RBB Bancorp

Greetings and welcome to the RBB Bancorp fourth quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Ms. Rebecca Rico. Mom, the floor is yours.

Thank you, Ollie. Good day, everyone, and thank you for joining us to discuss RBD Bankrupt's results for the fourth quarter of 2024. With me today are Johnny Lee, David Morris, Lynn Hopkins, and Jeffrey Yeh. David, Johnny, and Lynn 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. I would ask that everyone please refer to the disclaimer regarding forwarded statements in the investor presentation and company SEC filings. Now I'd like to turn the call over to RBB Bank Works Chief Executive Officer David Morris. David?

Thank you, Rebecca. Good day, everyone, and thank you for joining us today. First, as a bank headquartered in Los Angeles, it's important to acknowledge the tremendous devastation and impact to many Southern California communities due to the wildfires. We are proud of our team's effort to support the affected communities and are committed to assisting with the long recovery process. We've partnered with nonprofit organizations, serving low to moderate income communities, collecting donated supplies in our branches, and donated $30,000 to provide essential services to affected families. While many in Southern California have been impacted by the fires, we are grateful our Royal Business Bank team is safe and we're not aware of any significant exposure to the bank's loan portfolio or the bank's operations. We reported fourth quarter net income of $4.4 million or $0.25 per share. The decrease in earnings compared to the prior quarter relates mostly to credit which we are actively addressing and we'll discuss in detail on today's call. On a more positive note, the net interest margin increased by eight basis points due primarily to a 33 basis points decline in the cost of interest-bearing deposits, which was a welcome reversal to an extended period of increases. Loan balances declined in the fourth quarter But as Johnny will explain, we are confident that growth will resume in the coming quarters. Deposits declined slightly from the last quarter, but we did see a $20 million increase in non-interest-bearing deposits. Finally, before I hand it over to Johnny, I'd like to congratulate him on his new role as President and Chief Executive Officer of RBD, Royal Business Bank. I am confident that the bank is well positioned to succeed under his leadership. And while I look forward to retirement, I will remain on the board of directors of both RBB Bancorp and Royal Business Bank, where I will continue to offer my support to Johnny and the rest of the team. Johnny?

Thank you, David. I appreciate the confidence the board has in me and look forward to continue to build shareholder value. as we serve the financial needs of the Asian American community. I would also like to personally thank David for his leadership and contributions as the Chief Executive Officer of Royal Business Bank and for his willingness to remain on board directors where his input and guidance will ensure a smooth transition. RVB is a relationship-driven business bank which combines the lending expertise of a large bank with the speed and personalized service of a community bank to provide a full suite of financial services to individuals in small to medium-sized enterprises. We achieved $126 million of loan production in the fourth quarter, and after consideration of loans sold, total loans declined about $28 million. We continue to see surprisingly high levels of paydowns due to aggressive refi offers from competitors and borrowers who repay loans using their own funds. Due to last year's successful efforts to hire experienced commercial lenders and broaden our lending capabilities, we have maintained and grown a healthy pipeline, so we do expect to resume loan growth in the coming quarters. While we are confident in our ability to prudently and profitably grow loans over time, we are also focused on resolving a number of non-performing loans, the majority of which were originated prior to 2022. Starting on slide nine of the investor presentation, we provide some additional details on credit. Non-performing assets totaled $81 million or 2% of total assets at the end of the fourth quarter. The $20 million increase from the third quarter was mainly due to $26 million in deed loans that migrated to non-accrual status. At year end, we had eight MPLs that were greater than $1 million. including the C&D loan that was moved to non-performing after going past due in early January. It is secured by a mixed-use construction project near a major sports and entertainment venue in Los Angeles. Lynn will provide some additional details about our substandard and non-performing loans, but I want to emphasize that we are focused on resolving them as quickly as possible while minimizing the impact to earnings and capital. It will take time, but we feel comfortable we have a good handle on them and can work effectively to resolve them. Lynn?

Thank you, Johnny. Please feel free to refer to the investor presentation we have provided as I share my comments on the company's fourth quarter of 2024 financial performance. Slide three of our investor presentation has a summary of our fourth quarter results. As David mentioned, net income was $4.4 million, or $0.25 per diluted share. We did see the net interest margin we've been expecting with NIM increasing eight basis points to 276 due to the decrease in the cost of deposits offset by the impact of an increase of on-balance sheet liquidity. The higher liquidity was due to the timing of loan production and in anticipation of $150 million in FHLB advances that will mature in the first quarter. Non-interest income was $2.7 million in the fourth quarter, following a $2.8 million recovery of a fully charged-off acquired loan that temporarily elevated the third quarter results. Fourth quarter non-interest expenses were relatively stable, increasing by $297,000 to $17.6 million due to an increase in legal and professional expenses, mostly due to year-end accruals. The provision for credit losses was $6 million compared to $3.3 million in the prior quarter. The fourth quarter provision was primarily due to partial charge-offs on three loans moved to health for sale in the fourth quarter and an increase of $4.5 million in specific reserves for the CND loan which migrated to non-performing as of year end. The fourth quarter provision also took into consideration the size of our loan portfolio an improved economic forecast, and our general credit quality trends. Slides five and six have additional color on our loan portfolio and yields. The overall loan portfolio yields decreased 10 basis points to 6.03%, with a decrease attributed to an 18 basis point decrease in the CRE loan yield due to higher prepayment fees in the third quarter. As Johnny mentioned, Fourth quarter loan production totaled $126 million and had an average yield of 7.711. Slide 7 has details about our $1.5 billion residential mortgage portfolio, which remains stable and consists of well-secured non-QM mortgages, primarily in New York and California, with an average LTV of 56%. The $20.4 million increase in non-performing loans from the third quarter was mainly due to the $26.4 million C&D loan that migrated to non-recrual status, offset by paydowns and payoffs of $6.7 million and partial charge-offs of $2 million. The charge-offs related almost entirely to the three loans moved to held for sale in the fourth quarter. They are all under contract and are expected to be sold in the first quarter. Special mention loans decreased $12.2 million and totaled $65.3 million at the end of the fourth quarter. The decrease was primarily due to upgrades on two performing CRE loans totaling $11.8 million after the borrowers paid their delinquent property taxes. Otherwise, there were three other CRE loans totaling $13.4 million that are current but remain classified as special mention due to unpaid property taxes. The $44 million CND loan on a completed hotel that was downgraded in the third quarter is current and its property taxes have been paid, but it remained on special mention as it is still awaiting a certificate of occupancy. Substandard loans totaled $100 million and included $81 million of non-performing loans and $19 million of loans on accrual status. This included $11.7 million related to a C&D loan on a completed multifamily project that was in the process of transitioning to permanent financing at the end of the year. Since that time, we received a pay down of $1.5 million, and it has been refinanced with a new CRE loan. The ratio of our allowance for loan losses to total loans held for investment increased by 15 basis points to 1.56%. inclusive of specific reserves, while the coverage ratio of our allowance for loan losses to non-performing loans held for investment decreased to 68% from 72%. When we exclude specific reserves and individually reviewed loans, the ratio of our allowance for loan losses to loans held for investment and those not individually evaluated was up two basis points to 1.35% at the end of the year. Slide 13 has details about our deposit franchise. Total deposits remained stable from the third quarter at 3.1 billion, with some minor movement between categories. Our average all-in cost of deposits decreased by 30 basis points to 335 in the fourth quarter, including an estimated quarter and spot rate of 315. Tangible book value per share decreased slightly to 2451, As earnings were offset by a $4.2 million increase in accumulated other comprehensive losses and $2.9 million in dividends paid to our shareholders. Our capital levels remain strong with all capital ratios above regulatory well-capitalized levels. With that, we are happy to take your questions. Operator, please open up the call.

Thank you. Ladies and gentlemen, at this time we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question key and you may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question is coming from Brendan Mosel with Havati Group. Your line is live.

Hey, folks. Hope you're doing well, and congratulations to David and Johnny on the announcement not too long ago. Thank you. Thank you. Yeah, you bet. Maybe starting off here on the the $26 million C&D loan. Can you just give us kind of a little more color on a few things? Like, just kind of curious, what drove the migration? How close to completion the project is? How much undrawn commitment is left on kind of that project and any evaluation on whether there needs to be an additional advance of funds to get the project over the finish line? Thanks.

Sure. I'll start and then I'll turn it over to credit. That was a huge question. I think some analysts guessed it. Because this moved to non-accrual so close to the end of the quarter, we took a little bit extra time to make sure that we could get the right estimate of fair value done. It did involve working with an appraiser and also our fund control since the project is in completion. It is over 50%. But I don't know if getting into all of those specifics is kind of necessary in the sense that it is $26.5 million outstanding. We're working with those parties. I think we've taken a $4.5 million specific reserve to get to what we estimate the fair value is as of year end.

Okay. That's helpful.

Okay.

Anything else, Brandon?

Yeah, and then maybe turning to capital for a moment. I think you folks completed the million share buyback earlier in 2024 during the third quarter. Just kind of curious for any thoughts around appetite for another repurchase program or just capital allocation decisions in general as you move through this year. Thanks.

Sure. Yeah, thanks for recognizing what we were able to complete in 2024. You know, I think we would be interested in looking at a stock buyback again in 2025. I think we needed to focus on credit kind of in the last quarter year, and then we can maybe look back at starting at the stock buyback again.

All right, great. Thanks for taking the questions.

Thank you. Our next question is coming from Matthew Clark with Piper Sandler. Your line is live.

Hey, good morning, everyone. Thanks for the questions. Just a few questions around the margin, Lindy, the average margin in December, maybe on an adjusted basis for any noise on credit. And then just remind us, how much you have in CDEs coming due in the first and second quarter, you know, the rates on those, and where do you expect them to renew at?

Sure. So there's a few things at play that you pointed out. I'll try to walk through a few of them. I would say relative to the fourth quarter, the NIM itself is moving up over the course of the quarter as our CDs continue to price down into the current rate environment. So it's a little bit higher, you know, call it about five basis points. If we look to the first and second quarter, In the first quarter, we have about $650 million of CDs that have a weighted average maturity of about 460. We estimate that those would have an opportunity to come into the market now closer to a 4, 410 idea. At the same time, we do have the FHLB advances, which are only $150 million, are maturing in the March timeframe. They are priced at 118. We look to replace those with retail deposits, wholesale deposits, and potentially some FHLB advances, but they'll obviously be priced higher than what they're maturing at. I think we'll see the impact of all of this more in the second quarter. So the first quarter has an opportunity to continue and expand because we are liability sensitive. And then once those funds reprice, you know, the NIM may flatten out a little bit from there. Also, with the Fed maybe on pause until June, then as rates, if they move down further, the NIM would have an opportunity to start expanding again maybe in the second half of the year. So I think those are the things at play. I think one of the biggest drivers of our net interest margin will be loan production, which we, you know, have some visibility to the pipeline, and that also has a positive impact on our net interest margin.

Great. Thank you. And then just on the growth outlook, can you give us a sense for where the pipeline is, you know, year over year or, you know, relative to the prior quarter? maybe on a percentage basis, and kind of what are you assuming for loan and kind of core deposit growth this year?

Hi, Matt, it's Johnny. So I can maybe just provide a little bit of a highlight. So ever since last year, at any given time, you know, we have, I would say, $200, $225 million on average at any given time that we're looking at in our pipeline. Obviously, our efforts are trying to identify the ones that fit our sort of credit standards and ensuring that they're generating proper returns to us. You know, obviously, we've got through that. But pipeline has always been staying healthy in that respect and average around that range. So we are, you know, for better quality credits, We are being more flexible as far as aggressively – allowing our RIMs to aggressively pursue those relationships a little bit on the pricing side. But obviously we measure – determine the pricing based on risk profile, right? So the better quality credits that we feel that it's going build great relationships for us in the long term. We will go more aggressive on those rates. But overall, the pipeline has always been healthy. It's just a matter of our selection, if you will, making sure that we are bringing in good relationships that's going to help us continue to expand on and grow the bank.

I think in the investor deck, page nine here at the bottom, we put in the production that we were able to achieve in the third and fourth quarter. You know, we were up at about 175 in the third quarter, a little bit lower, 126 in the fourth quarter, and then the pipeline's been building a little bit here for the first quarter. So, you know, I think, you know, we're looking at kind of leveraging off of those levels from a production standpoint, and then Obviously, net growth is then a little bit contingent on, you know, what prepayments we've seen.

Okay. You know, low single-digit, though, seems like a reasonable assumption for the year with maybe a single family being flat to down.

I don't know if I'm going to be able to comment on all of those numbers.

Go ahead. Probably still early right now to – but the – You know, I guess overall, yeah, we're trying to maintain, yeah, I would say mid-low to mid-low single digits I think is certainly reasonable. But again, we do have a lot of gills that we're looking at at any given time in the pipeline. I guess it doesn't matter how aggressively you want to compete on those deals to secure these relationships. I mean, we can give up on our credit underwriting standards or be more, you know, price aggressive, but certainly we, you know, do our best to avoid that. You know, we don't want to compromise on credit, that's for sure. But we are willing to be more aggressive on the pricing side in order to secure relationships.

Okay, great. And then last one for me, just on the expense run rate going forward into the new year here, what kind of range should we assume?

Sure. So in the fourth quarter, we were kind of up a little bit above the – I think during 2024, we were kind of 17 to 17.5. And in the fourth quarter, we were a little bit higher than that. I think as we turn the page to 2025, we've brought on some new people looking at maybe, you know, some modest growth and initiatives. I think the expenses might be, you know, a little bit above that 17.5. A million-dollar rent rate, obviously, first quarter kind of gets a timing of payroll taxes, so it's probably a little bit higher than that in the first quarter.

Okay, great. And then just on the legal professional line, should we expect more meaningful relief in that going forward, or do you think that's going to remain kind of stubbornly high with kind of the work out on the credit side?

Yeah, I think that's probably a fair statement. We've got a little bit of a road to walk down related to that in 2025.

Okay, thank you. Thank you. Our next question is coming from Andrew Terrell with Stevens. Your line is live.

Good morning. This is Jackson Loren on for Andrew Terrell.

Hi, Jackson.

If I could just start off on deposits. I was wondering if you'd give us a little bit more color on what drove the strength in NIBs this quarter, and then just what your expectations are for non-interest-bearing deposits moving forward.

So you're focused on the increase in non-interest-bearing deposits?

Yes, correct.

Okay.

We did in the fourth quarter, there was one or two larger sort of commercial clients that brought in deposits. So these are efforts and obviously continue to try to develop and expand on our CNI front So I would say, you know, as we bring in – well, last year, you know, brought in some new commercial lenders and also continue to build all the talents there. So as we bring in these new lenders, certainly the expectation would be that they would be able to continue to contribute to our non-interest-bearing deposit generations as well.

I'm sorry, Jackson, the second half of your question. Can you repeat it?

Well, I think Johnny just answered it. I was just kind of looking for expectations moving forward on non-interest-bearing deposits. So thank you for that. And then I guess last one for me, can you just remind us your interest on M&A in this environment and if the strategy overall has changed?

The strategy has not changed. We are continuing to look at other Asian American banks in our market areas to strengthen our branch network and go into the San Francisco Bay Area. So it has not changed at all.

Great. Thank you for taking my questions.

Thanks, Jackson.

Thank you. Once again, if you have any questions or comments, please press star one on your telephone keypad. Our next question is coming from Kelly Mota with KBW. Your line is live.

Hi, good morning. Thanks for the question. I did want to circle back on credit. I appreciate all the detail on the slides, and it looks like construction is your three biggest And it looks like almost a quarter of the construction book is in MPL right now. Have you made any changes? Is it idiosyncratic? Any changes you've made in order to, you know, potentially mitigate problems ahead? Have you done a deep dive into the construction book as well and relative comfort level? and the rest of it. And then kind of third part of that question is, you provided some loan to values on your NPLs. I'm assuming those are updated valuations given C&D 92% weighted average LTV in NPL, but also just wanted to confirm that.

Sure. I'll start with the last one. We are looking at as current valuations as possible since they did make it to NPL. We do get current valuations and try to get them at fair value as we go through our CECL process. I think as far as your question on kind of the deep dive, I think we have done some additional work. to make sure that we understand those. You're right that it represents about a third of our quarter, a third of our construction portfolio. I think Johnny mentioned that we looked at it. Those are just before 2022, maybe 2020, 2021 loans. I don't think they're loans similar to those in the portfolio. And...

I'll give you a little more color. The characteristics of these loans were they were done during COVID. They were initiated or originated during COVID, and they had problems with getting materials, problems with getting people to complete the projects and so forth. So that's where they stem from and so forth. And We are looking to make sure if we have any more, we have identified them and try to shore them up now before they go any further.

Okay. That's helpful. And I think maybe on the last quarter call or the call before, we were talking about kind of working through some of these legacy credit issues and hopefully kind of cleaning the slate by mid-2025. Is that still... a reasonable timeline here. Just wondering how you're thinking about this, you know, resolution process playing out. I think the release mentions you're looking to kind of minimize losses as you work through. So just from a high level, it seems like that's kind of this last leg of this nice remediation work you've done over the past couple of years. So just trying to Put some guideposts as to how we can think through this timing.

Okay. Given that we just put on this large look on non-performing, we're probably pushing that out to probably the end of 2025 to get all of these addressed. I do believe we're working hard on these. We have two of them that are on this list. you know, sole deals that we hope to close, you know, within the next couple of weeks, actually. So we're hoping that we'll begin to see this number go down.

Got it. Maybe last question from me to round it out. You kind of alluded to you've gotten through the buyback authorization this quarter and did a good job with that. and have talked a little bit about M&A. Is it fair to say like the near-term focus is on the resolution of these NPAs and then you can kind of return to your strategy or you do have a ton of capital? Are you able to juggle kind of both that one?

Well, we're working on both items right now, but clearly cleaning up the NPAs is is a very high issue um we have a special team now working on that that's reporting directly to the dlc the team meets twice a week i mean get into the weeds here but it's very it's very important for us to do that um but uh clearly we're working on both i'm still meeting with people um other bankers and so forth to see if they're interested in joining us and so forth. Okay. While I'm still here.

Got it. Thank you for all the color. I just wanted to walk through those pieces. I'll step back.

Now we have Tim. Thank you. We have a question from Tim Coffey with Johnny. Your line is live.

Okay. Thanks. Morning, everybody. Lynn, if I can start with you and talk a little bit about deposit costs. I guess the rate of change in the quarter was a bit more than I had anticipated. Was it, you know, programs that were initiated during the quarter to bring those deposit costs down? Was it just, you know, kind of, you know, the final efforts of hard work? Can you kind of give me some color on what brought those costs down?

Sure. So I am going to give a lot of credit out to our branch network. It is a lot of hard work to bring in our deposits in the communities and branches where we're located. We brought down our wholesale funding percent to just barely 4% at the end of the year. So a lot of local deposits. But, you know, the interest rate environment was walking down, and we saw you know, 50 basis points in September and then another 50 during the fourth quarter. So what we saw in the fourth quarter was really the benefit of the September cuts. And a lot of our deposits, which we've talked about in the past, are basically 12-month CD products. So we have a very nice ladder, and as it matures, it reprices into the current environment. So 92% of our CDs now mature within the next 12 months. And, you know, with the weighted average interest rate on those is 430, kind of top end non-brokered is around 4%. So, you know, it has the opportunity to just naturally reprice. And I mentioned earlier, $650 million has a weighted average price of about $460 million. And that has an opportunity to reprice in the first quarter of 2025. So I think we're seeing – this is why we say we're liability sensitive. We're seeing them just reprice into the environment, even if they are fully priced at a 12-month CD at about 4%. Great.

That's helpful.

Thank you. But as I mentioned, yeah, the FHLB advances, we'll see that in – The second quarter, which will – they'll kind of offset each other, if you will, which will be nice to not have a big impact there. And then with loan production, you know, we still have an opportunity to maintain our NIM or, you know, continue to grow it this year.

Okay. Great. Thank you. And, Johnny, if I can talk a little bit about Tether. The pace of loan growth expected through 2025, aiming for the low to mid-single digits for the year. Got it. Is it expected that or is it reasonable to think that growth might be heavier in the second half of the year than the first half?

Well, obviously, from the get-go, starting January 1st, I've been, you know, pushing the loan production. But I think typically Q1 is maybe a little bit, slower, but then I do expect Q2, Q3 to really ramp up.

I think also, Tim, and I don't know what everyone else has seen out there, but the Fed's on pause right now. Fed fund futures indicate maybe March or June. Again, in the second part of the year, the curve ended up being a little bit steeper in the longer term. I think we're still navigating through a little bit of change. So I think earlier it was mentioned, you know, low to mid single digits. You know, I think it is probably still a little bit of a challenging environment given the interest rate environment and some transition out there and talks to things like tariffs and other things that might impact the marketplace. So I think your comment is a good one, and I think that's what we're seeing right now as well.

I'll just add that obviously, you know, we were able to successfully bring in some more additional talent on the commercial learning side at the beginning of this year. So hopefully, you know, they will be able to contribute to our overall, you know, sort of strategic initiatives that we're driving.

Okay. Okay, great. Appreciate that. And then, sorry, this is my last question. When it comes to mitigating payoffs, is the company – or do you plan to employ any new strategies to, you know, slow that as much as you can? I mean, I understand some things, you know, are just out of your control. But, you know, if there are things that are already in your control, what are you doing to get out in front of them?

Sure. I appreciate the question. That's a good question. And actually, since last year, we've, you know, actively looked through our portfolio with all the audience, you know, with all our teams, And actually, we do try to look ahead, looking at the maturities and so on, and trying to get ahead in a quarter or two to start having that dialogue conversation, just kind of get a feel of what the borrowers may be planning to do, what their thought is. But unfortunately, maybe because of the elevated high interest costs, some of our borrowers who have excess funds on hand, sometimes they just decide to just go and pay these songs off. And then, obviously, there's some by our own business decision we decided to let go that we felt potentially may be problematic. And then, yeah, we always try to stay ahead by looking ahead at these bars and see if we can get in front of them to establish some retention sort of strategy.

And then, you know, half of our portfolio, Tim, is our mortgage products. And so I think we, you know, some of it is commoditized, some of it is specialized. And I think there's opportunities there to try to be preemptive and encourage renewals in the current environment. I think, as we know, a portion of it is their hybrids. So they reprice after five or seven years. So these aren't 30-year mortgages. So some of our borrowers have sensitivity to the interest rate environment. So, you know, trying to work to retain that business as it moves from its fixed to floating period. So I'd say we have some programs there as well.

Okay. Great. Well, thank you very much. Those are my questions. Thanks.

Thanks, Tim. Okay. And then, I'm sorry, go ahead, Johnny. We do have him closing the mark.

Oh, okay. Is that all the questions? Okay. Well, 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, ladies and gentlemen.

This does conclude today's call, and you may disconnect your lines at this time. And we thank you for your participation.