RBB Bancorp - Earnings Call - Q1 2025
April 29, 2025
Executive Summary
- Q1 2025 EPS of $0.13 missed S&P Global consensus of $0.38 due to a $6.7M provision for credit losses taken to accelerate the resolution of nonperforming loans; net income was $2.3M versus $4.4M in Q4 2024. Revenue (S&P Global definition) was $21.7M vs consensus $28.9M, a significant miss as well (see Estimates Context).
- Asset quality actions were tangible: nonperforming assets fell 20% QoQ to $64.6M (1.61% of assets), and the allowance coverage of NPLs rose to 86% from 68% in Q4.
- Core profitability drivers improved: net interest margin expanded 12 bps QoQ to 2.88% on a 29 bps decline in interest‑bearing deposit costs; loan originations were $201M at a 6.77% yield and loans HFI grew 12% annualized.
- Capital return catalyst: management indicated it was working to implement a buyback on the call, and on May 29 authorized up to $18M in repurchases through June 30, 2026, a potential stock support near term.
What Went Well and What Went Wrong
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What Went Well
- Accelerated de-risking: “We reduced our net exposure to nonperforming loans to $51 million…or 32% since year end” (CEO).
- Margin traction: NIM rose to 2.88% (+12 bps QoQ) on lower deposit costs; spot deposit rate exited at 3.06%, below the 3.13% quarterly average (CFO).
- Loan growth resumed: $201M of Q1 production at 6.77% blended yield; pipelines remain healthy though growth likely moderates (President).
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What Went Wrong
- Earnings under pressure from credit costs: $6.7M provision (vs $6.0M in Q4) tied to specific reserves and charge-offs; EPS fell to $0.13 from $0.25 in Q4.
- Higher operating expenses: noninterest expense increased $0.9M QoQ to $18.5M on seasonally higher comp/benefits and data processing; efficiency ratio rose to 65.1%.
- Deposit mix drift: noninterest-bearing deposits declined to 16.8% of total (from 18.3% in Q4) amid migration into higher-yielding products.
Transcript
Operator (participant)
Good day everyone, and welcome to the RBB Bancorp Q1 2025 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, Rebecca Rico. Ma'am, the floor is yours.
Rebeca Rico (AVP and Financial Analyst)
Thank you, Matthew. Good day everyone, and thank you for joining us to discuss RBB Bancorp results for the Q1 of 2025. With me today are Johnny Lee, David Morris, Lynn Hopkins, and Johnny Lee. 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 forward-looking statements in the investor presentation and the company's SEC filings. Now I'd like to turn over the call to RBB Bancorp's Chief Executive Officer, David Morris. David?
David Morris (CEO)
Thank you, Rebeca. Good day everyone, and thank you for joining us today. Q1 net income declined to $2.3 million or $0.13 per share as we took decisive strategic action to address our non-performing assets. We reduced our non-performing assets by 20% and our net exposure to non-performing loans by 32% to $51 million. To accomplish this, we sold $18 million of loans, recognized provisions of $6.7 million, and received paydowns of $1.8 million. We believe the provisions we have taken over the last few quarters have addressed the vast majority of potential losses in our non-performing loans. As we said last quarter, we are focusing on resolving our non-performing loans as quickly as possible while minimizing the impact of earnings and capital, and we think our actions in the Q1 helped accomplish this.
We continue to work through our remaining non-performing assets and expect to be able to report additional progress in the coming quarters. We did downgrade a $5.3 million New York CRE loan to non-performing in the Q1 after the largest tenant moved out. While unfortunate, we feel relatively confident that it will be resolved without any loss of principal as the borrower is actively working to fill the vacancy and has also listed the property for sale. A recently completed appraisal on the property indicates an LTV of about 85%. Now I'll hand it over to Johnny to talk about happier subjects like loan growth and margin expansion. Johnny?
Johnny Lee (President)
Thank you, David. As David mentioned, in addition to making good progress resolving our troubled loans, we have strong loan growth in the Q1, another quarter of net expansion. Loans helped our investment grow by $90 million or 12% on an annualized basis, driven by the continued execution of our growth initiatives. Growth in commercial SBA and SFR balances more than offset the decline in C&D loans. We have seen especially strong results from our in-house mortgage origination business, which, despite the rare environment, originated $112 million in mortgages in the Q1. These contribute nicely to our total Q1 loan originations of $201 million at a blended yield of 6.77%, 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 Q1. Net interest margin increased 12 basis points to 2.88% due primarily to a 29 basis point decline in the cost of our interest-bearing deposits, which drove a 17 basis point decline in our overall cost of fund. We expect some incremental decreases in funding costs from here, but likely at a slower pace than we've seen since the peak in the Q3 last year. It's worth highlighting that since that time, we've reduced the cost of deposits by 50 basis points and the total cost of funds by 42 basis points. With that, I'll hand it over to Lynn to talk about the results in more detail. Lynn.
Lynn Hopkins (CFO)
Thank you, Johnny. Please feel free to refer to the investor presentation we've provided as I share my comments on the company's Q1 of 2025 financial performance. Slide three of our investor presentation has a summary of our Q1 results. As David mentioned, net income was $2.3 million or $0.13 per diluted share. Q1 results were negatively impacted by a $6.7 million pre-tax provision for credit losses as we worked to address several non-performing assets. Net interest income before the provision increased for the third consecutive quarter to $26.2 million. We are optimistic that lower future provisions and the redeployment of capital previously tied up in non-performing assets will result in increasing net interest income after provisions in the coming quarters.
As Johnny mentioned, we had another quarter of net interest margin expansion, our third in a row, primarily driven by the decrease in the cost of deposits. Our spot rate on deposits on March 31 was 3.06%, or 7 basis points below the average of 3.13% for the Q1. Costs are likely to continue to decrease, but at a more measured pace in future quarters. Funding costs also included the Q1 maturity of $150 million of low-cost FHLB term advances, which were largely replaced with $110 million of FHLB advances with an average rate of 3.88%. Non-interest income declined by $434,000 to $2.3 million in the Q1 due to lower gain on sale of loans and other income that was partially offset by higher fees and servicing income.
Q1 non-interest expenses increased by $873,000 to $18.5 million due to a seasonal increase in comp and benefits, higher data processing fees, and an increase in legal and professional expenses. We expect comp and benefit expenses to normalize next quarter and for legal and professional expenses to trend down from here. Turning to credit, the provision for credit losses was $6.7 million compared to $6 million in the prior quarter. The Q1 provision was due to an increase in specific reserves of $2.8 million, net charge-offs of $2.6 million, and an increase in general reserves of $1.3 million due mainly to loan growth. The increase in specific reserves relates mostly to two lending relationships.
Net charge-offs included $1.2 million related to an $8.8 million loan that was moved to REO and subsequently sold, and $1.4 million related to a bulk sale of $10.8 million of underperforming SFR mortgages, of which $6.5 million were on non-accrual at year-end. Slide five and six have additional color on our loan portfolio and yields. The loan portfolio yield was stable from the Q4 at 6.03%. Slide seven 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 55%. Slides nine through twelve have details on asset quality, some of which David has already covered in detail. NPLs decreased $20.7 million, or 25%, to $60.4 million and represent 1.92% of loans held for investment at quarter end.
With the increase in specific reserves to $9.7 million, our net exposure to MPLs decreased 32% to $50.6 million. Substandard loans decreased $24 million and totaled $76.4 million at the end of the Q1. The decrease was primarily due to $11.7 million in loan sales, transfers to REO totaling $12.8 million, of which $8.8 million was subsequently sold, and payoffs and paydowns totaling $5.4 million. These decreases were partially offset by downgrades of two loans totaling $6.2 million. Of the total substandard loans at March 31st, $16 million were on accrual status. The ratio of our allowance for loan losses to total loans held for investment increased by 9 basis points to 1.65%, inclusive of the specific reserves, while the coverage ratio of our allowance for loan losses to non-performing loans increased to 86%, up from 68%.
When we exclude specific reserves and individually reviewed loans, the ratio of allowance for loan losses to loans held for investment was up one basis point to 1.36% at the end of the Q1. Slide thirteen has details about our deposit franchise. Total deposits increased at an 8% annualized rate from the Q4 to $3.14 billion, with growth in money market accounts and CDs more than offsetting a decline in non-interest-bearing accounts. Our tangible book value per share increased to $24.63. Our capital ratios remain strong, with all capital ratios above regulatory well-capitalized levels. Now I'd like to hand it back over to David and Johnny for a few closing remarks.
David Morris (CEO)
Thank you, Lynn. As this is my last earnings call here at RBB, I want to take a moment to express my gratitude to all of our employees, customers, the board, and our shareholders. We have had our share of challenges over the last few years but have not lost sight of our goal to be the bank of choice for Asian Americans nationwide. I've enjoyed the friendships I've built since joining RBB over 15 years ago, and I look forward to continuing to be of service on our board of directors. Johnny.
Johnny Lee (President)
Thank you, David, and thank you for your years of leadership and contributions to the world of business. We are particularly grateful for all the work you have done over the last year to work through our non-performing assets, and we look forward to your continued input and guidance as a member of the board of directors. With that, we are happy to take your questions. Operator, please open up the call.
Operator (participant)
Certainly. Everyone at this time will 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. Your first question is coming from Brendan Nosal from Hovde Group. Your line is live.
Brendan Nosal (Analyst)
Hey, good afternoon, everybody. Hope you're doing well.
Lynn Hopkins (CFO)
Yes, thank you.
Brendan Nosal (Analyst)
Maybe just starting off here on capital, we'd just love to get your thoughts, your updated thoughts that is on potential for share purchase at some point this year. It feels like you're getting a better line of sight toward asset quality resolution and made progress this quarter. Capital ratios are strong, and obviously the pricing for a buyback would remain pretty attractive.
Lynn Hopkins (CFO)
Thank you, and thanks for starting with that. I think we all can recognize that with our current share price and our capital ratios, a buyback is one of the best uses of our excess capital. We are working hard to put a buyback in place and hope to have more to report to everyone soon.
Brendan Nosal (Analyst)
Okay, thanks for that, Lynn. Maybe moving over to a couple of dynamics within the margin. Maybe just first, when during the quarter exactly did that FHLB roll from the lower cost to the higher cost one, just to get a sense of how much that is embedded in this quarter's margin.
Lynn Hopkins (CFO)
I probably could answer that a couple of different ways. It's fully priced into our March net interest margin, and I would say our March net interest margin is a little bit below the whole quarter's average. Obviously, the FHLB advances at $150 million are just a fraction of our total funding base, even though they needed to come up into the mid to high threes.
Brendan Nosal (Analyst)
Okay. All right, that's helpful. Last one from me before I step back here. Just wanted to hit on the interplay of the margin and non-accruals for a minute. Can you just give us a sense of how much margin drag you're currently experiencing from the non-accrual base at the moment? Thanks.
Lynn Hopkins (CFO)
I don't know that I translated it completely into basis points, but there is certainly a drag on our net interest margin. Last year, when we were reversing our interest income, when we were placing them on non-accrual, those were expensive. I think when we look at just $20 million able to come back onto accrual status at 6%, it's about $1.2 million in the year. That's probably how I would look at it, and we have $60 million more to go.
Brendan Nosal (Analyst)
Yeah, yeah. All right, fantastic. Thanks for taking the questions.
Lynn Hopkins (CFO)
Yeah, no, thank you.
Operator (participant)
Thank you. Your next question is coming from Matthew Clark from Piper Sandler. Your line is live.
Matthew Clark (Managing Director and Senior Research Analyst)
Hey, good morning, everyone. Just on the staying on the margin, did you have any kind of outsized interest recoveries in the quarter from unloading some of these problem loans? Just trying to get a sense if there was any outsized reversals in the quarter.
Lynn Hopkins (CFO)
Fair question. The short answer is no. We tried to, I think, articulate that in the earnings, I think, release. For this quarter, the resolution of the non-performing assets did not result in the recapture of any interest income with the loans being sold and then also a couple of them moving to REO.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. What is your appetite for doing more of these problem loan sales at this stage?
David Morris (CEO)
Okay. We believe we want to keep all of our options open. However, we believe that we're well reserved for future write-offs, if any.
Lynn Hopkins (CFO)
Yeah. I think they were—let me add—I think we were opportunistic in the sales that occurred in the Q1. Obviously, we took some charge-offs associated with them. One was it's a unique property. We would have had operating costs. We took the opportunity to get that closed by quarter end. I think having the opportunity to approach a bulk sale where a majority of them had been on non-accrual at year-end, and then we were able to fold in some other less desirable SFRs and, again, get it done by quarter end helped move it forward.
I think for what's left, we believe that we're adequately reserved for what we would need to do to take action, and we are open to sales, working with the borrowers to return them to accrual status if that was a possibility, but do look to add them back to being performing assets or redeploying the money into earning assets.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. Just on the tariff war, have you all—I know it's probably still a little early, but have you made—have you done any work to try to ring-fence or quantify what exposure you might have from kind of an import-export perspective and maybe even from an indirect perspective?
David Morris (CEO)
Yeah, I'm happy with this, Johnny. Yes, we have reached out to our top 10 customers just to do a health check, if you will. So far, yeah, we do not observe any potential financial impacts at this time. Obviously, there is still uncertainty here with the changing sort of terms associated with the tariffs and how it is going to be applied and everything. So far, yes, we do not observe any potential financial impact. Also, just want to keep in mind that our overall C&I, trade finance mix of the loan to our total portfolio in loan portfolio is contributing currently about 4% only. Again, that is roughly the income mix of our overall loan portfolio at this time.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. Okay. The last one for me, just on the gain on sale this quarter, a little light. Maybe speak to the weakness there and your outlook if you could.
Lynn Hopkins (CFO)
You want me to start?
David Morris (CEO)
Yeah, you can start.
Lynn Hopkins (CFO)
Sure. I'll start. Loan sales were a little bit lower in the first quarter. We did take the opportunity to keep some of it on the balance sheet. I believe that there's a little bit of a pipeline building on SBA that has larger gains. I think our outlook is that it would return to more normalized levels that we at least saw in the Q4.
David Morris (CEO)
Yeah.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. Perfect. Thank you.
Lynn Hopkins (CFO)
Yeah. Does anybody want to add?
David Morris (CEO)
Oh, no, no. I want to add a comment on the SBA side. We did have a new hire right at the beginning of January. Yeah, it is coming online. We do expect a higher volume of SBA loans being funded in Q2.
Matthew Clark (Managing Director and Senior Research Analyst)
Great. Thanks again.
Operator (participant)
Thank you. Your next question is coming from Andrew Terrell from Stephens. Your line is live.
Andrew Terrell (Analyst)
Hey, good afternoon. Good morning.
Lynn Hopkins (CFO)
Hi.
Andrew Terrell (Analyst)
Hey, I wanted to ask on just I heard some of the comments early on. It sounds like expectations around loan growth are still generally positive, maybe at a slower pace relative to a pretty strong quarter here in the Q1. I wanted to shift to the deposits and just get a sense on expectations around ability to core fund that expected loan growth, the sensitivity around the 100% loan to deposit ratio, if any. I also wanted to drill down a bit on if you have any color on the non-interest-bearing deposit trends. It looks like off a bit towards the end of the period. Any color as to what drove the NIB rotation this quarter?
Lynn Hopkins (CFO)
Sure. I'll start and you can add. Good question, Andrew. Thank you. With respect to the non-interest-bearing deposits, I think some of it was seasonal business activities we observed. We did observe some migration into higher-yielding money market and CD product. I think we did observe some of that in the Q1. We did have a successful CD campaign in the first quarter that we were able to reduce our reliance on wholesale funding a little bit when you consider FHLB advances and our brokered funds. I think that we foresee success in being able to fund our loan growth organically. Again, our reliance on wholesale funding, I think, is modest. We have some room there to the extent that loan growth remains at the similar levels.
We still remain focused on C&I production, how we can bring in some additional non-interest-bearing deposits, but that will take a lot longer time period.
Andrew Terrell (Analyst)
Got it. Thank you. Thank you, Lynn. I appreciate it. Also, just do you have the weighted average? It looks like the FHLB that you added in the quarter had varying maturities. Do you have the weighted average term or the range of terms there?
Lynn Hopkins (CFO)
Sure. $130 million of them are puttable advances with the longest final terms at seven years. However, the put options at the FHLB side range from, I'm thinking, June until September this year. Pretty short on the FHLB's call option side of things with final maturities at three, four, and seven years.
Andrew Terrell (Analyst)
I got it. Okay. I appreciate it. Yeah, I just want to say, David, it's been a pleasure speaking with you on these quarterly calls for a while now. Congratulations.
David Morris (CEO)
Okay. Thanks. Thanks.
Operator (participant)
Thank you. Once again, everyone, if you have any questions or comments, please press star, then one on your phone. Your next question is coming from Kelly Motta from KBW. Your line is live.
Kelly Motta (Managing Director and Equity Research Analyst)
Hi. Thank you so much for the question. I just, again, want to echo those sentiments of, "David, it's been a pleasure working with you, and congrats on a well-deserved retirement, and congrats again, Johnny, on the upcoming role." I guess with the credit, I apologize if you've addressed this at this point, but in terms of the workout, I know you talked a bit about your approach to the sales. I'm just wondering in terms of the timeframe of this workout. I think originally you were hopeful that would be completed by mid this year. It feels like that might get pushed out a bit. Do you have any sense in terms of the timeframe in your ability to work out these credits, understanding that there's a lot of parties, insurance involved, etc.?
David Morris (CEO)
Yeah. Kelly, thanks for the question. It is really hard for us to tell exactly when the NPLs are going to come off our balance sheet and to decrease it down to our normal baseline. However, we believe that by the H2 of 2025, that could be our target. NPLs will continue to be lumpy through 2025. It's going to continue to be out there and so forth. We are making steady progress on all of these right now. We're making steady progress, and we expect to see more to go off in the Q2.
Kelly Motta (Managing Director and Equity Research Analyst)
Got it. That's really helpful. I appreciate the color on the trade finance and the C&I component. I know it's relatively small, but digging in a little further, I believe a lot of those factories in China have shifted production during the last Trump administration. Do you have any ballpark as to your exposure to China versus some other countries, given you're a Chinese American bank and might get lumped into that narrative with that niche there? Just trying to understand what the actual exposure might be.
Johnny Lee (President)
Kelly, that's a good question. All I can say is right now, as of today, all we know is that there's that 10% baseline, right, that impacts all countries. For me personally, I separate into two buckets: one that's U.S., China, and U.S., revenue world. Right now, U.S., China, I mean, the China tariffs obviously is up to, what, 145%. Revenue world, they're still based on 10%. Additionally, there will be, obviously, depending on the trade balance between U.S. and those respective countries, there will be different tariffs potentially be applied to them. Right now, it's at a pause. It remains to be seen how that's all going to play out. Obviously, it impacts different industries or different types of businesses that get impacted somewhat differently. It remains to be played out.
Lynn Hopkins (CFO)
Kelly, in addition to Johnny's comments, our loan portfolio, the 4% we mentioned, about $120 million in trade finance, the portion that's China-specific versus other countries or markets where they might have taken action, I don't think we have that exactly broken down within that category. Again, I think anecdotally with the reach-out, we're not identifying anything at this point.
Johnny Lee (President)
Right. Yeah. Nothing at this point. In fact, our existing borrowers are all very seasoned. Obviously, they've either made preparations in advance already or they have contingency plans put in place as this all plays out.
Kelly Motta (Managing Director and Equity Research Analyst)
Got it. Last question for me. It sounds like, again, there's a lot of optimism about the loan growth pipeline. Obviously, not as strong as what was a really strong Q1, but wondering if you could provide some insight as to the composition of that pipeline, either if there's any particular markets that are particularly strong that you're seeing or which categories the pipeline is weighted to.
David Morris (CEO)
Sure. If I can answer that. Our pipeline remains strong. It's pretty much still primarily contributed by our CRE loans and single-family residence. However, our C&I are starting to pick up. That takes time. Because of the new hires that we have recently since the beginning of this year, I do expect that to incrementally contribute to that pipeline. At this time, the pipeline is predominantly made up of CRE, MFRs, and SFRs primarily, even though SFR is a relatively small mix of the loan. I think we're gaining very good momentum on SBA loans as well.
Kelly Motta (Managing Director and Equity Research Analyst)
Thank you so much. I'll step back.
Operator (participant)
Thank you. Your next question is coming from Tim Coffey from Janney. Your line is live.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Thank you. Thanks for the opportunity to ask a question or two here. Lynn, apologies if this has already been discussed, but I have a question about non-interest expenses going forward. I heard the comments you made in the prepared remarks. Is it reasonable to think that expenses could look a little bit like they did the H2 of last year versus the H1 of last year?
Lynn Hopkins (CFO)
Yes. I think that's reasonable. I think we are still looking at our OpEx ratio to be around the 180% of average assets. We do think they were a bit elevated in the Q1, kind of as I talked about in our prepared remarks, especially with salary benefits moderating down. I think there's opportunity in OpEx to also trend down.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
How much of the additive to expenses are the new hires and the lending side going to be, if at all?
Lynn Hopkins (CFO)
It's a little hard to say in the sense that you have people coming in that are new and in charge of certain things, but then we're also rationalizing the expense in other places. I don't think it's a direct add. I would just stick with the idea that we would estimate our operating expense run rate to be in kind of $17.5 million-$18 million, maybe with some puts and takes.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay. All right. Those are my questions. Thank you.
Lynn Hopkins (CFO)
Thanks, Tim.
Operator (participant)
Thank you. That concludes our Q&A session. I'll now hand the conference back to our host for closing remarks. Please go ahead.
David Morris (CEO)
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.
Operator (participant)
Thank you. Everyone, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.