RBB Bancorp - Earnings Call - Q2 2025

Executive Summary

• GAAP diluted EPS was $0.52 on net income of $9.3M, aided by a one-time $5.2M Employee Retention Credit and offset by ~$1.2M related advisory costs; adjusted EPS would have been ~$0.36, implying results were essentially in line on a normalized basis.
• Net interest margin expanded 4 bps sequentially to 2.92% as loan growth and stable asset yields offset modestly higher funding costs; ROA improved to 0.93% from 0.24% in Q1.
• Credit quality mixed: nonperforming assets fell to 1.49% of assets, but special mention and substandard loans increased as management tightened credit surveillance; allowance coverage of NPLs rose to ~90%.
• Deposits grew at a ~6% annualized rate; loan-to-deposit moved to 101.5% with plans to moderate loan growth and pursue loan sales in H2 to manage balance sheet and funding.
• Board declared a $0.16 dividend; new $18M buyback program authorized in May provides capital deployment flexibility while asset resolution continues.

What Went Well and What Went Wrong

What Went Well

• Net interest income rose to $27.3M (+$1.2M QoQ) and NIM expanded to 2.92%, supported by $182.8M in new loan production at a 6.76% blended yield and lower average deposit costs; “another quarter of strong loan growth and stable loan yields drove increasing net interest income and margin expansion” (CEO).
• Nonperforming assets declined to $61.0M (1.49% of assets), driven by charge-offs and paydowns; allowance coverage of NPLs increased to ~90%.
• Management emphasized strong mortgage origination: “originated $120 million of mortgages… total second quarter loan originations of $183 million at a blended yield of 6.76%” (CEO).

What Went Wrong

• Criticized assets rose: special mention loans increased to $91.3M (2.82% of loans) and substandard loans to $91.0M, reflecting downgrades as surveillance tightened.
• 30–89 day delinquencies rose to $18.0M (0.56% of loans), largely due to new delinquencies including an $8.5M CRE loan (later brought current).
• Operating expenses increased to $20.5M (+$2.0M QoQ), including $1.2M ERC advisory costs and ~$0.33M executive transition costs; efficiency ratio improved but remains above 57%.

Transcript

Speaker 4

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 *0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Rebecca Rico. Ma'am, the floor is yours.

Speaker 6

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 Lynn Hopkins, and Chief Credit Officer Jeffrey Yeh. 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 the call over to RBB Bancorp's President and Chief Executive Officer Johnny Lee. Johnny?

Speaker 4

Thank you, Rebecca. Good day, everyone, and thank you for joining us today. Second quarter net income totaled $9.3 million, or $0.52 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 and stable earning asset yields, which supported a $1.2 million increase in net interest income and a four basis point increase in net. Loans helped our investment grow 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. After rate cuts, our funding costs are likely close to stabilizing at this level. 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?

Speaker 6

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 $0.52 per diluted share. Second quarter results benefited from the recognition of a $5.2 million employee retention credit, or ERC, refund, which is included in other 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 cost. 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.

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 loan-to-value of 55%. Slides nine 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. NPLs 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 NPL 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 payoffs and paydowns totaling $2.7 million. Of the total substandard loans on June 30, $30.2 million were on accrual status. Past due 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. It is worth noting that with the 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-interest-bearing 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 question. Operator, please open up the line.

Speaker 4

Thank you. At this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *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 * keys. One moment, please, while we pull for questions. Thank you. Our first question is coming from Brendan Nosal with Hovde Group. Your line is live.

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

Speaker 6

Yes, thank you, 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, you know, credit workout? Thanks.

Sure. Thanks, Brendan, for the question. 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. We view it as a modest amount of cash. I think we have sufficient liquidity and affordability. With respect to how it relates to the fact that we have been working through kind of our higher elevated NPL levels, we've had plenty of capital to support that initiative, plus our high coverage ratio I just kind of concluded my comments with. I think we're able to do both.

Okay. All right. Great. 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?

Speaker 2

I think Jeffrey can.

Sure.

Yeah. Over the week, over the quarter, we have about $27 million of the downgrade 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 credit. Those credit are mainly those bridge and gate loans that they have, they see a little, we see a little bit of delay in stabilizing their income. They are paying as agreed, and then the loan-to-value 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 that compared to the previous quarter, but we consider it as a credit enhancement.

Speaker 6

On the few downgrades to substandard, I mentioned it was mostly driven by two credits that remain on accrual status. There are examples of one transitioning to the higher interest rate environments and working with a borrower. Again, current and going through transitions. 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, for how long is that dual path sustainable for? If we're still seeing inflows into criticized, presumably it 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?

Speaker 2

Yeah. I think that's 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 hand. I think we're making good progress in that respect. At the same time, growth side, I mean, just as the comment in previous quarters, it's always been very healthy, always have a very healthy pipeline. We certainly feel that we can manage that well, work with that dual path that we're taking.

Okay. Great.

Speaker 6

Thanks.

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? 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. We're already covering, you know, when we had our loan growth this quarter, when you exclude our specific reserves, our coverage ratio is up at about 136%, 138%. 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 of quarters.

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

Speaker 4

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

Hey, good morning. Thanks for the questions. The first one, just on the kind of loan-to-deposit growth. You know, deposits trailing loans here, loan-to-deposit ratio obviously up over 100% now. 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. Just trying to kind of think through those moving parts, and is there some deliberate effort to maybe tighten the screws a little bit on the pipeline? Any commentary around your outlook for deposits?

Speaker 2

I can comment on the loan. Hi, Matthew. This is Johnny. We've been tightening the screws on the loans because, you know, we've always focused on some quality first, you know, with all the new loans that we are bringing to the bank or new relationships. We always have been, you know, very selective so far as far as the new loans that we, new relationships we're bringing to the bank. Obviously, the deposit side, we're continuously trying to find ways to originate more organically new deposits through various, you know, for example, recently launched a special promotion program in our money market DDA, so the bundle package that's bringing in pretty good, you know, getting pretty good traction as far as bringing in new deposits as well to support the, you know, our funding.

I recognize the loan-to-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. We, again, will continue to manage that now that there's, you know, we're trying to keep that in a good balance.

Speaker 6

Matthew, I think in the investor materials, we've shared our new production levels of over $180 million this quarter at a rate of kind of $675 and how that compares to prior quarters. 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 from a net loan growth, we would expect potentially some loan sale activity to pick up in the second half of the year. Just to comment on deposits, I think that we have been very successful in growing organic deposits, and we can, and we have plenty of capacity for wholesale funding. There's room to bring the loan-to-deposit ratio down a little bit if need be.

I think we're watching it closely, but very comfortable with where we kind of ended the quarter.

Okay. Great. On the deposit cost side, you know, an expectation for maybe some stabilization without Fed rate cuts, spot rate obviously down, which is helpful going into 3Q. 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, you know, 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. We were successful in moving our deposit rates down almost 100% after rates moved down 100 basis points. 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. 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 if 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 4.15%, 4.20%.

I think those have an opportunity to price down into the current market, not a significant amount because rates are higher for longer, but somewhat.

Okay. Just to clarify, the amount of CDs that are coming due this quarter, I assume new pricing is around 4%?

Yeah. It's basically all of our CDs. All of our CDs mature within 12 months, I think like 99.5%. A third of them mature next quarter. 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. 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 I think if you exclude some of the noise, it was around $19 million this quarter. Just wondering where the relief is coming from.

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

Okay, thanks again.

Yeah, thanks, Matthew.

Speaker 4

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

Hey, good morning.

Good morning.

I wanted to go back to some of the credit discussion in, 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 expand on that point a little bit more. Does that necessitate kind of a more full portfolio review under newer standards, or could you just maybe elaborate on that a little bit?

Speaker 6

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

Speaker 2

Yeah, this is Johnny. 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 very, very manageable. Loan-to-value ratio, global cash flow is strong. You know, none of these borrowers here that move to special mention have past due. They're all current and accruing.

Okay. Understood. I appreciate that. 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. Do you have the amount that was sold this quarter? I see a pickup in the gain-on-sale line. Just wondering if you have any kind of expectation for the back half.

Speaker 6

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 product that we have, and managing the size of the portfolio relative to the whole balance sheet. 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 speeds play out. We also have opportunity with our SBA loan portfolio. I believe Johnny's spoken in the past, we've added some resources in that area. I think that's an area that's increased some production, and we usually sell the guaranteed portion. A 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.

Speaker 2

Thanks, Jason.

Speaker 4

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

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. I'm wondering if you could provide your track record with gaining commercial customers and how that's tracking and any sort of color as to what drove the non-interest-bearing increase this quarter. Thanks.

Speaker 2

Hi, Kelly. That's Johnny. I can make some comments. Maybe colleagues here can also add if they'd like. Thanks for the question. First of all, I think it's a combination of things. I think, you know, to our frontline associates' credit via the branch of commercial lenders, we've been very focused on ways to deepen and expand the relationships that we have right now. Certainly, that has brought some additional DDA deposits, I think, to us. Also, with the new relationships that we're bringing in, obviously, we're very much focused particularly on the CNI side, even though as overall banks' total mix of these 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.

I think the combination, and obviously, I mentioned earlier about, you know, we have certain promotional sort of promotions that we've launched to try to generate more new relationships by bundling money market and the DDA sort of a product. 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 deposits, but at the same time, a combination of including the DDA deposits as well.

Speaker 6

Yeah. 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. I think the composition and, you know, more granularity to our non-interest-bearing deposits with the efforts that Johnny described. That's what we're observing.

Great. That's helpful. 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? I'm wondering if this change in the California tax law has any material impact on your outlook for the tax rate.

Good question on the California tax rates. We did include the impact to our taxes in this quarter. It did have a small catch-up impact in the second quarter, and it won't have a material impact overall. 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. Both are in there, Kelly.

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

Yeah.

Speaker 4

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.

Speaker 2

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.

Speaker 4

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.