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CALL PARTICIPANTS
- President and Chief Executive Officer — Johnny Lee
- Executive Vice President and Chief Financial Officer — Lynn Hopkins
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TAKEAWAYS
- Net Income — $10.1 million, a 9% increase sequentially and 45% increase year over year, driven by core earnings growth and lower credit costs.
- Earnings Per Share — $0.59, reflecting a 12% sequential increase, supported by higher earnings and share repurchases.
- Net Interest Income — $29.3 million, up $1.9 million from the prior quarter, due to a $3.2 million increase in interest income.
- Net Interest Margin — 2.98%, expanding by 6 basis points sequentially and 30 basis points year over year.
- Loans Held for Investment — Grew by $68 million, representing 8% annualized growth; origination activity concentrated in in-house mortgage origination.
- New Loan Originations — $188 million at a blended yield of 6.70%, which is 67 basis points above the prior quarter’s blended loan portfolio yield.
- Provision for Credit Losses — $625,000, reflecting improved asset quality trends and net loan growth.
- Nonperforming Loans — Decreased by $11.3 million (20%) to $44.5 million; all remain risk-rated substandard.
- Substandard Loans — Declined $14.1 million to $76.9 million; decrease includes charge-offs and loan upgrades.
- Special Mention Loans — Fell 46% to $49 million, largely due to a $44 million upgraded construction loan.
- Past Due Loans — Reduced $11.5 million to $6.5 million at quarter end.
- Allowance for Loan Losses — $6.1 million sequential decrease (to 1.36% of total loans), shaped by $6.9 million in net charge-offs offset by provision expense.
- Residential Portfolio — $1.7 billion, modestly increased, primarily non-QM mortgages in New York and California; average loan-to-value at 55%.
- Total Deposits — Increased by $178 million to $3.4 billion, with growth across all deposit categories; includes $84 million in wholesale time deposits.
- Tangible Book Value Per Share — Rose to $25.89, a 12% annualized increase.
- Share Repurchases — 660,000 shares (4% of outstanding shares) repurchased during the quarter.
- Operating Expense Ratio — 1.8%; Efficiency Ratio — Just over 57% for the quarter.
- Noninterest Income — Decreased $5.2 million, attributed entirely to prior-period employee retention credit proceeds.
- Noninterest Expenses — Dropped $1.8 million to $18.7 million, due mainly to absence of prior quarter’s ERC-related and executive transition costs.
- Funding Costs — Deposit spot rate at 2.97% (6 bps below average); cost of funds down 2 basis points sequentially.
- Repayment of FHLB Advances — $50 million in FHLB advances repaid with proceeds from wholesale time deposits; FHLB advances matured at a 3.40% rate and were replaced by brokered funds at rates “closer to 4%.”
- Capital Ratios — All regulatory capital ratios remain above “well-capitalized” levels.
SUMMARY
Management cited disciplined expense control and stabilization in credit quality as key positive factors, with the decrease in both nonperforming and substandard loans emphasizing improvement in asset quality. Executives outlined continued focus on resolving a handful of significant nonaccrual relationships, while also aiming to expand the commercial and industrial lending pipeline, noting that pipeline mix remains heavily weighted toward residential and commercial real estate loans. RBB Bancorp’s deposit growth funded loan expansion and allowed for repayment of higher-cost borrowings, but management acknowledged ongoing competitive pressures for liquidity and uncertainty regarding the timing of further reductions in funding costs.
- Hopkins stated, “93% of our nonaccrual loans are represented by a handful of relationships,” highlighting targeted resolution efforts.
- Management provided no update on new share repurchase authorizations, confirming $4 million remains under the current program.
- Pipeline for future loan growth includes commercial and industrial segments, but residential and commercial real estate loans are still expected to drive near-term activity.
- Hopkins confirmed, “we did not have in net interest income much kind of anomalies either interest reversal or interest recapture” in the period, indicating stable net interest income composition.
- Potential refinancing of subordinated debt remains under consideration for the coming year, but no priority shift in capital deployment was cited.
INDUSTRY GLOSSARY
- Non-QM Mortgage: A mortgage loan that does not meet the Consumer Financial Protection Bureau’s qualified mortgage guidelines, often featuring flexible income or credit documentation requirements.
- Criticized Assets: Loans or other assets rated below ‘pass’ by regulators or internal standards, signaling elevated credit risk but not necessarily impaired.
- FHLB Advances: Borrowings from a Federal Home Loan Bank, commonly used by banks for short- and intermediate-term funding needs.
- Subordinated Debt: Debt with lower repayment priority than senior obligations in the event of bankruptcy or liquidation, often used by banks for regulatory capital purposes.
- Deposit Beta: A measure reflecting how much a bank’s deposit interest rates change in response to fluctuations in market benchmark rates.
Full Conference Call Transcript
Johnny Lee: 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 nonperforming 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 4 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 quarter’s 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’re making on originations.
We also continue to make progress addressing our nonperforming loans as quickly as possible while minimizing the impact on earnings and capital. 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?
Lynn Hopkins: Thank you, Johnny. Please feel free to refer to the investor presentation that we have provided, as I share my comments on the company’s third quarter of 2025 financial performance. Slide 3 of our investor presentation has a summary of our recent and third quarter results. As Johnny 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%, our 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 $2.97, which was 6 basis points below the third quarter’s average of $3.03. 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 noninterest income showed a $5.2 million decrease, which is attributed entirely to the employee retention credit, or ERC, proceeds recognized last quarter. Third quarter noninterest 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 and ongoing investment in our business.
As we look out, quarterly noninterest expense is expected to be in the $18 million to $19 million range, and at the same time, we are focused on managing our operating costs to be below 2% of average assets. Slide 5 and 6 have additional color on our loan portfolio and yields. The loan portfolio yield expanded by 9 basis 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. Nonperforming 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 NPLs. 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 to net charge-offs of $6.9 million, offset by the provision expense. The net charge-offs were related almost entirely to 1 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 $25.89 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: [Operator Instructions] Our first question is coming from Brendan Nosal with Hovde Group.
Brendan Nosal: 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?
Johnny Lee: Well, that’s — Brendan, I appreciate the question, first of all. I think it’s very relevant point given the World Series coming up. Well, as you sort of suggested, we certainly still have a lot of work to do. I mean, certainly, 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’ll continue to stay laser focus and very vigilant in 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 that. [indiscernible] ninth inning and finish at the World Series.
Lynn Hopkins: So I had a couple more minutes to contemplate your clever question. Let me add a couple of things that I think we might go to your point as well. When are we going to view mission accomplished? So about 93% of our nonaccrual 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.
Brendan Nosal: I appreciate you offering a couple of timestamps along the way of what we should be looking for. Maybe turning the page to capital for one before I step back. You folks were 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 program?
Lynn Hopkins: 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 our stock price was attractive, and we would like to see it trading at a higher price, so we want to take advantage of that during the quarter. I think as we look forward, we are looking at our subjects that has the opportunity to reprice, maybe be refinanced next year. So I think there’s a couple of things at play, but we would always be considering opportunities for a buyback, but I don’t have information on anything new at the moment. I think we’ll be working on our current program.
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