RBB Bancorp boosts Q3 net income to $10.1 million, driven by loan growth and improved asset quality

OPERATOR - (00:00:52)

Greetings and welcome to the RBB Bancorp third quarter 2025 earnings call. @ 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 and zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to the Company Representative, Rebecca Rico. Rebecca, the floor is yours.

Rebecca Rico - Company Representative - (00:01:43)

Thank you, Ollie Good day everyone and thank you for joining us to discuss RBB Bancorp's results for the third quarter of 2025. With me today are President and CEO Johnny Lee, Chief Financial Officer Lynn Hopkins, Chief Credit Officer Jeffrey Yang and Chief Operations Officer Gary Phan. Johnny and Lynn will briefly summarize our 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 a 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 Lee - President and CEO - (00:02:34)

Johnny thank you Rebecca Good day everyone and thank you for joining us today. Third quarter net income totaled $10.1 million or $0.59 per share, which is a 9% increase from last quarter and a 45% increase from a year ago. The increase in net income was driven by core earnings growth and lower credit costs which we believe are both positive signs for our outlook. Loan growth supported increased asset yields and net interest income and loan loss provisions decreased as credit continued to stabilize and we made good progress addressing many of our non performing loans and performing criticized loans. Net interest margin increased by 6 basis points to 2.98% compared to the prior quarter and has increased by 30 basis points over the last four quarters. Loans held for investment grew by $68 million or 8% on an annualized basis, with a large part of that growth coming from our in house mortgage origination business which continues to perform well. Third quarter loan originations totaled $188 million at a blended yield of 6.70% or 67 basis points above the prior quarters blended loan portfolio yield. So even with the recent rate cut in continued competition, we've been able to increase loan yields and maintain strong growth which we feel demonstrates the progress we've making on originations. We also continue to make progress addressing our long performing loans as quickly as possible while minimizing the impact on earnings. Criticized and classified assets decreased due mostly to the upgrade of a $44 million construction loan following the completion of the project. And with that, I'll hand it over to Lynn to talk about results in more detail.

Lynn Hopkins - Chief Financial Officer - (00:04:29)

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 third quarter of 2025 financial performance slide three of our investor presentation as a summary of our recent and third quarter results. As Jonny mentioned, net income for the third quarter was 10.1 million or $0.59 per diluted share compared to our second quarter results. Net income increased 9% while earnings per share increased 12% due to the higher earnings and stock repurchase activity. The increase in net earnings was driven by ongoing loan growth, lower credit costs and controlled operating expenses which more than offset the employee retention credit we recognized in the second quarter. Net interest income increased for the fifth consecutive quarter and is up $1.9 million for the linked quarters to $29.3 million driven by higher interest income of $3.2 million. Our net interest margin continued to expand also for the fifth consecutive quarter reaching $2.98% as we increased the overall loan yield and achieved a 2 basis point decline in funding costs. Our spot rate on deposits on September 30 was 297, which was 6 basis points below the third quarter's average of 303. So we may get some incremental improvement in the fourth quarter, but competition for liquidity remains stiff and we are unlikely to see big reductions in funding costs without additional rate cuts. Third quarter net non interest income showed a $5.2 million decrease which is attributed entirely to the employee retention credit or ERC proceeds recognized last quarter. Third quarter non interest expenses decreased by 1.8 million to 18.7 million due mainly to the ERC related expenses of 1.2 million and other executive management transition costs recognized in the second quarter, both of which were not repeated in the current quarter. Our operating expense ratio was 1.8% and our efficiency ratio was just over 57% for the third quarter. Nonetheless, expenses were slightly higher than expected due to costs related to strong loan originations, ongoing investment in our business. As we look out quarterly, non interest expense is expected to be in the 18 to 19 million dollar range and at the same time we are focused on managing our operating costs to be below 2% of average assets. Slides 5 and 6 have additional color on our loan portfolio and yields. The loan portfolio Yield expanded by 9 basis points points to 6.12% due primarily to the strong origination yields Johnny mentioned combined with the repricing and renewal of loans in the current rate environment. Slide 7 has details about our $1.7 billion residential 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 few specific points. Non Performing loans decreased 11.3 million or 20% to $44.5 million and are all risk rated substandard. This decrease was due mostly to a $6.9 million charge off and $5 million in upgraded loans. Substandard loans decreased $14.1 million and totaled $76.9 million at the end of the third quarter. The decrease included the same charge offs and upgrades noted for MPLs. In addition, we had payoffs and paydowns of $16.6 million offset by downgrades totaling 15.4 million, including one $8.4 million CRE loan. 41% of total substandard loans at quarter end remain on accrual status. Special mention loans decreased 46% to $49 million due to a $44 million loan for a completed construction project that was upgraded. Past due loans also decreased $11.5 million to end the quarter at $6.5 million. In light of the improved asset quality trends and net loan growth for the quarter, the provision for credit losses totaled $625,000. The overall allowance for credit losses decreased $6.1 million during the third quarter due due to net charge offs of 6.9 million offset by the provision expense. The net charge offs were related almost entirely to one lending relationship due to the borrower declaring bankruptcy during this quarter and this charge off included $6.6 million in reserves we had established in previous periods. The allowance for loan losses to total loans held for investment ratio stood at 1.36% at September 30, which we think appropriately addresses the risk in our loan portfolio. Slide 13 has details about our deposit franchise. Total deposits increased by 178 million from the end of the second quarter to 3.4 billion with growth in all deposit categories. This growth included $84 million in wholesale time deposits, a portion of which was used to repay $50 million in FHLB advances. Our tangible book value per share increased to 2589, which was a 12% annualized increase. We repurchased 660,000 shares or 4% of shares outstanding in the third quarter, our capital levels remain strong with all capital ratios above regulatory and well capitalized levels. And with that we are happy to take your questions. Operator, if you could please open up the call.

OPERATOR - (00:11:23)

Thank you. At this time we'll be conducting our question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue and you may press Star two. 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 havdegroot. Your line is live.

Brendan Nossel - Equity Analyst - (00:12:04)

Hey, good morning folks. Hope you're all doing well.

UNKNOWN - (00:12:08)

Hey Brandon, good. How are you?

Brendan Nossel - Equity Analyst - (00:12:11)

Maybe starting off here on asset quality. Congratulations on getting across the board improvement in all of your metrics this quarter. Really nice to see everything moving together in the same direction. I know that there's probably more work to do. So I guess if credit resolution is a baseball game, what inning do you folks think you're in? And then what levels of problem assets do you view as mission accomplished? Just given that there's always some churn in the asset base. Thanks.

UNKNOWN - (00:12:42)

Oh, that's a wow. That's. Brandon, I appreciate the question. First of all. I think it's very relevant for what's given the series coming up. Well, as you sort of suggested, we certainly still have a lot of work to do. I mean, certainly we, I think for Q3, with all the hard work and. Sort of disciplined focus that everyone put. In, we certainly have made good progress. But to your earlier comment, we certainly. Have more work to do and we.

Johnny Lee - President and CEO - (00:13:17)

Continue to stay laser focused and very vigilant on making sure that we continue to address the remaining sort of credit issues that we may have. I would say we're keeping track to what we've been focused on doing. Just continue to hopefully get to the bottom of the ninth inning and finish. At the World Series.

Lynn Hopkins - Chief Financial Officer - (00:13:46)

So I had a couple more minutes to contemplate your clever question. Let me add a couple things that I think we might go to your point as well. You know, when are we going to view mission accomplished? So about 93% of our non accrual loans are represented by a handful of relationships. I think we're very focused on getting those resolved. It's taking longer than anticipated, so I think moving those all the way through is going to be one thing that would be considered Mission accomplished. We would be looking for. NPAs are always going to be part of a bank's balance sheet, but for them to not be maybe individually as significant as some of the ones we've had to handle. Our NPAs this quarter have some REO in it. So mission accomplished. We'll be getting those sold and off of our books, which we think are carrying an appropriate value. And I hate to even guess what inning it is because I think I will definitely get that one wrong. So I think those are kind of the big things that we're looking at for right now.

UNKNOWN - (00:15:11)

Yeah.

Brendan Nossel - Equity Analyst - (00:15:12)

Thank you, Johnny and Lynn. I appreciate you offering a couple of, you know, sign signs along the way of what we should be looking for. Maybe turning the page to capital for one. Before I step back, you folks are obviously very aggressive on share repurchase for this quarter. Can you just remind us how much is left in the current authorization and then thoughts on kind of re upping that if and when you complete the current programs?

Lynn Hopkins - Chief Financial Officer - (00:15:41)

Sure. So we have about 4 million left on the current program. When we kind of look at second quarter and third quarter activity, I would say that, you know, our stock price was attractive and we would like to see it trading at a higher price. So we did take advantage of that during the quarter. I think as we look forward, we are looking at our sub debts that have the opportunity to reprice, maybe be refinanced next year. So I think there's a couple things at play, but we would always be considering opportunities for a buyback. But I don't have information on, you know, anything new at the moment. I think we'll be working on our current program.

UNKNOWN - (00:16:37)

Yep. Okay.

Brendan Nossel - Equity Analyst - (00:16:38)

All right, well, thank you folks for taking the question. I appreciate it.

OPERATOR - (00:16:45)

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

Matthew Clark - Equity Analyst - (00:16:53)

Hey, good morning, Johnny and Lynn. Just on the spot rate you gave us at 297. It suggests your deposit beta may have slowed here a little bit more recently with the recent cut. But obviously there's some lag with your CD portfolio and the repricing that likely unfolds there. But the deposit beta, I think cycle to date has been over 70%. I'm trying to get a sense for assuming we get a few more rate cuts, what type of deposit beta you might be targeting, whether or not that might slow some or do you think you still can hold that 70% level?

Lynn Hopkins - Chief Financial Officer - (00:17:35)

So I would say it's probably slowed a little bit because competition for liquidity is quite fierce. The rate cut came Pretty late in the quarter. So I don't know that it's fully reflected in a September 30 spot rate. And you know, I think it's just indicating a little bit of movement. You know, our cost of funds to your point, moved down two basis points for the linked quarters. We have highlighted and mentioned that, you know, the majority of our time deposits do mature within the next 12 months. We have about 40% maturing in the fourth quarter. I would offer up that those are coming off at a rate that is very similar to what is being offered in the marketplace now. You know, high threes. So with interest rates potentially moving down, maybe there will be some opportunity there. And I would expect we would be able to capitalize on that. And then you know, we did a nice job with increase in our money market savings and some non interest bearing. So I think that will help also with our overall funding costs. But I do think competition is impacting our ability to maybe push all the way down when rates come down.

Matthew Clark - Equity Analyst - (00:19:19)

Okay. And then if you have it, the average nim in the month of September.

Lynn Hopkins - Chief Financial Officer - (00:19:26)

You know what, it's pretty close to the average, Matthew.

Matthew Clark - Equity Analyst - (00:19:32)

Okay.

Lynn Hopkins - Chief Financial Officer - (00:19:33)

That we have for the quarter. I think while we remain liability sensitive because of the repricing profile of our CDs and that part of our balance sheet, I think one of the key drivers of our net interest margin is our earning assets and the loan growth in our portfolio. So we're bringing on the funding because we've had nice loan growth. So I think that that's the other thing that is showing up in the deposit beta.

Matthew Clark - Equity Analyst - (00:20:11)

Okay. And then just last one for me, on the loan growth this quarter, a decent amount of it came from single. But I also know that or I believe that you want to kind of mix shift the portfolio toward CNI longer term. Just any commentary around that potential mix shift and what you're seeing in the pipeline on the loan side? I mean growth is still high single digit here this latest quarter. Not sure how the pipeline though looks coming out of the quarter. Sure.

Johnny Lee - President and CEO - (00:20:47)

Hey Matthew, this is Johnny. So yeah, pipeline is still relatively healthy. I think for us. But just keep in mind Q4 typically. Is due to seasonality impact. It might be moderated a bit, but the majority of the what's in the pipeline right now certainly are still predominantly. The. Residential mortgage CRA related type of prospects or deals that we have. But at the same time we are, you know, basically bringing more prospects, if you will, any pipeline that's under discussions within the cni, including in our, the SBA side of the pipeline is, you. Know, still maintaining pretty healthy. Fortunately, as you know, with the government shutdown, it does impact the funding of the SBA loans that we currently have on hand. So we have to see how that plays out and how long that might take as far as the government shutdown is concerned. But cni, it is a relationship driven. Business and those typically will require a. Little bit more time. But the good thing is that we do have a number of good quality. Prospects that we're talking to right now. But for as far as the contribution. To the overall growth, obviously it was still, I would think it's still predominantly sfr CRE type of products that would be driving still that growth.

Matthew Clark - Equity Analyst - (00:22:24)

Okay, great. Thank you.

OPERATOR - (00:22:29)

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

Jackson Loren - (00:22:37)

Hey, good morning, this is Jackson Loren on for Andrew Terrell.

Johnny Lee - President and CEO - (00:22:42)

Great. Hey Jackson.

Jackson Loren - (00:22:45)

Just quickly to start off, I'm not sure if I missed this in the release or presentation, but was there any interest recovery during the third quarter?

Lynn Hopkins - Chief Financial Officer - (00:22:57)

For the third quarter I would say that we did not have in net interest income much kind of anomalies either interest reversal or interest recapture. So there wasn't much activity there. Fortunately credit was stabilizing and so you don't have that noise in the third quarter financial information.

Jackson Loren - (00:23:27)

Got it. That's helpful, thank you. And then just last one quickly for me on the $50 million of the FHLBs that matured and were replaced by broker during the quarter, can you just remind us like what rate those were maturing at and then what rates you guys were replacing those with and then also when those occurred during the quarter.

Lynn Hopkins - Chief Financial Officer - (00:23:52)

So the FHLB advances matured on the last day the quarter and we had put them on a year earlier. So they were at a rate of 340 ish. And the wholesale brokered market short term was probably up closer to 4%.

Jackson Loren - (00:24:26)

Got it. Thank you, that's helpful. The rest of my questions have been answered. Congrats on the good quarter.

Lynn Hopkins - Chief Financial Officer - (00:24:33)

Great. Thanks Jackson.

OPERATOR - (00:24:37)

Thank you. As a reminder, ladies and gentlemen, if you do have any questions or comments, you may press Star one on your telephone keypad. Our next question is coming from Kelly Mortar with kbw. Your line is live.

Kelly Mortar - Equity Analyst - (00:24:52)

Hey, thank you for the question. Maybe. Circling back to the margin, just the commentary about the perhaps lagging deposit betas. You've done a tremendous job expanding the margin. Now the past, I don't know, like five quarters, wondering if we get another rate cut, would you anticipate that you're still able to offset the impact. On. The earning assets side with declines in deposits in order to improve your margin? Or could there be a modest net drag if we get an additional cut here this quarter?

Lynn Hopkins - Chief Financial Officer - (00:25:35)

Thanks. Sure. Kelly, I would say there's probably a few things that we have opportunities that I'm going to say outpace, I think the impact of a rate cut and sort of the stiff competition for liquidity. So I would say that as we look at it, we do view ourselves as liability sensitive, although it is modest. So we're probably looking at just a handful of basis points. I think we would look for the margin to expand but really I think the opportunity has been in the origination and production platform that we've been working on. So with the loan growth and the yields that we've been bringing the new production on with that is pulling up on the earning asset yield more than what we've been able to achieve on managing the funding costs. So you know, I think, I think with the rate cut, while that might push down on earning asset yields, we would expect it also to push down on our funding costs. I don't know if you want to add anything, Johnny.

Johnny Lee - President and CEO - (00:27:05)

Maybe I'll just add. Just a couple comments. Kelly, if you recall past quarters, we. Made a business suggested we always, you. Know, obviously on the credit, the origination. Side we were trying to hold our line on our on the yield, obviously. Credit quality first and then secondly we. Try to price our loans appropriately based upon the opportunity that we see with the relationships that we bring in. But I think so far obviously we've. Been try to stay as disciplined as. Possible, maintaining good origination with good yield. So we continue to try to make an effort to do that. But obviously there's competition out there and we would continue to look at each deal individually to determine what would make sense as far as the overall pricing of a relationship, if you will.

Kelly Mortar - Equity Analyst - (00:28:01)

Great. Do you happen to have. I apologize if I missed it. What the average rate was on new originations last quarter?

Lynn Hopkins - Chief Financial Officer - (00:28:11)

Yeah, the originations it was 670. 670.

Kelly Mortar - Equity Analyst - (00:28:15)

Great. Awesome. Maybe last for me would be just on the capital. You've touched on your kind of thoughts on the buyback. Historically, RBB has been an acquirer of some smaller banks. Obviously the multip makes it challenging, but you do have a ton of capital. Just wondering if you have any updated thoughts on how you're thinking about other avenues of capital return here.

Lynn Hopkins - Chief Financial Officer - (00:28:45)

Fair question. I think we've been a little bit focused on how to demonstrate progress on credit, how to demonstrate progress on growing loans, organically controlling costs, and see, you know, work on getting our currency to catch up to our tangible book value at least. And I think then we would look for opportunities to. I think we've talked about, you know, deeper relationships in the markets that we're already in. I mentioned that we have some opportunity with our sub debt refinancing next year. And I think the buyback continues to be on the table. I think the other things are just investing in our business, growing the commercial platform. I think there's some technology that we're looking at. So I think it's all there, but it takes time. And there's not one thing right now that I would put in front of another. Got it. That's helpful.

Kelly Mortar - Equity Analyst - (00:30:01)

Thank you. I'll step back. Nice quarter, guys. Thanks, Kelly.

OPERATOR - (00:30:07)

Thank you. Ladies and gentlemen, as we have no further questions on the line at this time, I would like to turn the call back over to management for any closing remarks.

Johnny Lee - President and CEO - (00:30:19)

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.

OPERATOR - (00:30:29)

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