RBB Bancorp ($RBB)

Good day, everyone. Welcome to the RBB Bancorp Q1 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Rebecca Rico. The floor is yours.

Thank you, Kelly. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the first 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, Rebecca. Good day, everyone, and thank you for joining us today. The first quarter was a strong start to the year with continued earnings growth, expanding margin and further improvement in our credit metrics. We generated net income of $11.3 million or $0.66 per share, which was an 11% increase from the fourth quarter and our highest quarterly earnings level in 2 years. Return on assets increased to 1.09%, and we continue to grow tangible book value per share. Net interest margin increased another 60 basis points to 3.15%, which marked our fifth consecutive quarter of margin expansion. The increase was driven by both lower funding costs and higher asset yields. Our cost of deposits declined 10 basis points and our spot rate on deposits ended the quarter at 2.79%, which gives us some additional opportunity for improvement in the second quarter. Loan growth was more modest in the first quarter with loans increasing by approximately $11 million or 1% annualized. We originated $131 million of new loans at an average yield of 6.4%, but that growth was offset by elevated payoffs and paydowns as some borrowers refinance or sold assets. As we mentioned before, we remain disciplined on pricing and structure and have focused on profitable growth. Our pipelines remain healthy, and we continue to believe we are positioned to deliver stronger loan growth over the balance of the year. Deposits declined slightly during the quarter due to a reduction in wholesale deposits, but this was more than offset from a quality standpoint by another quarter of growth in retail relationships. We also continue to make progress on credit. Nonperforming assets declined 9% from prior quarter and are down 24% from a year ago. Overall, we believe the first quarter reflected continued progress in returning RBB to its historical levels of performance. We continue to focus on disciplined growth, maintaining strong credit quality and increasing long-term shareholder value. With that, I'll hand over to Lynn to talk about the results in more detail. Lynn?

Thank you, Johnny. Please feel free to refer to the investor presentation we have provided as I discuss the company's first quarter of 2026 financial performance. As Johnny mentioned, net income for the first quarter was $11.3 million or $0.66 per diluted share, which compares to $10.2 million or $0.59 per diluted share in the fourth quarter. Despite 2 fewer days in the quarter, net interest income increased $1 million to $30.5 million and included a $1.4 million decrease in interest expense, partially offset by a $390,000 decrease in interest income. The decrease in interest expense was due mainly to the shorter quarter and lower rates on retail deposits as we continue to benefit from the repricing of our deposit portfolio into the current rate environment following the Federal Reserve rate cuts made towards the end of 2025. Retail deposits increased by $50 million and included a shift from time deposits into a high-yield savings product. The decrease in interest income was due to the shorter quarter and lower cash and securities yields, offset by higher loan yields and the receipt of a $430,000 FHLB special dividend. Our net interest margin increased to 3.15% in the first quarter from 2.99% in the fourth quarter. The increase included an 8 basis point increase in the yield on earning assets and an 8 basis point decline in the overall cost of funds. The FHLB dividend added 4 basis points to our NIM in the fourth quarter -- sorry, 4 basis points to our NIM in the first quarter. Turning to credit quality. Nonperforming loans remained basically unchanged. Substandard loans decreased $2.7 million and special mention loans increased $5.5 million. All special mention loans are on accrual status. We had effectively no net charge-offs in the quarter, and we recorded a small reversal of provisions for credit losses, supported by paydowns on nonperforming loans, overall stable credit quality and positive economic indicators in the underlying forecast. We believe that we are adequately reserved and with credit quality generally improving over the past year, we expect future provisions to reflect that. Noninterest income increased $1.4 million to $4.3 million. The increase was driven primarily by an $890,000 higher net gain on OREO, $484,000 in a recovery on a fully charged-off acquired loan and $360,000 of interest income on tax refunds related to purchased federal tax credits. Noninterest expense increased by $293,000 to $19.3 million due mainly to higher payroll taxes and employee benefit costs at the beginning of the year. Even with the increase, our efficiency ratio improved to 55% from 59% in the fourth quarter. We expect noninterest expense for the next few quarters to be in the $18 million to [ mid ] $19 million range. Turning to the balance sheet. Total assets were $4.2 billion at quarter end. Loans held for investment increased $11 million since year-end and deposits declined $10.5 million. Importantly, the mix of deposits continued to improve as we reduced wholesale funding and grew lower costing retail deposits. Book value per share increased to [ $31.10 ] and tangible book value per share increased 2% to [ $26.84 ]. This concludes my prepared remarks. Kelly, we are now ready to take questions.

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

Nice to see continued workout on the asset quality front and improvement there. So I guess I just want to start my questions on that front.

I think we got disconnected [indiscernible].

Brendan? [Technical Difficulty]

Can you focus on me now?

Yes.

Okay. So sorry about that. Maybe just starting off on asset quality. Nice to see continued work out an improvement in ratios this quarter. Can you offer a little bit of color on some of the larger nonperforming assets you still have kind of in the workout process and then to the extent that you're able to continue to work those out, what do you view as a normalized kind of reserve to loan ratio as you work through the noise?

Okay. Well, how about I start with the end of your question and we'll go backwards. We -- well, first, we'll acknowledge we're elevated on our NPLs and we would expect those to normalize down at a much smaller percent of our total loans. I think you are familiar that 90% of our NPLs are represented by the same three relationships, so that remains stable or understood. And I think as far as a normalized coverage ratio given the composition of our overall loan portfolio. we could see it coming down somewhat relative to the levels it is now. But we do go through a robust process, and I think we have to take into consideration everything that's going on in the market. So I think it has an opportunity to move lower. As you recall, last year, it was much higher with those specific reserves that ultimately we did some charge-offs and now we resolved loans. So I think that's where we would say going forward. With respect to specific comments on the NPLs, I think I can turn that over to you, Johnny or Jeffrey.

Yes, NPL actually this is virtually unchanged during the quarter. However, there is a reduction of the numbers so long. So there's [ to exit one in ]. And then the one that those assets are those are successful workout and then they pay off. One in [indiscernible] technical issue, they become core. So -- but virtually and is -- this is a pretty quiet quarter.

I'll just add, we have represented that our largest one is working its way through a bankruptcy process, and we will continue to work on that. So we do see an opportunity for NPLs to be resolved during 2026, but it is a process.

Just [indiscernible] actually, they're still paying still down, right?

Okay. Okay. That's super helpful color on that topic. Maybe turning to capital ratios obviously remain quite strong. Asset quality is incrementally getting better from here with good line of sight. Any updated thoughts on kind of capital deployment from here? I think you had a tranche of sub debt that was repricing and perhaps looking at the buyback at some point, but any updated color there would be great.

Sure. So we have stated that we've been focused on the sub debt that's coming up for repricing. We recognize that its capital treatment, we'll start to sunset. It does reprice April 1. We do view, I think the sub debt from as a capital instrument is sort of something that we're going to address this year. I think that there's also opportunity for us to look at a stock buyback. But I do think the sub debt is our first priority. I think that based on the current interest rate environment and how we're looking at the balance sheet, there may be a good reason to look to retire a good portion of it. So we're working through, I think, that process, as everyone knows, does require regulatory approval.

Okay. Fantastic. I'm going to try and sneak one more here on the margin. Can I guess, just comment on whether that 4 basis points of margin from the FHLB special dividend is onetime in nature. And then to the extent that we don't get any more Fed cuts for the foreseeable future. Just talk about your expectations for the margin path from here.

Excellent question. So there's definitely a few dynamics in our net interest margin. I think you're right, the FHLB special dividend is onetime in nature. We would welcome a special dividend every quarter, but I don't view that as recurring. I think with the subject, our retirement dates are the first date of each quarter. So in the near term, we will be absorbing the sub debt at a little bit higher price in the second quarter at least. And then I think the other thing I would point out is half of our portfolio is a mortgage portfolio. And as everyone knows, those are priced on a [ $33.60 ] basis. So we do get a bit of a benefit in the which is probably closer to or just above 3% with balance sheet growth in the current environment and some modest repricing of our deposits. So I think that's where we're headed in the near term.

Your next question is coming from Kelly Motta with KBW.

Question. Maybe on loan growth in growth for the quarter was a bit more muted than we had expected. I think the pipelines coming into the quarter were quite strong. Can you provide any color as to kind of where that variance? What drove that and how pipelines are looking as we look ahead here? .

This is Johnny. Thanks for the question. Well, Q1 is always serve a seasonal quarter and also with the geopolitical risk everything, obviously, there's still a lot of serving up there. But -- it was -- in some ways, we're trying to balance, obviously, as always, we look at quality first and then look to see if based on the competition on the pricing side, whether it makes sense or not was to aggressively compete on certain types of deals. And we weren't prepared to sort of compete in sort of submarket rates in the 5.5% for the [ MFR ] final 3/4, we have been lower for some [ CRE ] loans. So we feel like a command feel is a baiting to trying to hold the line. So we stand pretty disciplined during the first quarter in keeping our rates above [ 6% ]. Unless, as always, if there are certain sort of enhancements to the yield with ancillary businesses such as deposits or other potential fee income that might come with a relationship. Otherwise, we're trying to stay pretty disciplined as far as keeping the rate hike. So in that sense, we did sort of let go, if you will, of a few deals during the Q. And then also, there's been a little bit higher pay downs, payoffs during the quarter as well. So certainly that impacted the net growth. But to your question about the pipeline, pipeline is still very healthy. And I think you'll see the in Q2 based on the sales that we have right now, we should be able to get training toward what we have achieved in the past year in 6 quarters. I think we're in a good training there. So I'm very positive about the pipeline overall. But again, we definitely set for quality first and making sure any pricing that we're going to compete on makes sense with...

Got it. That's helpful. And then on the deposit costs, those came down quite nicely. I think you mentioned in your prepared remarks, you had shifted some customers to different categories to help manage that. As we look ahead, borrowing rate cuts, is there still any room to bring down deposit costs within categories outside time? And then within time, can you remind us the roll-on versus roll-off rates?

Sure. So I think there is still some opportunity with the latest changes in interest rates, the belly of the curve kind of moving up. I think there's probably less opportunity. I think we have historically had a very strong 12-month CD ladder. And as those CDs mature, mature over a 12-month period of time. Those have typically repriced into a lower environment. For the amounts that are coming off, they are probably pretty similar to these higher interest rates and the competition that we're seeing. We are seeing things as high as 4% now being offered by other banks. So I think that the opportunity is maybe smaller. But having said that, our spot rate at the end of the quarter is lower than what the average was over the quarter. So I do think there's still a little bit of opportunity. I would -- as far as the runoff rate, we did mention that, of course [ similarly ] or maybe a little bit lower than what we saw in the fourth quarter. we still have a fair amount of repricing in the current quarter, but maybe it's a few basis points.

Got it. That's helpful. Last question, if I can just sneak it in is just in regards to, I think, Trump, it's been reported that he may look to do an executive order requiring banks to collect citizens chip data on their customers. I'm wondering if you guys have looked at this and have any preliminary thoughts of how that could impact the way you look to do business or anything of that nature?

Kelly, are you speaking to like the [ SBA ] topic order? .

I think this is a broader...

It's not -- it's hypothetical, but I think [indiscernible] talked about Trump's potentially working on an executive order to collect citizenship -- requiring banks to collect citizenship data on their customers.

Yes. No, the only thing that we were kind of sort of margin a little bit more close with respect to the U.S. [ SP ] administration's recent sort of procedural guideline, if you will, which restrict applicants to only -- to the U.S. citizens, if you will. So that's the only thing that we were kind of watching more closely.

Got it. You guys do have an [ SBA ] business? Like has that does that have any bearing on kind of your expectation for that on a go-forward basis?

No, no. In fact, when you first no, not yet, we not off. We don't have any -- there's no impact based upon our system.

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

Just wanted to drill into the loan growth outlook a little more. I think coming into the year, the expectation was for high single digits, a little bit more of a challenge here after the first quarter. Are we -- do you expect to kind of work toward high single digits as we move through the year? Or do you still think we can bounce back here and get close to something in that high single-digit range?

I'm going to turn it over to Johnny in a second, but let me make a couple of comments. So we had loan production of about $145 million in the fourth quarter. We came into the first quarter of about $130 million, approximately the same yield kind of holding the line as we observed interest rates. Kind of stop moving down even some talk of potentially moving up, we recognize our funding base. I think that while we didn't observe much of an impact with the government shut down, call it, in our [ SBA ] business, I would say our originations in that area were maybe a little bit lighter in the first quarter. So there's opportunity there. Our second and third quarters have historically been our highest producing quarters, so much so that they achieve, I think that higher number. So we're stringing together I think, positive quarters. There's business to be done. And with interest rates as high as they are, it will depend whether people come off with sidelines and go ahead and move forward. And so when I think about the range, high single digits, I mean, I would put it mid- to high-single digits. So we were only building off of a $3 billion and change portfolio in big areas, we should be able to participate. But to the extent that we're operating inside this interest and rate environment that might be tempered with maintaining NIM. So I think piecing together everything we're seeing an attractive pipeline. Historically, fourth and first quarter can be a little bit lower we would still remain optimistic, but let's maybe anchor it in the mid- to high single digits. So I can turn more comments over to Johnny, but that I think what we're looking at.

No, I echo on Lynn's comments noted to digits. And again, our pipeline is healthy. We just want to be very disciplined in and what kind of loans we find quality wise and also making sure we're generating proper returns for the bank with these new relationships that we're bringing.

Great, the one I had was to get a little more color on the CD repricing and the savings promotional product. Just want to get to specific amount of CDs that are coming due here in 2Q and the related rate. And then it sounds like the renewal rate is similar, maybe a little bit lower, but I just want to get the specific numbers, including the promotional savings rate product.

Sure. So I think what we are looking at is about 60% of our deposits sit into the CDs and sort of Flex savings products and 1/3 of them repriced in the first quarter. And our observation in the marketplace is I think the more rate-sensitive money is now costing between 3.85% and 4%. We've been successful, a little bit lower than that, and that's what it's actually coming off that. So we're working with our relationships and our customers, but our latter at the same time last year, when we were putting on 12 months money, that was around at the [ 3.75% ] level, right? So that's what's coming due. And interestingly, it's all 3.5% to 4% despite short-term or Fed fund rates being lower. So Yes, we still have about 60% of our funding base in CDs and savings about 1/3 reprices in the first quarter. And we've been kind of in the 3.70% to 3.75% range. I think that we are competing heavily and we've done a really great job. But we are observing rates at 3.85% and 4% when you look around at operates.

[Operator Instructions] Your next question is coming from Jackson Laurent with Stephens.

This is Jackson on for Andrew Terrell. Maybe coming back to margin. I appreciate the color on kind of the short-term side path. But if we look a little bit longer term, you've run out a 4% NIM in the past. Do you guys see a path to get back to that?

Can you just start your question again. I think the line cut, and I didn't catch all of it.

Yes, of course. So just more longer term on the margin. You guys have run at a, call it, 4% NIM in the past. I was just wondering if you guys see a path to kind of get back to that level? And if so, what do you think is kind of required to get back there? .

So I think what you may be referring to is a point in time in RBB's history where there was a very high percent of noninterest-bearing deposits. And in order to move to, I think, that mid-3% net interest margin, it requires a high percent of noninterest-bearing deposits. And we remain focused on building the commercial or C&I part of our business, which tends to have the more attractive deposits and funding base associated with it. I think before we start talking about a NIM with a 4% handle, we'll need to squarely get into [ 3%, 3.25% ]. And I think we believe we have the opportunity to do that. But it does require staying focused on our C&I business growing that, bringing in more noninterest-bearing or less rate-sensitive customers and then continuing to work with our relationships that we have so that we can move down on our wholesale funding, which we did in the first quarter.

Got it. That's helpful. And then just last one for me on fees. I was wondering if you guys could just talk about gain on sale margin trends and kind of how we should be thinking about loan sales versus loan retention going forward?

I can start. So for loan sales, I think they fall into two buckets. One is our mortgage banking business. That tends to be a higher volume, lower premiums. We like to test the secondary markets to make sure that we do have an off-ramp relative to our loan production. But generally, we hold the majority of it, look at our prepayments and then we're balancing our mortgage portion of our portfolio against our overall total portfolio. We've kept out at about 50%. We would like to continue to grow our commercial side, which includes multifamily CRE, C&I and SBA. And then on the SBA loan sales, those are smaller dollar volume but higher premiums. And we would expect to be -- it's similar, if not higher levels than what we were able to achieve in 2025. 2025 was a little bit lower than 2024, a little bit of disruption from the government shutdown is a little bit of noise. So we still see that as a good opportunity. We've hired a couple of people last year. So I think there's still opportunity in the fee income area to have that move higher in other quarters compared to the first quarter.

Thank you. There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Johnny Lee for any closing remarks.

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, everyone. Thank you.

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.