Good day, ladies and gentlemen. And welcome to the RBB Bancorp First Quarter 2024 Earnings Conference Call. At this time, all participants are placed on a listen-only mode and the floor will be open for questions-and-comments following the presentation.

It is now my pleasure to turn the floor over to your host, Catherine Wei, Investor Relations Officer. Ma’am, you may begin..

Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp’s results for the first quarter of 2024.

With me today are Chief Executive Officer, David Morris; President, Johnny Lee; Chief Financial Officer, Lynn Hopkins; Chief Credit Officer, Jeffrey Yeh; Chief Administrative Officer, Gary Fan; and Chief Risk Officer, Vincent Liu.

David 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’s Chief Executive Officer, David Morris.

David?.

Thank you, Catherine. Good day, everyone, and thank you for joining us today. First, I’m happy to share that Lynn Hopkins has been formally appointed as our Chief Financial Officer. We appreciated her expertise since joining RBB in late 2023 as Interim CFO and look forward to her ongoing contributions as an official member of our leadership team.

Turning to our first quarter performance, earnings and margins showed signs of stabilizing and loan balances remaining flat. Net interest margin declining 4 basis points and earnings declining $0.02 per share from last quarter’s results when we exclude the income from the CDFI award.

While changing expectations about the timing and size of our rate cuts makes forecasting challenging. We are cautiously optimistic that margins should start to creep back up as deposit costs stabilize and loan yields continue to increase. Loans held for investment remain stable this quarter at $3 billion after a few quarters of intentional declines.

We had expected some loan growth in the first quarter, but were surprised by the pricing in the market and held back originations rather than adding loans at levels that would put further pressure on our profitability.

That said, we did originate approximately $69 million of commercial loans in the first quarter at a yield of 8.3%, which coupled with renewal and other repricing activities contributed to an 11-basis-point increase in our overall loan portfolio yield of 6.07%. With that, I hand it over to Lynn, who can go into some more detail about the quarter.

Lynn?.

Thank you, David. Please feel free to refer to the investor presentation we have provided as I share my comments on the company’s first quarter of 2024 financial performance. Slide 3 of our investor presentation has a summary of first quarter results.

Net income was $8 million or $0.43 per diluted share, so relatively stable compared to last quarter’s $0.45 per share after adjusting for last quarter’s $5 million CDFI income. There was no similar income in the first quarter of 2024.

As David mentioned, our net interest margin decreased 4 basis points, as our cost of funds increased 16 basis points, while our yield on interest earning assets increased by 10 basis points from last quarter. The earning asset yield expansion is mostly due to our total loan yield increasing 11 basis points.

Interest income remained stable at $54.8 million.

The increase in total cost of funds to 3.54% was due to the continued pressure on the cost of interest-bearing deposits, which increased by 24 basis points, but was offset by the benefit of our $55 million redemption of subordinated notes during the fourth quarter and a small decline in average non-interest-bearing liabilities.

As a result, net interest income decreased $792,000. Non-interest income of $3.4 million decreased primarily due to the positive impact of last quarter’s $5 million CDFI ERP award. The first quarter also benefited from the $724,000 in gains on OREO due to current appraisals on two properties and the sale of one property in the quarter.

As expected, non-interest expenses increased by $576,000 to $17 million due to seasonally high salaries and benefits offset by lower legal fees, which included a legal expense recovery of $165,000 and lower regulatory assessment fees. Non-interest expenses in the second quarter are expected to remain around the $17 million level.

Non-performing loans increased to $36 million due to $7.7 million being placed on non-accrual, consisting primarily of low LTV single-family mortgages offset by $3 million of payoffs and paydowns. Non-performing assets at March 31st totaled $37 million and included $1.1 million in two new OREOs.

Our allowance for loan losses remained stable at 1.38% of total loans held for investment and represented 116% of non-performing loans. Commercial real estate loans and construction and land development loans were stable at 39% and 7% of our total loans, and Slides 6 and 7 have additional details about our exposure in these portfolios.

Slide 8 has details about our $1.5 billion residential mortgage portfolio, which consists of well-secured non-QM mortgages, primarily in New York and California, with an average LTV of 61%. Slide 10 has details about our deposit franchise.

Total deposits were $3 billion at the end of the first quarter, $146 million decrease compared to the fourth quarter, as we let more expensive-time deposits roll off and maintained non-interest-bearing deposits relatively stable.

Our average all-in cost of deposits for the first quarter was 3.59%, an increase of 21 basis points from the fourth quarter. While we continue to see upward pressure on our funding costs, the actions we took in the last two quarters, namely redeeming $55 million of subordinated notes and reducing wholesale deposits has reduced the pace of increase.

We continue to implement longer term strategies to attract lower cost deposits, which we expect will contribute to improved funding costs over time.

Our tangible book value per share increased 1% during the first quarter to $23.68 due to earnings and accretive share repurchases offset by a $1.5 million increase in unrealized losses on our securities portfolio and dividends of $3 million.

We authorized a share repurchase plan of up to 1 million shares at the end of February and repurchased about 80,000 shares during the first quarter. Our capital levels remain strong, with all capital ratios above regulatory well-capitalized levels. With that, we are happy to take your questions.

Operator, would you please open up the call?.

Thank you. [Operator Instructions] Thank you. Our first question is coming from Nathan Race with Piper Sandler. Your line is live..

Yes. Hi, everyone, and congrats, Lynn, on the appointment, formally..

Thank you, Nathan..

Just a question on the margin outlook.

I think David alluded to in his comments that the first quarter may mark a trough there, so just curious if that’s actually the case and how you guys see the margin trending going forward in a higher-for-longer rate environment and also as the Fed begins to cut rates on the short end of the curve?.

I can start. So I think when we’re looking at our net interest margin, we were pleased with the 4 basis point compression compared to the prior quarter. I think with the higher-for-longer outlook and the shape of the yield curve, I think, deposit pricing is still going to have some upward pressure on it. However, we’ve taken that into consideration.

The modest, I think, originations in the first quarter and the re-pricings, we were able to see that it resulted in just 4 basis points of compression. So with, I think, some opportunity for loan growth, we would expect that our net interest margin would have the ability to come up a little bit, but I think it’s still pretty challenging currently.

So I don’t know if I would, trough, is a strong word, but I think based on the opportunity for growth, current interest rates, our funding, I think, we have the opportunity for it to be stabilized or come up a little bit..

Okay. Great. That’s helpful.

And I appreciate it’s a pretty fluid environment, but just curious if you guys have any thoughts on just the pace of both loan and deposit growth going forward this year?.

We think the loan and deposit growth would be tough this year. I think it’s going to be in the low-to-mid-single digits and I think loan growth will be more still to the end of the year, if we’re lucky enough to get a rate cut. You may see some stimulation with that if we’re lucky enough to get one..

Okay..

I think we’ve been noticing the pipelines are filling up though and I think those remain healthy. It’s really coming down to I think some price competition. So being selective on how we’re able to grow the portfolio. So I think you saw that in the first quarter because we pivot to looking to the rest of the year and there’s some opportunities there..

Okay. Great. Very helpful. And just one last one for me. I think last quarter on expenses Lynn we were talking about $17.5 million. For this quarter, you guys absolutely came in solidly below that here in 1Q. Just curious how you’re thinking about the overall run rate trending in 2Q and 3Q as well..

Sure. Yeah. I think last quarter we talked about a range of $17 million to $17.5 million. First quarter can be a little bit higher with taxes and benefits. I think there’s an opportunity for those to sort of stabilize and we did have a recovery in this quarter which pushed down on one of the line items.

So I think that being around $17 million looks approximately correct. However, as we participate in more production and some modest loan growth, I could come up a little bit off of that but around $17 million is appropriate..

Okay. Great. Thank you..

That’s okay..

Thank you. Our next question is coming from Kelly Motta with KBW. Your line is live..

She dropped..

Kelly, your line is live. You might be on mute. Okay, we can’t appear to hear Kelly at this time. I will skip to the next question and if Kelly wants to rejoin the queue please do. Our next question is coming from Erik Zwick with Hovde Group. Your line is live..

Thank you. Hello, everyone. I wanted to start with maybe a follow-up Lynn for you. You mentioned that the line pipeline -- loan pipeline it’s somewhat active today.

I’m curious if you could provide any color in terms of there’s any particular kind of product types or geographic regions that are particularly stronger than others you where you’re seeing activity today..

Okay. We’re seeing activity not in one specific area. We’re seeing it both in New York and California. We’re seeing it over all loan categories and types and all -- we’re seeing it including our retail mortgage market is getting stronger and then we also see that the commercial side is getting much stronger too.

So, we -- it’s kind of encouraging at this time. It is very price competitive. That is -- it’s extremely price competitive right now, so..

Okay. Thanks, David. I appreciate that the commentary there and I guess they’re kind of read there a lot competitive on price structure from your perspective is still reasonable. You’re not seeing any competitors maybe kind of weakening there to be more competitive..

Our main competitors we do not see anything changing. We do have some competitors in the marketplace that are not our main competitors that will take loans without deposits which is not our strategy at this time..

Okay. And then just from that the press release I think you mentioned about $288 million of securities available for sale and maturing over the next 12 months.

I am curious what the kind of average weighted yield on those might be and if you would just intend to kind of roll those back into new securities at higher yields and I assume that’s maybe already contemplated in the commentary you gave on the outlook for the margin at this point..

Sure. I think how you phrase it is a reasonable assumption. Our securities portfolio is I think appropriately sized for our balance sheet and with the securities rolling off, we are planning to reinvest in the portfolio.

There is good opportunity now to move up the yield on the securities portfolio as we reinvest, given the current environment, but still looking to keep duration relatively short kind of in the four-year to five-year range..

Okay. Thank you. Then kind of switching over to, you mentioned, Lynn, you kind of put into place some strategies on the deposit side to improve the cost over time.

Any color you could add there in terms of what you’ve changed or what you’ve implemented recently?.

Sure. I think everyone can appreciate moving a deposit base is slow over time. It’s a very competitive landscape. I think we’re focused on opportunities to maybe transition a little bit of our CD base to savings and money market, maybe non-maturity deposits with the expectation that we would be in a declining rate environment.

But I think it’s going to take a few quarters for that to be able to demonstrate any progress. I think we have shared that we’re focused on growing our C&I portfolio and the opportunities that are there with the expectation that that would have a positive impact on our non-interest bearing deposits as we move forward..

Thanks. And a quick follow-up there just in terms of how the relationship managers and lenders are compensated.

Did any changes to kind of the incentives that would place more favor on bringing deposits in today in addition to loans?.

So I can start, others can follow up. I’d say generally, no. I think we can all recognize that, again, stiff competition. So we think that we have a good incentive program for the folks here and as we focus on bringing in non-interest bearing deposits. So I don’t think there’s any big changes and it’s reflected in our operating results..

Thanks for taking my questions today..

Yeah. Thank you..

Thank you..

Thank you. [Operator Instructions] Thank you. We have another question from Nathan Race with Piper Sandler. Your line is live..

Yeah. Hi. Just a follow-up on the expectations for share repurchases going forward, the pace obviously slowed versus 4Q, so just curious for any updated thoughts in light of the updated authorization from a few weeks ago, I believe..

Sure. I think there was a little bit of a pause as we moved through the process of reauthorizing our program.

So I think, at this point in time, given where our stock is priced and our tangible book value, we expect that we would remain active in our share repurchase at the maximum level that we’re able to, but it’s subject to market conditions, and we’d be evaluating it from time-to-time.

But appreciate the first quarter looked a little bit lighter than fourth quarter as we transitioned into authorizing a new program..

Gotcha.

So as things kind of stand today, do you think it would be close to the 4Q level in terms of future repurchases, at least over the next quarter or two?.

So, I think -- look, I think, everyone needs to make their own investment decision and I think that we need to be able to pivot. So, I appreciate what you’re asking. All I really want to comment on at this point is explain why we’re a little bit lower for this quarter versus the fourth quarter. And it’s only a million shares out there.

So, I think we have the cash and the capital levels as we choose to participate. So, I think you can probably make a reasonable assumption there..

Understood. Sounds good. And then just on fee income going forward, it looked like the gain on sale revenue ticked up nicely versus the fourth quarter.

Any thoughts on just the overall run rate for fees going forward?.

Sure. Thanks for that question. We have been successful in originating loans and participating in the secondary market and selling them. I think we see that growing a bit as we move forward into 2024. So that would be our expectation and what the team is working on..

Okay. Great. And then just one last one. Just thinking about the reserve or ACL level going forward, obviously, there’s a nice improvement in credit quality when you look at substandard and classified loans in the quarter.

Just any thoughts on just kind of the appetite to just continue to operate with this above average ACL cushion or do you guys kind of see that trending down or do you kind of want to keep it where it is come out of the first quarter, just given expectations for loan growth going forward?.

Right. Right. We do spend a lot of time analyzing it and we go through our process. I think some of it is going to be dependent on how the credit cycle continues to unfold, how the economic environment that we have. I think our portfolio is well protected.

I think the expectation is generally we like the level that it’s at based on all the information that we have now. To the extent that we have some growth, I think, we would potentially have some reserves. But I think we got to continue to evaluate it going forward. We have a lot of capital.

I think it’s a healthy reserve, but we will have to monitor the year as it unfolds..

Okay. Great. I appreciate you guys taking the follow-ups. Thanks again..

Yeah. No. Thanks, Nathan..

Thank you. As we have no further questions on the line at this time, I would hand the call back over to Mr. David Morris for any closing remarks..

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 nice day. Bye-bye..

Thank you, ladies and gentlemen. This does conclude today’s event. You may disconnect your lines at this time and have a wonderful day, and we thank you for your participation..