,000 CD, the spot rate is 4.43%, and the CD over $250,000, the spot rate is 4.5%.
Okay. That's incredibly helpful. I really appreciate it. And then similar question just on loans as well. I'm trying to understand the timing throughout the quarter of when the pay down occurred, the weight on the loan yields. It might be easiest if you have just like the exit spot loan yield on the loan portfolio or how it's trending so far in the fourth quarter.
Well, right now, for the fourth quarter, we haven't had significant runoff at all in the fourth quarter. We expect. We have a $20 million mortgage loan sale that's closing today, and they're about a 6.75% coupon. And then we have this one, fifty-seven million, which is at, what? 9.5%?
9.5%.
9.5%. We don't know exactly when that's gonna roll off. It's currently on our books today. We expect that it would be rolling off by November 15th. It's supposed to go by the end of this month, but it's only a week away, so.
Yeah. No, Andrew, let me give you a little bit more color, if that will be helpful on your-
Yep.
model of the margin. Okay, we had about $45 million of loan originated for the Q3. You know, we've been talking about the payoff and pay down, but the rate was not bad, you know, average rate of 9.75%, and we would continue to originate our loans. You know, obviously, we are deleveraging the high risk loans. That's the one point. And the second point, you know, the margin compression for the quarter was due to the payoff pay down, and I did mention $165 million in Q2 and $36 million in Q3. And other than that, you know, $57 million that we talked about, that should be it. So I think that will give you an idea of the loan yield and the margin side of the equation.
Yeah. In addition to that $58.7 million, then the most we are expecting is less than $10 million.
Yeah, of normal.
Right.
Normal payoff.
Yeah, that's-
Paydown.
Yeah.
Payoff, paydown.
Okay. Understood. Okay, I appreciate it. And then maybe just one more question around the expenses. Sounds like about $17 million or so in 4Q, and then if I heard you right, a little bit of a seasonal lift into the first quarter of next year. Just wanted to get maybe a bit of expectations on, on, in this kind of operating environment, how you're thinking about managing expense growth. Is that $17 million number something you think you can kind of manage around throughout the balance of 2024? Or should we expect some expense growth off that base as you, as you kind of continue to reinvest into the franchise?
Yeah, maybe I can attempt to answer for that. Yeah, the basis for the $17 million in Q4 was based on the fact that our legal and professional fee expense will be much smaller than the previous quarters and even smaller than the Q4. Given about 85% or even higher of those SEC investigation or investigation-related expenses, it used to be millions of dollars will be covered by the insurance. So that is the biggest contributor for the reduction of the legal expenses. But also, as you know, we did have some material weaknesses and a lot of outside kind of advisory or consulting services, not to mention the credit related.
We wanna make sure the review by third party and CECL related, some validation, all those, you know, professional fees, I would expect that will go down. So $17 million is the one that we expect in Q4, but if you're asking me the run rate for the 2024 and going forward, I think it can be even lower than $17 million. But, you know, the, like, salary and benefit expenses, obviously, we are very careful at managing the salary and benefit expenses, but if we really grow, we need to hire the qualified employees. But I think overall, the run rate for Q4, I would feel comfortable about $17 million. And, 2024, it can be, you know, even more or higher, but in the neighborhood of $17 million.
Caveat is, Q1 on seasonal, kind of a high, expenses.
Okay, understood. I really appreciate all of the color and thank you all for taking the questions.
Thank you, Andrew.
Thank you.
Thank you. Once again, everyone, if you have any questions or comments, please press star one on your phone. Your next question is coming from Kelly Motta from KBW. Your line is live.
Hi, good morning. Thanks for the question.
Hi, Kelly.
I was hoping maybe you could provide us with an update on the FCC investigation. It was nice to see the insurance kick in, so it's not dropping down to expenses. But I was wondering if you had any idea in terms of potential timeline towards resolution?
Well, if you know how the FCC works, they don't tell us anything. So, you know, we really cannot really comment on where they are. We just know where they are based upon, you know, if they're asking us for a bunch of information, and that has significantly slowed down and stopped.
Got it. And I know Gateway was terminated. Just wondering as we look ahead, is that San Francisco market still one that you're interested in getting in? And, does this shift at all, you know, your appetite for M&A versus potentially, you know, de novo branches or things like that in order to drive expansion into new markets as you've done in the past?
Okay. It depends on the type of acquisition, but yes, we are, you know, after a while, we would be-- we would entertain an acquisition in San Francisco, and we would also look at local market here or local markets where we already have branches, where we can get significant cost savings, much more than your typical 30%-40%, something closer to a 70% or 80% cost save. And, and that would-- that would make a lot of sense because there's a lot of duplication, especially here in L.A. There's 17 or more Chinese American banks, and we all have branches on Valley Boulevard, maybe multiple branches on Valley Boulevard. And it doesn't make sense that we have 17 banks serving the same market. So But right now, it is not on the radar screen. Okay?
Got it. And then in terms of, now that you're down to your targeted loan-to-deposit ratio, just wondering where you're seeing the best opportunities for growth, by category, if there's any, you know, particular industry or segment where you're seeing more attractive risk-adjusted returns?
Yeah, go ahead, Johnny.
Oh, hi, Kelly. This is Johnny. Hi, how are you? You know, obviously there's still a lot of demand for construction, CRE-related type of loans, and obviously and probably because there's not too many lenders right now that are very keen on wanting to do more construction loans. But for us, obviously, that's an area that we'll still continue to look at case by case on, you know, opportunistic basis. If there's good quality, you know, experienced developer with good track records, certainly we'll still look at that. On the non-construction CRE side, on the C&I types of businesses, certainly, you know, for example, SBA, where you are, you know, SBA lender, certainly there's, we see demands there.
Obviously we're, you know, very selective even though these are government guarantee types of credit. For C&I, there's certain demand there, but at this point, you know, we just reached this 95% loan-to-deposit ratio, you know, and now obviously we, you know, better position now to sort of relaunch our lending. On the C&I side, certainly we will be pursuing it a little bit more on an elevated basis, but still very selective at this point.
Got it. Thank you so much. I'll step back.
Thank you. There are no further questions in the queue.
Okay. I would like to thank everybody for joining us today. You all have a good day. Thank you. Bye-bye.
Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.