Good day. And welcome to the RBB Bancorp’s Second Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen only mode. After management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to your host, Catherine Wei. Please go ahead..

Thank you. Good day, everyone. And thank you for joining us to discuss RBB Bancorp's results for the second 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 in our Investor Relations’ Web site, 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. RBB reported second quarter net income of $7.2 million or $0.39 per share as we saw further signs of stabilization with modest loan growth, and no change in funding costs. Net interest margin declined 2 basis points.

But as Lynn will explain, we are cautiously optimistic that it will begin to expand in the third and fourth quarters. What really is going to drive our results is deposit funded loan growth. Loans increased by $20 million in the second quarter, supported by approximately $115 million of loan production at a weighted average rate of 7.4%.

However, and more importantly, we are seeing increased loan activity and our loan pipeline is expanding, which we expect will support further net loan growth during -- going forward. Interest expenses decline from the first quarter as we continue to reduce our reliance on wholesale funding to 4% of total deposits.

This is down from about 16% of deposits a year ago and 7% at the end of last quarter. We did see an increase in non-performing loans in the second quarter, primarily due to three loans migrating to non-accrual, but we believe we are appropriately reserved based on updated appraisals we have obtained during the second quarter.

These three loans total $22 million and consist of a $10 million C&D loan, a $7.3 million CRE loan and a $4.7 million C&I loan secured by a personal residence. We are very focused on reducing the levels of NPLs.

And by way of example, we expect to settle through trustee sales, two SFR non-accrual loans totaling $8.1 million with loan to values less than 50% in the third quarter. While we recognize that in this environment or any environment for that matter, a 48% increase in non-performing assets could be a cause for concern.

We are comfortable with the underlying collateral of our troubled loans and expect we will be able to resolve them without material loss. With that, I'll hand it over to Lynn who can go into some more details 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 second quarter of 2024 financial performance. Slide 3 of our investor presentation has a summary of second quarter results.

As David mentioned, net income was $7.2 million or $0.39 per diluted share, a decline of $0.04 from last quarter's $0.43 per share. Net interest margin decreased 2 basis points due primarily to the impact of the $22.5 million in loans that migrated to non-accrual, which reduced interest income by $710,000 and net interest margin by 8 basis points.

Net interest income decreased by $912,000 to $24 million with $520,000 of that decrease coming from the impact of the non-accrual loans.

Interest income decreased $1.9 million due to a $1.7 million decrease in interest income on average cash balances and the aforementioned $520,000 reduction, offset by a net increase in loan interest income of about $300,000. Average cash balances decreased $109 million quarter-over-quarter.

Trimming our cash balances allowed us to reduce our reliance on wholesale funding and reduce our expenses or interest expenses by $1 million in the second quarter. Decreasing our wholesale funding also helped us maintain a stable cost of funds compared to the last quarter.

Non-interest income increased slightly to $3.5 million and benefited from $359,000 of distributions on an equity investment made for CRE purposes and higher gain on sale of loans. While we recognized $292,000 in gain on OREO, this was less than the $724,000 in gain on OREO we recognized last quarter.

Non-interest expenses were relatively stable at $17.1 million and we expect them to remain at close to this level for the third and fourth quarters. Commercial real estate loans and construction loan development loans were stable at 39% and 7% of our total loans, and Slide 6 has additional details about our exposure in those portfolios.

Slide 7 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%.

Starting on Slide 9, we added a couple of asset quality slides to the presentation that we hope will help investors understand our non-performing loans in light of the increase we reported this quarter. On Slide 12, you will see our allowance for loan losses remain stable at 1.37% of total loans held for investment.

However, due to the increase of non-performing loans, our allowance to non-performing loans ratio decreased to 76%. We expect this ratio to recover in future quarters as we resolve the non-performing loans. Slide 13 has details about our deposit franchise.

Total deposits were stable from the first quarter at $3 billion as wholesale funding was successfully replaced with retail deposits. In addition, non-interest bearing deposits remained relatively flat for the second quarter in a row. Our average all-in-cost deposit for the second quarter was unchanged at 3.59% from the first quarter.

Tangible book value per share increased to 24.06 due to earnings and accretive share repurchases, offset by our shareholder dividends of $3 million. We repurchased about 448,000 shares at an average price per share of 18.01 in the second quarter. 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 call..

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

Just to start off here, you certainly struck a bullish tone on both loan growth and the margin to the back half of the year.

I was hoping you could help us size up the opportunities on both these areas over the next two quarters?.

Okay, Lynn will start..

Let me start and then we can turn it over to a few people with details. So I think relative to the first half of the year, I think we're cautiously optimistic. We had reported net no growth in the first quarter and $20 million net growth in the second quarter. So I think relative to those two quarters, I think we're expecting increased growth.

I can definitely appreciate that the current environment is still kind of leaning towards low percent digit growth. So I think I don't know if that helps with the bullish tone and we can go into other details on pipelines.

And then on the net interest margin, we had to report the impact of placing or the migration of a couple non-accrual loans, which impacted our net interest margin 8 basis points. So I think with ongoing loan growth optimistic that we wouldn't have any additional large non-accruals to report in the absence of those.

I think that's where we would like to see our net interest margin stabilize and possibly come off of the floor we're at now..

And maybe one more for me, just on the migration you saw in non-accruals.

I mean, how would you folks characterize migration for these three credits or maybe talk about the drivers? And given that it's in three different portfolios, it feels like it's tough to say that these are kind of one-offs, but I'm kind of just curious if there's any common driver in that migration..

I don't think there is a common driver in the migration of the loans that you saw with the increase here at all..

So I would agree. I don't think we're seeing any trends that we're concerned about based on those moving to non-accrual. Obviously, every time you have somebody move to non-accrual, you have to take a hard look at the rest of your portfolio and determine if there's anything else that looks similar that could have exposure.

And at this point, I don't think we've identified anything or have anything to report. Two of the loans we did indicate are within one relationship. So they happen to be in different portfolios but I think that would be the only item, I guess, that has a common denominator..

Your next question is coming from Kelly Motta with KBW..

It looks like your loan sales pick up again this quarter.

Wondering if you could provide any color as to if that was residential or SBA, as well as your pipeline for loan sales as we look towards the back half of this year?.

We have seen a pickup in our SBA. So most of this is SBA but we still are gaining also a little bit of traction in our mortgage portfolio also. So Lynn has the exact -- can fill you in any more details if you need it..

Actually, I don't have those right at my fingertips. I think that on SBA, we're seeing wide spread, so that part's been successful. And then I think with the interest rate environment, we've seen a little bit more on the mortgage, but the majority is SBA..

And then maybe a question for you, Lynn. It looks like the securities yields ticked up slightly.

Just wondering if you are reinvesting any of the cash flows into the securities book or the driver of that as we think about that side of the margin?.

I think what we're seeing for the yield itself on the securities portfolio is probably a higher percentage that was in short term commercial paper, given the inversion in the yield curve. So I think that probably had the most impact as at a higher percent of our earning assets and average loans when I look at the whole earning assets.

So I think that was the main driver of the securities yield increase..

And I know you guys have been working through and making solid progress towards remediation of several items. I think the SEC investigation is done and you're still working towards AML.

Just wondering, as you guys work through those processes, if there's any additional expenses or if you continue to expect that those are all currently in the expense run rate..

I believe they're currently in the expense run right now..

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

Maybe first on the margin.

Lynn, do you have the average margin in the month of June on an adjusted basis, excluding that 8 basis points of interest income reversals, and then maybe the spot rate on deposits at the end of June?.

So I think my comment on how the net interest margin is trending, I think is your question, kind of April, May, June. I think we're seeing it stabilize based on all of the information we shared. And then the spot rate, I meant -- I had good intentions of including it in the investor deck, and I apologize for not getting that in there.

Just bear with me one moment while I pull that up.

Do you have another question, Matthew, in the meantime?.

I was going to get to the CDs and the roll rates there.

Just remind us what's maturing in the third and fourth quarter, at what rate and what you expect them to renew at?.

So I think 95% of our CDs mature over 12 months. I think there's a good portion and it's kind of evenly distributed. I think that interest rates have started to or the cost of deposits have actually kind of eased just over the last week or two.

So if you'd ask the question a month ago, I think my answer would have been different, because I think what we were seeing is funding rates come in pretty similar to how they were rolling off, because of the higher for longer mantra.

However, I think where we’re seeing a little bit of softening, I don't think it's a lot of basis points or as much as we would like to see. But I think there's probably opportunity for them to reprice a little bit lower, would be my general comment. I don't know if I could give you the exact basis points.

Anything else you would add David?.

No, I mean, I think you said everything. Our portfolio is pretty evenly dispersed over the months..

And then just on the $150 million of FHLB that's maturing in the first quarter at [118], what are your updated plans for that -- those borrowings?.

So obviously, with our loan to deposit ratio at the higher end and I think a desire to keep a good amount of on balance sheet liquidity, there's a likelihood that we would, in the absence of just other organic loan growth, look at the wholesale market and determine the best options at that point, whether it’s FHLB advances or tapping in different wholesale stores.

And we'll have to work with the interest rate environment as it is in the first quarter of next year. So I don't know that those are necessarily being prefunded given the -- we expect interest rates to decrease. So unfortunately, I think we're probably looking at some [source] repricing higher in the first quarter next year.

And with respect to spot rates, I mean, I'd say it's pretty similar to the rate that was the average for the quarter..

[Operator Instructions] Your next question is coming from Andrew Terrell with Stephens..

Just a couple of quick ones for me, most of mine were asked already. On the loan growth, just to clarify, Lynn, I think you said still kind of expectations for low single digits for the year. I think last quarter, we were talking about low to mid-single digits.

I guess any overall change to the loan growth message?.

I don't think so if it's low to mid. I mean as the years moved on, I mean if you're looking kind of for the rest of this year, again, relative to the first half, I think we're looking at something more. I don't know if you want to add just a couple of comments on pipeline or [Technical Difficulty] mortgage..

Our pipelines right now, Andrew, are very, very strong but we also have payoffs and those type of things that are -- also need to be calculated into this. We're also in a very trying environment. It's a very trying environment right now to try to get loans and we are competing as best as we can.

But we do expect, relative to the first half of the year the second half of the year will be better..

And any -- as you think about just like the composition of the pipeline as it sits today, any change mix wise versus three, six months ago? Is it -- is the maybe slightly more optimism driven by the pickup in C&I, CRE, single family? Any specific color there?.

I don't think so. I think it's 50-50 basically commercial, resi..

Have you brought spreads then on new loans at all? I think last quarter, we talked about 8.3%. New origination yield, I think you mentioned $7.4 million. For production yields this quarter, it's quite a lot of compression sequentially.

Maybe it's just a mix -- a function of mix, but have you guys actively lowered spreads?.

Before you -- I'm going to turn it over to -- about the current rate. But I think the 8.3% last quarter came from like maybe some examples of maybe C&I versus a part of our production that relates to our single family portfolio, which has a lower commoditized rate.

And I think that's how we ended up with the blend of the 7.4% that we reported as our average production yield. So I think we're -- I think if you were to talk by product, there are probably kind of two ends of that. And then I think just a comment on where we're seeing the trend on spreads, I'll turn that over to you, David..

So our rates are in the -- for mortgage, are about 7.25%, that's the start, rate, about. For commercial, they go anywhere from 6.75% to 10%, depending on the product..

We have a follow-up question coming from Brendan Nosal with Hovde Group..

Just wanted to hit on the buyback before the call wrapped up. You guys were quite active this quarter repurchasing shares, but the price is up quite a bit from that average price throughout the second quarter.

Just kind of curious what your appetite is to continue making use of that authorization over the next few quarters?.

I think we have still a pretty strong appetite since our stock price is still below our tangible book. But to your point, the stock price has moved up nicely and I think we'll consider looking at all aspects of it. Maybe it could moderate but we still have 0.5 million shares under our authorization there..

We have an additional follow-up question with Kelly Motta from KBW..

I was hoping to get a bit more color on the NPAs. I appreciate the commentary about, I believe Lynn, you had said two of them may have been the same borrower. But I know you guys took down specific reserves this quarter.

Just wondering if you could provide a bit more commentary on what gives you confidence on your ability to recoup those without losses? And just with the uptick we saw this quarter as well, was there -- was this as part of a specific review or anything like that? And is there anything on the horizon that you think could migrate inwards to kind of keep the NPAs at this higher level?.

Kelly, I'll start, then will pass it off with Lynn for further details. No, this was not a result of any review or examination or audit. This was just normal banking operations, I guess, you could say, and all. Really when you look about it, there's really two loans. There's two borrowers, I guess, you can say.

They both have very distinct and separate circumstances that brought them this way, and so forth. We went out and we did what you’re supposed to do, we’ve got new appraisals. Those appraisals came back and we do a discount to those appraisals and that's how we calculate if there's impairment or any of those type of things on these loans.

We do believe that on the one loan that we've been very proactive and we're going to be doing -- we're going to -- we expect to accept the deed in lieu of foreclosure in the one loan, so we could expedite the selling of the property in a very calm, normal way to get the most value out of that property. Lynn, I'll let you go from there..

So Kelly, all of the loans that are for nonperforming, kind of talking to your comment about specific reserves. So going through comprehensive CECL process, we can run a lot of models. But once something is impaired, obviously, it has to go through a detailed individual review.

So in some respects, you might take comfort that this group of loans has been specifically looked at and measured. To the extent that it's collateral dependent, we do charge off, which is some charge-off level that you saw in the quarter. And then there's limited specific reserves on our nonperforming loans.

So I don't know if that answers your question on the specific reserves. And I agree with David's comments, as we looked at, we put in Page 10 of the deck, so that to facilitate the conversation given the uptick and how we specifically looked at many of our nonaccrual loans. Unfortunately, as we all know, it takes some time to work through them.

I think we're going to be urgent about it but we obviously have a lot of things we have to comply with. We'll work through it in the third and fourth quarter of this year..

[Operator Instructions] You do have a follow-up question from Matthew Clark with Piper Sandler..

Thanks, and I apologize if I missed it.

But any commentary on the expense run rate, the noninterest expense run rate going forward after a seasonal decline in comp?.

It was a quick one. I think we believe our expense run rate will be approximately at the same or similar level that we have in the second quarter..

There appear to be no additional questions in queue at this time. I would now like to turn the floor back over to David Morris for any closing remarks..

Once again, we 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..

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation..