RBB Bancorp (RBB) Earnings Call Transcript

Greetings. Good day, ladies and gentlemen, and welcome to the RBB Bancorp's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Rebeca Rico, Investor Relations. Ma'am, you may begin.

Thank you, Ali. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the second quarter of 2026. With me today are President and CEO, Johnny Lee; Chief Financial Officer, Lynn Hopkins; Chief Credit Officer, Jeffrey Yeh; and Chief Operations Officer, Gary Fan. 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?

Thank you, Rebeca. Good day, everyone, and thank you for joining us today. We are pleased to report another solid quarter of earnings and continued progress across key metrics we have been focused on. We generated net income of $10.1 million or $0.59 per share which represents a 13% increase from the same quarter in 2025 as we improved credit quality for [ loans ] and deposits until capital actions. While net income decreased $1.2 million compared to the prior quarter, this decrease relates mostly to [ REO ] sales during the first half of 2026 as we resolve our nonperforming assets. And we did make further progress on further quality during the quarter with nonperforming assets declining 11% to 1.02% of total assets. Loan originations accelerated in the second quarter with $150 million of new loans at an average yield of 6.3%. Our lending pipelines remain healthy across the franchise and we expect continued progress on loan growth in the second half of the year. On that note, I want to highlight the exciting development in our franchise expansion into Northern California. We recently announced the opening of a loan [ production ] offers in [ Burlington ] in hiring of a commercial banking team in the San Francisco Bay area that will be led by [ John Curtis ]. John brings over 37 years of financial services experience, including serving as President and CEO of Banco of [ Orion ] and has a strong track record of building high-performing lending organization. The San Francisco [ payer ] is home to one of the largest Asian-American communities in the United States, and we believe this team in the [ nonproduction ] lanes will help us expand our commercial banking business in a market that is a natural fit for RBB. Deposits grew $50.8 million in the quarter, and our deposit mix continued to improve, with noninterest-bearing deposits increasing to 17.5% of total deposits and continued reductions in our reliance on [ our ] sales funding. Our steady growth in [ core ] funding combined with our strong regulatory capital help position us to redeem $40 million of subordinate debt on July 1, which will reduce interest expense in future quarters. Overall, we believe the second quarter demonstrated continued progress in improving RBB's fundamental earnings power [ and ] that we are on track for a strong second half of 2026. With that, I'll hand it over to Lynn to talk about results in more detail. Lynn?

Thank you, Johnny. Please feel free to refer to the investor presentation. We have provided, as I discussed the company's second quarter [ of ] 2026 financial performance. Net income for the second quarter was $10.1 million or $0.59 per diluted share. This compares to $11.3 million or $0.66 per diluted share in the first quarter and $9.3 million or $0.52 per diluted share in the second quarter of 2025. The decline in net income from the first quarter was due primarily to $1.1 million in lower gains from REO sales as we continue to resolve our nonperforming assets. The year-over-year improvement of approximately 13% in earnings per share reflects the impact of share repurchases and the sustained progress we have made in growing net interest income and reducing credit costs over the past year. Net interest income was $30.1 million for the second quarter compared to $30.5 million in the first quarter. The decrease was primarily due to lower FHLB dividend income and higher subordinated debt service, offset in part by a lower cost of deposits. We received a special FHLB dividend of $430,000 in the first quarter versus no special dividend in the current quarter. Our $120 million in subordinated debt repriced from its [ x ] 4% rate to a floating rate of [ $6.98 ] effective April 1, which added approximately $830,000 of incremental interest expense in the second quarter. At the same time, deposits have repriced lower and the cost of average interest-bearing deposits declined 5 basis points to [ 34% ]. Our net interest margin was 3.06% for the second quarter, down 9 basis points from 3.15% in the first quarter. The primary drivers were the subdebt repricing in the second quarter and the FHLB special dividend we received in the first quarter. On a year-over-year basis, our net interest margin improved 14 basis points reflecting the cumulative benefit of our deposit repricing efforts and improved earning asset yields. On July 1, we completed a partial redemption of $40 million of our subordinated notes at 100% of [ par ] plus accrued interest for a total payment of approximately $40.7 million. The redemption, combined with the new $1 million share repurchase program announced in June reflects our strong capital position and commitment to optimizing our capital structure. As a side note, our cash balances at June 30 were elevated compared to prior quarter end levels as we had accumulated cash in advance of sub debt redemption. Noninterest income was 30 -- well, 30. Noninterest income was $3.0 million for the second quarter compared to $4.3 million in the first quarter. The $1.3 million decrease was due mainly to the lower gains on sale of REO. In addition, the first quarter included a $484,000 recovery on a previously charged-off acquired loan and $360,000 of interest income on tax refunds related to purchase to federal tax credits. There were no similar items in the second quarter. These decreases in noninterest income were offset in part by higher gains on sale of loans of $640,000. Noninterest expense was [ 90 ] [ expense ] was $19 million for the second quarter, a modest decrease from $19.3 million in the first quarter. We expect our expense base will continue to track within the $18 million to $19 million range we have mentioned in the past. The efficiency ratio was 57.5% for the second quarter compared to in the first quarter with the increase driven primarily by lower noninterest income. Second quarter new loan originations increased 21% from the first quarter. Loans held for investment of $3.3 billion at June 30 were stable quarter-over-quarter. Our loan-to-deposit ratio ended the quarter at 98% as strong deposit growth supported loan originations. Total deposits grew $51 million to $3.4 billion with retail deposits increasing $94 million and wholesale deposits declining $44 million. Noninterest-bearing deposits increased to $592 million, representing 17.5% of total deposits, up from 15.8% at the end of the first quarter. We reported [ 0 ] provision for credit losses in the second quarter compared to a $200,000 reversal in the first quarter and a $2.4 million provision in the same quarter last year. Net charge-offs totaled just $83,000 in the second quarter or essentially 0% of loans on an annualized basis. Nonperforming loans declined $20.8 million or 47% from the prior quarter to $23.8 million. The primary driver was the transfer of a $19.4 million credit to REO. This credit is our largest nonperforming asset, and we continue to move it through the resolution process. Special mention and substandard loans declined 16% to $82 million from $97 million at March 31. Criticized and classified assets have improved meaningfully over the past year, and we believe the portfolio continues to trend in the right direction. Our allowance for credit losses remained essentially flat at $43.7 million. And as a result of the decline in nonperforming loans, the allowance coverage of nonperforming loans improved significantly to 184% at June [ 30. ] The allowance represents 1.32% of loans held for investment, which we believe is appropriate given the improving credit trends. Book value per share increased to [ 31.15 ] and tangible book value per share increased to [ 27.3% ] or approximately 1.5% higher when compared to March 31. Our capital ratios remained strong with the CET1 ratio of approximately 18% and a TCE to tangible assets ratio of approximately 11%. We were pleased to announce that our Board authorized the repurchase of up to 1 million shares of our common stock, representing 6% of shares outstanding. Our Board's decision was due to the company's strong capital position and reflects the work we've done resolving nonperforming assets and returning the bank to higher profitability. This concludes my prepared remarks. Operator, we are now ready to take questions. Thank you.

[Operator Instructions] Our first question is coming from Brendan Nosal with Hovde Group.

Maybe just starting off on the net interest margin. I guess, sequential pressure this quarter as expected, given the [ sub ] debt move from fixed to floating. Looking ahead to kind of the third quarter and I guess the tail end of this year, can you just walk through the margin dynamics and where you think the margin will land in the third quarter, just given the partial repayment of the debt issuance?

So I think the net interest margin still has an opportunity to improve based on opportunities for loan growth. Also retiring a portion of the sub debt should also [ buy ] back a portion of our margin. And we continue to monitor our deposit costs very closely. The average cost of deposits for the quarter were higher than the spot rate at the end of the quarter. So I think costs will continue to be relatively the same or slightly improved. And I think that there's an expectation that the loan production that we talk about in our materials will come through as net loan growth in the second half of the year. So I think we've talked about in the past that we've been liability-sensitive, rates are probably higher for longer. So I think it will have a little bit of a neutral impact on our funding sources and then the earning asset side probably has a chance to come out. So I think just around where we were able to achieve in the first quarter and above where we are in the second quarter.

All right. That's really helpful, Lynn. Maybe on a related note, can you just talk about the competitive backdrop for core funding and how it's evolved over the past couple of months across your footprint?

So I'll start with a couple of comments. And then from a competitive landscape, if I leave anything out, we can -- others can chime in. So I think we all recognize that the market has sort of moved up. I think we [ were ] started the quarter with deposits rates being kind of the high end around the [ 37 ]5 mark kind of ended the quarter with kind of wholesale funding being closer to 4, maybe even [ $45 ] million. And we've seen that reflected in our competitors' pricing as well when you go out and look at different specials. I think that we've been successful inside our marketplace with our customers sort of in that at the higher end between those [ 3.75% ] to 4%. And then also in bringing in some non-maturity and we did grow noninterest-bearing deposits as well. So it remains very competitive. I think it's moved up towards the end of the quarter compared to the beginning of the quarter. And our biggest opportunity continues to be how we grow noninterest-bearing deposits. From a competitive -- any other competitive?

No. The [ market ] is still is still very competitive as far as the deposit is consumer, but I think what we launched a couple of months ago from Q2 with the flex savings, that's been helping us to retain much of the customer at a lower cost.

Okay. Perfect. I'm going to sneak one more in there. Just on the new LTO and new lending team in Northern California. Like how should those of us on the outside benchmark like kind of breakeven times and kind of the portfolio size that you think can be kind of achieved in the medium term from the group that you've added there?

Well, Brendan, right what I would say is, obviously, this team brings a lot of relationship that our -- we're [ obviously ] expecting brand relationships to RBB in Northern California region in the team having combined over 80 years of experience out there with a very strong network relationship within the communities. So with this team on board, I would expect, hopefully, during the second half of the year to contribute to our commercial loan growth, particularly and hopefully, that will move up through the mid- to higher single-digit sort of marks, if you will. So that's what I would be expecting.

I do think -- yes, the addition of loan production office and the team, we definitely had strong originations and production. It's just been more than or equally offset by, call it, land-sale activity, but payoffs and paydowns, which has included -- [ I'm ] going to say strategic decisions to allow certain credits to refinance away. I think there was, at some point, an idea that rates might come down now we see higher for longer. So we definitely let some loan activity go to others. So when we think about loan growth in the second half of the year relative to, I'm going to say, a flattish growth in the first half of the year production might be mildly higher than what we thought, but we're expecting refinancing and payoffs to be lower. So maybe we are at the mid-single-digit range. on an annualized basis, it might be a little bit higher than that. But we expect it to contribute, I don't know that we're prepared to say specifically that LP's portfolio size.

Yes. [ Comments ], I see in their pipeline is very healthy.

Their pipeline is healthy and all of our other pipelines have remained strong, which is why I think the origination levels have come through at the levels they have

Our next question is coming from Kelly Motta with KBW.

Congrats on getting the capital plan out there back in June. Just wondering, I think you have about 6% of your shares authorized as part of that repurchase program. You guys obviously have a ton of capital and have been making progress on the credit front, wondering kind of the appetite and pace we should be expecting now that this is out.

Kelly. As far as the appetite, I mean, I think we demonstrated, and we still believe investing ourselves as a good use of our capital. So our appetite is healthy. We have traded a little bit below tangible book, and we're kind of right around that level now with the second quarter results out there. So I think that we'll pay attention to opportunities relative to our stock price.

Okay. Great. And then you noted that the move to [ Oreo ] that's, I think, one of your larger or largest problem assets out there. Can you help us presumably, there will be some sort of workout on that. Any updated thoughts on the cadence? Obviously, progress has been made, but I'm sure you want to get that off your books probably [ ASAP ].

Yes. ASAP is a good way to think about it. So every loan moved from a nonperforming loan to REO. We did view the REO value is appropriate. It is supported by a recent [ as-is ] appraisal, but we also recognize that this is a large partially completed construction project, and it will require the right buyer. And we also appreciate that time is also a factor. So I think all of those items together, we would be looking for a resolution in the second half of this year. I appreciate it's still complicated.

Okay. Got it. I guess lastly for me. Clearly, you have the new team coming on a new location in Northern California. Wondering as you kind of like look ahead and think about where you stand now, any other additional areas that you're looking to build out in terms of the footprint in order to support growth and vis-a-vis how we should be thinking about that in the expense base?

Well, I think more immediate, obviously, since we just hired this team where the focus is on making this team that is successful and given the very healthy pipeline they have we're not looking beyond that at this time, Kelly, really. I just want to making sure we can be well establishing in California region with this commercial team. And Yes. So nothing horizon paying -- just putting some attention and making sure this team [ gene ] to support it.

Got it. And Lynn, do you have any color or commentary on the expense run rate has been like pretty consistent in the past couple of quarters now? Any kind of gives and takes here.

Sure. I think the run rate has been consistent, and I think that for now, it should remain at a fairly consistent level. I think there's some opportunities down the road as we make some technology decisions and credit continues to work itself out. But I think in the near term, we're probably right about this level.

Our next question is coming from Matthew Clark with Piper Sandler.

On the -- can you just update us on the CDs coming due over the next couple of quarters here in the roll-on roll-off rates?

Sure. So for CDs. We introduced the [ flex ] savings. So the percent of CDs as a part of our balance sheet is a little bit lower. As we ended the quarter, we had about $1.5 billion in CDs that would mature within the next 12 months, and they have an average price of about [ $360 ] million and about just shy of 40%, they're able to mature reprice in the third quarter. The ones that are coming due in the near term are around 370 cost. So they have an opportunity to reprice into the current environment to the extent that we replace them with retail funding. The higher rather the lower costing CDs are maturing in the fourth quarter and into next year. So that's when we may see a little bit impact to the cost of funds. At the same time, that's when we would -- at the same time, that's when we would probably see the impact to the earning assets being coming in at a higher yield as well. So that's our CDs and the cadence. And then as far as the flex savings, that product has some attractive qualities to it, and we've been very successful at pricing that kind of in the high 3s and not necessarily moving into the wholesale funding rate level.