Participants

Rebeca Rico; Financial Analyst; Royal Business Bank

David Morris; Chief Executive Officer, Director; RBB Bancorp

Johnny Lee; Chief Executive Officer of the Bank, President and Director of Company and the Bank; RBB Bancorp

Lynn Hopkins; Chief Financial Officer, Executive Vice President; RBB Bancorp

Brendan Nosal; Analyst; Hovde Group

Matthew Clark; Analyst; Piper Sandler Companies

Andrew Terrell; Analyst; Stephens Inc

Kelly Motta; Analyst; Keefe, Bruyette & Woods North America

Tim Coffey; Analyst; Janney Montgomery Scott LLC

Presentation

Operator

Good day everyone, and welcome to the RBB Bancorp first-quarter 2025 earnings call. (Operator Instructions) It is my pleasure to turn the floor over to your host Rebeca Rico. Ma'am, the floor is yours.

Rebeca Rico

Thank you Matthew. Good day everyone and thank you for joining us to discuss our RBB Bancorp results for the first quarter of 2025. With me today are Johnny Lee, David Morris, Lynn Hopkins, and Jeffrey Yates. David, 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 over the call to RBB Bancorp Chief Executive Officer, David Morris. David?

David Morris

Thank you, Rebecca. Good day everyone, and thank you for joining us today. First quarter, net income declined to $2.3 million, or $0.13 per share, as we took decisive strategic action to address our non-performing assets. We reduced our non-performing assets by 20%, and our net exposure to non-performing loans by 32% to $51 million.
To accomplish this, we sold $18 million of loans, recognized provisions of $6.7 million and received paydowns of $1.8 million. We believe the provisions we have taken over the last few quarters have addressed the vast majority of potential losses in our non-performing loans.
As we said last quarter, we are focusing on resolving our non-performing loans as quickly as possible while minimizing the impact of earnings and capital, and we think our actions in the first quarter helped accomplish this.
We continue to work through our remaining non-performing assets and expect to be able to report additional progress in the coming quarters.
We did downgrade a $5.3 million New York CRE loan to non-performing in the first quarter after the largest tenant moved out. While unfortunate, we feel relatively confident that it will be resolved without any loss of principle, as the borrower is actively working to fill the vacancy and has also listed the property for sale.
A recently completed appraisal of on the property indicates the LTV of about 85%. Now, I'll hand it over to Johnny to talk about happier subjects like loan growth and margin expansion. Johnny?

Johnny Lee

Thank you, David. As David mentioned, in addition to making good progress resolving our travel loans, we have strong loan growth in the first quarter, another quarter of new expansion. Long healthful investment grew by $90 million or 12% on an annualized basis, driven by the continued execution of our growth initiatives.
Growth in commercial SBA and SFR balances more than offset the decline in CND loans. We've seen especially strong results from our in-house mortgage origination business, which despite the rare environment originated $112 million in mortgages in the first quarter.
These contribute nicely to our total first quarter loan originations of $201 million at a blended yield of 6.77%, which will continue to support our efforts yields and margins going forward. Our pipelines remain full, so we expect to continue to see long growth, but likely at a more moderate pace than we experienced in the first quarter.
Net interest margin increased 12 basis points to 2.88% due primarily to a 29 basis point decline in the cost of our interest bearing deposit, which drove a 17 basis point decline in our overall cost of funds. We expect some incremental decreases in funding costs from here, but likely at a slower pace than we've seen since they peaked in the third quarter last year.
It's worth highlighting that since that time, we've reduced the cost of deposits by 50 basis points and the total cost of funds by 42 basis points.
With that, I'll hand it over to Lynn to talk about the results in more detail. Lynn?

Lynn Hopkins

Thank you, Johnny. Please feel free to refer to the investor presentation we've provided as I share my comments on the company's first quarter of 2025 financial performance. Slide 3 of our investor presentation has a summary of our first-quarter results. As David mentioned, net income was $2.3 million or $0.13 per diluted share.
First-quarter results were negatively impacted by a $6.7 million pre-tax provision for credit losses, as we work to address several non-performing assets. Net interest income before the provision increased for the third consecutive quarter to $26.2 million.
We are optimistic that lower future provisions and the redeployment of capital previously tied up in non-performing assets will result in increasing net interest income after provisions in the coming quarters. As Johnny mentioned, we had another quarter of net interest margin expansion, or third in a roll, primarily driven by the decrease in the cost of deposits.
Our spot rate on deposits on March 31 was 3.06% or 7 basis points below the average of [313] for the first quarter. So costs are likely to continue to decrease, but in a more measured pace in future quarters.
Funding costs also included the first quarter maturity of $150 million of low cost FHOB term advances, which were largely replaced with $110 million of FHLB advances with an average rate of $388,000. Non-interest income declined by $434,000 to $2.3 million in the first quarter due to lower gain on sale of loans and other income that was partially offset by higher fees and servicing income.
First quarter non-interest expenses increased by $873,000 to $18.5 million due to a seasonal increase in comp and benefits, higher data processing fees, and an increase in legal and professional expenses. We expect comp and benefit expenses to normalize next quarter and for legal and professional expenses to trend down from here.
Turning to credit, the provision for credit losses was $6.7 million compared to $6 million in the prior quarter. The first quarter provision was due to an increase in specific reserves of $2.8 million, net charge-offs of $2.6 million and an increase in general reserves of $1.3 million due mainly to loan growth.
The increase in specific reserves relates mostly to two lending relationships. Net charge offs included $1.2 million related to an $8.8 million loan that was moved to REO and subsequently sold, and $1.4 million related to a bulk sale of $10.8 million of underperforming SFR mortgages, of which $6.5 million were on non-accrual at year end.
Slide 5 and 6 have additional color on our loan portfolio and yields. The loan portfolio yield was stable from the fourth quarter at 6.03%. Slide 7 has details about our $1.5 billion residential mortgage portfolio, which remains stable and consists of well secured non-QM mortgages, primarily in New York and California, with an average LTB of 55%.
Slides 9 through 12 have details on asset quality, some of which David has already covered in detail. NPLs decreased $20.7 million, or 25% to $60.4 million and represent 1.92% of loans held for investment at quarter end. With the increase in specific reserves to $9.7 million our net exposure to NPLs decreased 32% to $50.6 million.
Substandard loans decreased $24 million and totaled 76.4% at the end of the first quarter. The decrease was primarily due to $11.7 million in loan sales, transfers to REO totaling $12.8 million, of which $8.8 million was subsequently sold, and payoffs and pay downs totaling $5.4 million. These decreases were partially offset by downgrades of two loans totaling $6.2 million.
Of the total substandard loans at March 31, $16 million were on accrual status. The ratio of allowance for loan losses to total loans held for investment increased by 9 basis points to 1.65%, inclusive of the specific reserves, while the coverage ratio of our allowance for loan losses to non-performing loans increased to 86%, up from 68%.
When we exclude specific reserves and individually reviewed loans, the ratio of allowance for loan losses to loans held for investment was up 1 basis point to 1.36% at the end of the first quarter. By 313 has details about our deposit franchise.
Total deposits increased at an 8% annualized rate from the fourth quarter to $3.14 billion with growth in money market accounts and CDs more than offsetting the decline in non-interest bearing accounts. Our tangible book value per share increased to $24.63. Our capital ratios remain strong with all capital ratios above regulatory well capitalized levels.
Now, I'd like to hand it back over to David and Johnny for a few closing remarks.

David Morris

Thank you, Lynn. As this is my last earnings call here at RBB, I want to take a moment to express my gratitude to all of our employees, customers, the Board, and our shareholders. We have had our share of challenges over the last few years but have not lost sight of our goal to be the bank of choice for Asian Americans nationwide. I've enjoyed the friendships, I've built since joining RBB over 15 years ago, and I look forward to continuing to be service on our Board of Directors. Johnny?

Johnny Lee

Thank you, David, and thank you for your years of leadership and contributions to Royal Business Bank. We are particularly grateful for all the work you have done over the last year to work through our non-performing assets, and we look forward to your continuing input and guidance as a member of Board Directors.
With that, we are happy to take your questions. Operator, please open up the call.

Question and Answer Session

Operator

Certainly, everyone at this time will be conducting a question-and-answer session. (Operator Instructions)
Brendan Nosal, Hovde Group.

Brendan Nosal

Everybody hope you're doing well. Maybe just starting off here on capital, we just love to get your thoughts -- your updated thoughts that is on potential for sharing purchases at some point this year, feels like you're getting a better line of sight toward asset quality resolution and made progress this quarter. Capital ratios are strong and obviously the pricing for a buyback would remain, pretty attractive?

Lynn Hopkins

Thank you, and thanks for starting with that. I think we all can recognize that with our current share price and our capital ratios, a buyback is one of the best uses of our excess capital. So we are working hard to put a buyback in place, and hope to have more to report to everyone soon.

Brendan Nosal

Okay, thanks for that, Lynn. Maybe moving over to a couple of dynamics within the margin, maybe just first, when in the quarter exactly did that FHLB roll from the lower cost to the higher cost one just to get a sense of how much, that is embedded in this quarter's margin?

Lynn Hopkins

Probably could answer that a couple of different ways. It's fully priced into our March, net interest margin, and I would say our net March net interest margin is a little bit below the whole quarter's average, obviously the FHLB advances at $150 million or just a fraction of our total funding base even though they needed to come up into the mid to high 3s.

Brendan Nosal

Okay, alright, that's helpful. Last one for me before I step back here, just wanted to hit on the interplay of the margin and non-accruals for a minute. Can you just give us a sense of how much margin drag you're currently experiencing from the non-accrual base at the moment? Thanks.

Lynn Hopkins

I don't know that I translated it completely into basis points, but there's certainly a drag on our net interest margin. Last year when we were reversing, our interest income when we were placing them on non-accrual, those were expensive. I think when we look at just $20 million able to come back onto accrual status at 6%, it's about $1.2 million in the year, so that's probably how I would look at it and we have $60 million more to go, so.

Brendan Nosal

Yeah. Alright. Fantastic, thanks for taking the questions.

Lynn Hopkins

Yeah, no thank you.

Operator

Thank you. Matthew Clark, Piper Sandler.

Matthew Clark

Hey, good morning, everyone. Just on the staying on the margin, did you have any and outsized interest recoveries in the quarter from unloading some of these problem loans just trying to get a sense if there was any outsized reversals in the quarter?

Lynn Hopkins

Fair question. I did, the short answer is no. We tried to, I think articulate that in the earnings, I think re-releases so for this quarter the resolution of the non-performing assets did not result in the recapture of any interest income with them being the loans being sold, and then also a couple of them moving to REO.

Matthew Clark

Okay. And what's your appetite for doing more of these problem loan sales at this stage?

David Morris

Okay, we believe, we want to keep all of our options open. However, we believe that we're well reserved for future, write-offs, if any.

Lynn Hopkins

Yeah, so I think they were, let me add, I think we were opportunistic in the sales that occurred in the first quarter, obviously we took some charge offs associated with them, one was, it's a unique property, we would have had operating costs. We took the opportunity to get that closed by quarter-end.
I think having the opportunity to approach a bulk sale where a majority of them had been on non-accrual year end, and then we were able to fold in some other less desirable SFRs, and again get it done by quarter and help move it forward.
I think for what's left, we believe that we're adequately reserved for what we would need to do to take action. And we are open to sales, working with the borrowers to return them to accrual status if that was a possibility, but do look to add them back to being performing assets or redeploying the money into earning assets.

Matthew Clark

Okay. And then just on the tariff war, have you all, it's probably still a little early, but have you made -- have you done any work to try to ring fence or quantify what exposure you might have from kind of an import export perspective, and maybe even from an indirect perspective?

Johnny Lee

Yeah, hi Matthew, this is Johnny. Yeah, we have reached out to like our top10 customers and just to do a health check, if you will. So far, yeah, we don't, observe any potential financial impact at this time. Obviously, things are, still, there's still uncertainty here with the changing sort of terms associated with the tears and how it's going to be applied and everything, but so far it's that we do not observe any potential financial impact and I also just want to keep in mind that our overall C&I tree finance mix of the loan to our total portfolio, loan portfolios contribute current is about 4% only. So again, that's a roughly you can mix up all of our loan portfolio this time.

Matthew Clark

Okay. And the last one for me just on the gain on sale this quarter, a little light, maybe speak to the weakness there in your outlook if you could?

Lynn Hopkins

You want me to start, sure, so I'll start. Loan sales were a little bit lower in the first quarter. We did take the opportunity to keep some of it on the balance sheets. I believe that there's a little bit of a pipeline building, on SBA that has larger gains, and I think our outlook is that it would return to more normalized levels that, we at least saw in the fourth quarter.

Matthew Clark

Okay. Alright, thank you.

Lynn Hopkins

Yeah.

Johnny Lee

it's just I want to comment on the SBA site. We did have new hire right beginning of January. So, yeah, so coming online, so we do expect higher volume of SBA loans being funded in Q2.

Matthew Clark

Great. Thanks again.

Operator

Thank you. Andrew Terrell, Stephens.

Andrew Terrell

Hey, good morning. Hey, I wanted to ask on just, I heard some of the comments early on. It sounds like expectations around loan growth are still generally positive, maybe at a slower pace relative to a pretty strong quarter here in the first quarter, but I wanted to shift to the deposits and, just get a sense on expectations around ability to core fund that expected loan growth, the sensitivity around the 100% loaded deposit ratio if any, and then I also wanted to drill down a bit on if you have any color on the non-interest bearing deposit trends, it looks like off a bit towards the end of the period, any color as to what drove the NIB rotation this quarter?

Lynn Hopkins

Sure, I'll start in command, so, good question, Andrew thank you, with respect to the non-interest bearing deposits, I think some of it was seasonal business activities, we observed and then we did observe some migration into higher yielding money market and CD product.
So, I did, I think we did observe some of that in the first quarter, we did have a successful CD campaign in the first quarter, that we were able to reduce our reliance on wholesale funding, a little bit when you consider FHLV advances and our brokered funds.
I think that we foresee success in being able to fund our loan growth organically, and again our reliance on wholesale funding I think is modest we have some room there to the extent that loan growth remains at a similar level and then we still remain focused on C&I production how we can bring in some additional non-interest bearing deposits, but that will take a lot longer time period.

Andrew Terrell

Got it. Thank you. Thank you, Lynn. I appreciate it. And then also just do you have the weighted average, it looks like the average LB that you added in the quarter had varying maturities. Do you have the weighted average term or the range of terms there?

Lynn Hopkins

Sure, so, $z130 million of them are putable advances with the longest final terms at seven years. However, the put options, at the FHLB side range from, I'm thinking the June until September this year, so pretty short on the FHLB's call option side of things with final maturity at three, four, and seven years.

Andrew Terrell

I got it. Okay, I appreciate it. And yeah, I just want to say David, it's been a pleasure speaking with you on these quarterly calls for a while now, so congratulations.

David Morris

Okay. Thanks. Thanks.

Operator

Thank you. (Operator Instructions) Kelly Motta, KBW.

Kelly Motta

Hi, thank you so much for the question. I just again want to echo the sentiments of David. It's been a pleasure working with you, and congrats on a well-deserved retirement and congrats again, Johnny on the upcoming role.
I guess with the credit, I apologize if you've addressed this at this point, but in terms of the workout, I know you talked a bit about your approach to the sales. I'm just wondering in terms of the time frame of this workout. I think originally you were hopeful that would be completed by mid this year.
It feels like that might get pushed out a bit. Do you have any sense in terms of the time frame in the your ability to work out these credits, understanding that there's a lot of parties, insurance involved, etc.

David Morris

Yeah, Kelly, it's, thanks for the question. It is really hard for us to tell exactly when the NPLs are going to come off our balance sheet, and to decrease it down to our normal baseline. However, we believe that by the second half of 2025, that could be our target. MPLs will continue to be lumpy through, 2025. It's going to continue to be out there.
And so forth, but we are making steady progress on all of these, right now. We're making steady progress and we expect to see more to go off in the second quarter.

Kelly Motta

Got it. That's really helpful. And I appreciate the color on the trade finance and the C&I component. I know it's relatively small, but, digging in a little further, I believe a lot of those factories in China have shifted production during the last Trump administration.
Do you have any ballpark as to your exposure to China versus some other countries given you're a Chinese American bank and might get lumped into that narrative with that niche there, just trying to understand what the actual exposure might be?

Johnny Lee

Kelly, that's a good question. And all I can say is right now as of today, all we know is that there's a 10% baseline, right, that impacts all countries and then so I, for me personally, separate into two buckets, one that's, US, China and US, rest of the world. So right now US, China, I mean the China cars obviously up to what 145%.
And rest of the world, there's that based on 10, and then additionally, there will be, obviously depend on the trading balance between US and those respective countries. There'll be different tariffs, potentially be applied to but now at the (inaudible)
So it, it's remains to be seen how that all going to play out, obviously it impacts, different industries or different types of businesses are getting impacted somewhat differently. So it remains to be played out.

Lynn Hopkins

Kelly, in addition to Johnny's comments, our loan portfolio, the 4% we mentioned, about $120 million in trade finance. The port -- the portion that's China specific versus other countries or markets where they might have taken action. I don't think we have that exactly broken down within that category, but again I think anecdotally with the reach out we're not identifying anything at this point.

Johnny Lee

Yeah, nothing at this point and, in fact, our existing bars, they're all very season, obviously they've either made preparations in advance already or they have contingency plans put in place as the -- as this all plays out.

Kelly Motta

Got it. Last question for me, it sounds like again there's a lot of optimism about the loan growth pipeline, obviously not as strong as what was a really strong first quarter, but wondering if you could provide some insight as to the composition of that pipeline either if there's any particular markets that are particularly strong that you're seeing or which categories the pipeline is weighted to?

Johnny Lee

Sure, I, if I can answer that. So, our pipeline remains strong and pretty much a still primary contributor by our, CRE loans and, single family residents. However, our C&I are starting to pick up that debt, take time, but because of the new hires that we have recently since the beginning of this year, we do expect that to incrementally contribute to that pipeline.
But at this time, the pipeline is predominantly made up of CRE, MFRs and SFRs primarily, even though, it is a relatively small mix of the loan, but I think we're doing gaining very good momentum on the SBA loans as well.

Kelly Motta

Thank you so much. I'll step back.

Operator

Thank you. Tim Coffey, Janney.

Tim Coffey

Great, thank you. And I thank you for the opportunity to ask a question or two here. Then, apologies if this is already, been discussed, but I have a question about non-interest expenses going forward. I heard the comments you made in the prepared remarks. Is it reasonable to think that expenses could look a little bit like they did the second half of last year versus the first half of last year?

Lynn Hopkins

Yes, I think that's reasonable. I think we are still looking at our OpEx ratio to be around the 180 of average assets, so we do think they were a bit elevated in the first quarter kind of as I talked about in our prepared remarks, and especially with salary and benefits moderating down and I think there's opportunity and OPS to also trend down.

Tim Coffey

How much is you additive to expenses are the new hires and the lending side going to be if at all?

Lynn Hopkins

It's a little hard to say in the sense that you have people coming in that are new and in charge of certain things, but then we're also rationalizing the expense in other places so I don't think it's a direct ad I would just stick with the idea that we would estimate our operating expense run rate to be in kind of $17.5 million to $18 million maybe, with some puts and takes.

Tim Coffey

Okay. Alright. Those are my questions. Thank you.

Lynn Hopkins

Thanks, Tim.

Operator

Thank you. That concludes our Q&A session. I'll now hand the conference back to our host for closing remarks. Please go ahead.

Johnny Lee

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.

Operator

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.