RBB Bancorp

Greetings and welcome to the RBB Bancorp second quarter 2025 earnings 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, Rebecca Rico. Mom, the floor is yours.

Thank you, Ali. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the second quarter of 2025. With me today are President and CEO, Johnny Lee, Chief Financial Officer, Ben Hopkins, and Chief Credit Officer, Jeffrey Yeh. Johnny and Lynn will briefly summarize the results, which can be found in the earnings personis and investor presentation. They're 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 forward-looking statements in the investor presentation and the company's SEC filings. Now, I'd like to turn the call over to RBB Bancorp's President and Chief Executive Officer, Johnny Lee. Johnny?

Thank you, Rebecca. Good day, everyone, and thank you for joining us today. Second quarter net income totaled $9.3 million, or 52 cents per share, and included $2.9 million of after-tax net income for an employee retention tax credit refund. The increase in net income was also driven by another quarter of solid loan growth in stable earning asset yields, which supported a $1.2 million increase in net interest income and a four basis point increase in net. Loan's healthful investment grew by $92 million, or 12% on an annualized basis, with growth in almost all categories. We continue to see strong results from our in-house mortgage origination business, which originated $120 million of mortgages in the second quarter. These contributed to our total second quarter loan originations of $183 million at a blended yield of 6.76%, which will continue to support our asset yields and margins going forward. Our pipelines remain full, so we expect to continue to see loan growth, though likely at a more moderate pace than we experienced in the first and second quarters. We're pleased with our loan growth so far this year and believe we're making good progress on our efforts to expand originations. Net interest margin increased to 2.92% and has increased by 25 basis points over the last four quarters. As some rate cuts, our funding costs are likely close to stabilizing at this level. And at the same time, we may see increases in yields on earning assets, which should support incremental margin increases over the next few quarters. We remain focused on resolving our non-performing loans as quickly as possible while minimizing the impact to earnings and capital. We did have some charge-offs, which Lynn will discuss in more detail, but we did not see any increase in our total non-performing loans in the second quarter. Criticized and classified assets increased. However, the majority of the additions this quarter are loans that remain on accrual status. We continue to work through our remaining non-performing, criticized, and classified assets and expect to be able to report additional progress in the coming quarters. With that, I'll hand it over to Lynn to talk about the results in more detail.

Lynn? Thanks, Johnny. Please feel free to refer to the investor presentation we have provided as I share my comments on the company's second quarter of 2025 financial performance. Slide three of our investor presentation has a summary of our second quarter results. As Johnny mentioned, net income was 9.3 million, or 52 cents per diluted share. Second quarter results benefited from the recognition of a $5.2 million employee retention credit, or ERC, refund, which has included another income. We also recognized related ERC advisory costs of $1.2 million, which are included in professional service fees. There is no similar income or expense in any of the other quarterly periods presented. Adjusted for the ERC refund and associated fees, net income would have been $6.5 million or $0.36 per diluted share. Also, excluding ERC related income and expense, Pre-tax, pre-provision income increased $1.4 million due to higher net interest income of $1.2 million and higher non-interest income items of $1 million, offset by higher non-interest expense items of approximately $800,000. Net interest income increased for the fourth consecutive quarter to $27.3 million and was driven by loan growth and stable asset yields. The overall loan yield remained above 6% and was supported by the quarter's average production yield of 6.76% and loans repricing in the current higher interest rate environment. As Johnny mentioned, we had another quarter of net interest margin expansion, our fourth in a row, driven primarily by an eight basis point reduction in total deposit costs. Our spot rate on deposits on June 30th was 2.95%, which was 10 basis points below the second quarter's average of 3.05%, so we may get incremental improvement in the fourth quarter. But until we get some rate cuts, we are likely to see big reductions in our funding costs. The second quarter also included a full quarter of more expensive FHLB term advances after they were refinanced late in the first quarter. Second quarter non-interest expenses increased by $2 million to $20.5 million, of which $1.2 million was directly related to the receipt of the ERC refund from the IRS. Higher compensation expenses related to executive management transitions and incentive payments for increased loan production also contributed to the increase. We expect non-interest expenses to return to an annualized run rate of about $18 million in future quarters. Slides five and six have additional color on our loan portfolio and yields. The loan portfolio yield was relatively stable at just over 6% when compared to the last two quarters. Slide seven has details about our $1.6 billion residential mortgage portfolio which increased modestly and consists of well-secured non-QM mortgages, primarily in New York and California, with an average LTV of 55%. Slides 9 through 11 have details on asset quality, and I'll make a couple specific points. The $2.4 million provision for credit losses was due to $1.5 million for net loan growth and the impact of economic forecasts, and a $924,000 increase in specific reserves for a loan on a partially completed construction project. Net charge-offs of $3.3 million, which had previously been established as a specific reserve, were related almost entirely to one lending relationship. MPL decreased 3.6 million or 6% to 56.8 million and represented 1.76% of loans held for investment at quarter end. Accounting for our specific reserves of 7.4 million, our net MPL exposure decreased 3% to $49.4 million. Substandard loans increased 14.6 million and totaled 91 million at the end of the quarter. The increase was primarily due to A couple of downgrades totaling 20.6 million, partially offset by charge-offs of 3.3 million, and pay-offs and pay-downs totaling 2.7 million. Of the total substandard loans of June 30th, 30.2 million were on accrual status. Past few loans increased 12.1 million to 18 million due mostly to additions and include one $8.5 million CRE loan which has since been brought current. I think it's worth noting that with a 1.58% allowance for loan losses to total loans held for investment ratio, we believe we have appropriately addressed the risk in our non-performing loans. Slide 12 has details about our deposit franchise. Total deposits increased at a 6% annualized rate from the first quarter. to 3.2 billion, with growth in non-interfering deposits and CDs more than offsetting a decline in money market accounts. Our tangible book value per share increased to 25.11. 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 line.

Thank you. 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 queue. 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 Nossel with Hovda Group. Your line is live.

Hey, everybody. Thanks for taking the question. Hope you're doing well.

Hi, Brendan.

I'm going to be starting off here on capital and the buyback. I think you announced the $18 million buyback in the middle of the second quarter. You used a little bit of it in the month or so you had it. Can you maybe just speak to how active you want to be with that new program, just given where shares are trading, but also factoring in credit work out? Thanks.

Sure. Thanks, Brendan, for the question. So based on the timing of when we had the opportunity to announce the buyback, I think that's a little bit why you've seen the modest participation. We obviously view our stock attractive at its current trading price relative to our tangible book value. The amount that got approved based on current trading prices would represent about 5% of our stock. So we view it as a modest amount of cash. I think we have sufficient liquidity and affordability. And with respect to how it relates to the fact that we have been working through kind of our higher elevated MPL levels, we've had plenty of capital to support that initiative, plus our high coverage ratio I just kind of concluded my comments with. So, I think we're able to do both.

Okay. All right, great. And then maybe turning to asset quality, can you offer a little more color on the loans that were downgraded both to substandard and special mention for the quarter?

Over the quarters, we have about $27 million of their done great to special mention, mainly because the bank actually is enhancing our credit quality control. The difference is that we have more frequent control for those credits. Those credits are those bridge and gap loans that we see a little bit of delay in stabilizing their income. They are paying the degree and then the LTV are still manageable. However, this is one of the management's efforts to enhance our credit control on that. You can see an increase of the special mention that is notable to the information compared to the previous quarter, but we consider it as a credit enhancement.

And then on the few downgrades to substandard, I mentioned it was mostly driven by two credits that remain on accrual status. And there are examples of one transitioning to the higher interest rate environment and working with a borrower. So again, current and going through transition. So we believe there's some conservatism in our view, but nonetheless felt that that was the appropriate classification for the end of June for those couple of credits. There were some smaller ones as well, but there's two main credits that got added during the second quarter.

Okay, that's helpful. Maybe I'll just sneak one more in here. You know, this year you've been kind of pursuing this dual path of growing loans again and trying to kind of move the top line higher while also working through asset quality issues. I mean, like, for how long is that dual path sustainable for? Like, if we're still seeing inflows into loans, criticized presumably takes a little longer to work that out. Is there still the ability to, you know, and desire to keep growing loans at the same time as you work through credit issues?

Yeah, this is Johnny. I think we certainly can continue to do that. We're obviously continuing to be very laser-focused on resolving some of the NPL that's on our hands. I think we're making good progress in that respect. At the same time, the growth side, I mean, just as the comment in previous orders, it's always been very healthy. We always have a very healthy pipeline. So, you know, certainly we feel that we can manage that well with that dual path that we're taking.

Okay, great. Thank you for taking the questions.

Yeah, Brendan, I would just add to Johnny's comment. I think we're executing on the business model, right? So healthy pipeline, able to convert them into 12% annualized loan growth. We've shown strength in both our mortgage portfolio and commercial portfolio. I think you saw some additional loan sales this quarter. We would expect potentially some of that to increase in the second half of the year, which I think kind of speaks to how we continue to manage our loan-to-deposit ratio. And then we're already covering, when we had our loan growth this quarter, when you exclude our specific reserves, our coverage ratio is up at about 136, 138. And Given that it's future-looking, I think there's still opportunity for, you know, maybe that would actually come down a little bit as we finish resolving some of these larger credits that have taken center stage the last couple quarters.

Okay. Thank you, Lynn. That's helpful.

Thank you. Our next question is coming from Matthew Clark with Piper Sandler. Your line is live. Hey, good morning. Thanks for the questions.

First one, just on the loan and deposit growth, you know, deposits trailing loans here, loan to deposit ratio obviously up over 100 now. But it does sound like the pipeline on the loan side remains healthy, and you also expect maybe a more measured pace of growth going forward. So just trying to kind of think through... those moving parts and, you know, is there some deliberate effort to maybe tighten the screws a little bit on the pipeline? And just any commentary around your outlook for deposits.

Well, I can comment along. Hi, Matthew. This is John. Well, I guess we've been trying to screw on the loans because we've always focused on quality first with all the new loans that we are bringing to the bank or new relationships. So we've always been very selective so far as far as new loans and new relationships we're bringing to the bank. Obviously, the deposit side, we're continuously trying to find way to originate more organically new deposits through various, you know, for example, we recently launched a special promotion program, a money market, sort of bundle package that's bringing in pretty good, you know, again, pretty good traction as far as bringing in new deposits as well to support the, you know, our funding. So we're, you know, I recognize the loan-deposit ratio is high, but I think toward the second half, as we continue to grow the loan, there's certainly potential opportunities for us to maybe sell some loans to take that pressure off a little bit. But, you know, we, again, we will continue to manage that. We're trying to keep that in a good balance.

Matthew, I think in the investor materials, we've Our new production levels is over 180 million this quarter at a rate of kind of 675 and how that compares to prior quarters. So our annualized growth rate up at 12%, I think it was slightly higher than that in the first quarter. I think it's been strong and we've kept our origination rates fairly high given the current market. I think we're evaluating that. I think that there's probably some net loan growth. We would expect potentially some loan sale activity to pick up in the second half of the year. And then just a comment on deposits. I think that we have been very successful in growing organic deposits, and we have plenty of capacity for wholesale funding. So there's room to bring the loan to deposit ratio down a little bit if need be. So I think we're watching it closely, but very comfortable with where we kind of ended the quarter.

Okay, great. And then on the deposit cost side, an expectation for maybe some stabilization without Fed rate cuts, spot rate obviously down, which is helpful going into 3Q. But do you feel like even when the Fed does start to cut, that deposit costs might not come down as much as you previously thought just because you need to keep rates up to generate the deposit growth?

That I would like a crystal ball for. Look, I think there's a lot of competition for liquidity, and I don't think that's going to change even when rates come down. But we were successful in moving our deposit rates down almost 100% after rates moved down 100 basis points. So while there could be somewhat of a lag, I would expect we would be successful in moving down our cost of funds should rates decrease. We remain liability sensitive. But it doesn't happen overnight and it would stair step down. But that would be our expectation that we would be able to push down on our deposit costs. I think historically we've shared to the extent helpful as we look out over the next quarter or so. We have about a third of our CDs that are maturing that are coming off at about 415, 420. And I think those have an opportunity to price down into the current market, you know, not a significant amount because rates are higher for longer, but somewhat.

Okay. And just to clarify the amount of CDs that are coming due this quarter, and I assume new pricing is around four?

Yeah. Yeah. So it's basically all of our CDs. So all of our CDs mature within 12 months, I think like 99.5%, and then a third of them mature next quarter. And we've had a pretty even CD ladder over a 12-month horizon, and those have continued to just reprice into the current market.

Okay, great. And the last one for me, just to clarify the expense run rate going forward, I think I may have heard you say $18 million, but it I think if you exclude some of the noise, it was around 19 this quarter. So just wondering where the relief is coming from.

Sure. So the rest of it, we had a little bit of extra costs associated with executive management transitions. I think there is some timing items related to, I think, some of our director compensation. We filed some form forms associated with that. And then I think just the timing on some legal costs just accumulated this quarter. So I think some of that's expected to normalize and bring us back down to about $18 million.

Okay, thanks again.

Yeah, thanks, Matthew.

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

Hey, good morning. I wanted to go back to some of the credit discussion, you know, in some of the, I think, an answer to a prior question. It sounded like you mentioned you were maybe changing up or tightening kind of the credit control process. I was hoping you could just kind of expand on that point a little bit more and you know, does that necessitate kind of a more full portfolio review under newer standards? Could you just maybe kind of elaborate on that a little bit?

Andrew, Lynn, I'm going to turn it over to Jeffrey in a second. I just want to make one comment regarding that. So in the majority of the special mention, it relates to one type of loan, which was our gap and bridge financing loan. And that is a smaller part of the portfolio. So it's not necessarily all the way across all loan categories. And I think the majority have been addressed and are reflected in the results that you see in the second quarter. And then we'll carry that forward and then we'll move them, you know, special mentions expected to be a temporary holding place for them. So Jeffrey can answer it more fully, but it just, that was how I would clarify.

Yeah, with this, John, we're just simply taking a more conservative approach to making sure we're safe, you know, keeping an eye on these credits, but they're, you know, very, very matchable. I don't think value ratio, global cash flow is strong, and, you know, none of these borrowers here that have moved to special mention have past dues. They are all current and accruing.

Okay. Understood. I appreciate that. And then, Lynn, I think you talked about maybe some more loan sales in the back half of the year. I'm assuming that's single family. And, you know, do you have the amount that was sold this quarter as you pick up in the gain-on-sale period? Just wondering if you have any kind of expectation for the back-off?

I don't know that there's anything that we can share for modeling purposes. I think it's more the level of production, the type of products that we have, and managing the size of the portfolio relative to the whole balance sheet. So we see opportunity there. On the single-family portfolio, I would just share that the premiums are pretty small in the market. Obviously, if rates come down, those might have a better opportunity, depending on how prepayment fees play out. But we also have opportunity with our SBA loan portfolio, and I believe Johnny's spoken in the past, we've added some resources in that area, so I think that's an area that's increase some production, and we usually sell the guaranteed portion. So, the combination of the two would be what would be generating any gains.

Okay. That's it for me. Thank you for taking the questions.

Yeah, thanks, Andrew. Thanks, Andrew.

Thank you. Just as a reminder, ladies and gentlemen, if you do have any questions, please press star 1 on your telephone keypad. Our next question is coming from Kelly Motta with KBW. Your line is live.

Hey, thank you for the question. Most of mine have been addressed at this point, but I did want to touch base on the deposit side of things. You did have some nice non-interest-bearing growth this past quarter. I'm wondering if you could provide some color as to the drivers of that. I know CNI has been a focus here and you did have some growth now for the last several quarters. So I'm wondering if you could provide, you know, your track record with gaining commercial customers and how that's tracking in any sort of color as to what drove the non-interest bearing increase this quarter. Thanks.

Hi, Kelly. That's Johnny. I can make some comments. Maybe a colleague you can also add if you'd like. Thanks for the question. First of all, I think the combination of things. I think to our frontline associates credit, we have a branch of commercial lenders. We've been very focused on ways to deepen and expand the relationship that we have right now. And certainly that has brought some additional DDA deposits into us. Also with the new relationship that we bring in, obviously we're very much focused on, particularly on the CNI side, even though overall banks' total mix of the loans is still relatively small, but then they do contribute to good DDA deposits for us for any of these new CNI relationships that we bring in as well. So I think the comments, and also I mentioned earlier about, you know, we have certain promotional, sort of promotions that, you know, that we've launched to try to generate more new relationships by bundling a money market and a DDA sort of a, you know, a product. And we just, we only launched it just, I think, beginning of June, June 1st when we first launched that in. Actually, that's been building up very good momentum for us as far as bringing new relationships that provide not only money market sort of deposits, but at the same time, a combination of including the DDA deposits as well.

And Kelly, I think when you're looking at our trends, what we observed was I think we had a couple or one or a couple larger withdrawals in the first quarter. And I think the composition and, you know, more granularity to our non-interfering deposits with sort of the efforts that Johnny described. So that's what we're observing.

Great. That's helpful. And then maybe just one last modeling question from me, Lynn. Your tax rate was a little... lower this quarter. I think it was around 28%. Is this a good run rate on a go-forward basis? And I'm wondering if this change in the California tax law has any material impact on your outlook for the tax rate.

Sure. So, good question on the California tax rates. We did include the impact to our taxes in this quarter, so it did have a small catch-up impact in the second quarter, and it won't have a material impact overall, but we will actually have a little bit of a benefit from that. I think it's a reasonable tax rate. We've been below, you know, the effective or the statutory rate anyway. But, yeah, both are in there, Kelly.

Got it. Thank you. I'll step back.

Yes. Thank you. As we have no further questions on the lines at this time, I would like to hand it back to Mr. Lee for any closing comments.

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

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.