RBB Bancorp Q4 FY2025 Earnings Call

Greetings, and welcome to the RBB Bancorp Fourth Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Rebeca Rico, financial analyst. Ma'am, the floor is yours.

Thank you, Ali. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the fourth quarter of 2025. 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 our 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, Rebeca. Good day, everyone, and thank you for joining us today. The fourth quarter was a strong finish to 2025 with solid loan growth, improving performance ratios, and normalizing credit. The entire RBB team continues to work hard to return the bank to its historic performance, and I'm very proud of what the team has accomplished. We still have work to do, particularly with respect to resolving remaining nonperforming assets, but we're confident that we turned the corner on credit, and that performance will continue to improve in future quarters. Fourth quarter net income totaled $10.2 million or $0.59 per share which was stable from the third quarter but more than double our earnings for the same quarter a year ago. ROA and NIM showed similar trends and were stable from the third quarter while increasing sharply from a year ago. For the year, loans grew at a solid 8.6%, which we believe demonstrates the progress we have made in returning RBB to its historical rate of growth. We had another quarter of strong originations to $145 million. And for the year, loan originations were 32% higher than they were in 2024. Our pipeline remains healthy and in line with this same time last year, so we are optimistic we will see another year of high single-digit growth in 2026. We continue to maintain pricing and structuring discipline with fourth quarter originations yielding 31 basis points above our current loan portfolio yield. Despite the Fed rate cuts of 75 basis points in 2025, we were able to drive our fourth quarter yield on loans up 4 basis points to 6.7% compared to the same quarter a year ago. Deposits were not the bright spot of 2025, and we show the progress we made by focusing on community outreach to attract retail deposits and expanding relationships with our business clients. Fourth quarter total deposits increased 6.6% compared to the fourth quarter a year ago, with strong growth in interest-bearing non-maturing deposits supporting loan growth and a reduction in FHLB advances. Average demand deposits remained stable in 2025 and currently comprise 16% of total deposits. The fourth quarter rate on average interest-bearing deposits declined by 55 basis points from the fourth quarter of 2024 or 73% of the rate cuts we saw last year. While we were successful in reducing funding costs last year, competition for deposits has been increasing and recent rate cuts have not delivered the same pace of reductions in our deposit costs. We made significant progress addressing our nonperforming assets during 2025. Nonperforming loans decreased 45% and nonperforming assets decreased 34% since the end of last year and included ongoing improvement during the fourth quarter. Criticized and classified assets also improved during 2025, decreasing by 43% for the full year and 25% since the end of the third quarter. With that, I'll hand it 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 share my comments on the fourth quarter and annual 2025 financial performance. As Johnny mentioned, and you can see on Slide 3, net income for the fourth quarter was $10.2 million or $0.59 per diluted share, which is stable from the third quarter. Fourth quarter pretax pre-provision income was $2.3 million or 21% higher than a year ago, which is four times the growth rate in assets over the same time period. Net interest income increased slightly, the sixth consecutive quarterly increase, adding 1 basis point to the net interest margin, which was $2.99 in the fourth quarter. Asset yields declined by 7 basis points, driven primarily by the 4 basis point decrease in loan yield due to the market decreases in the prime rate in the last four months of the year. At the same time, average funding costs declined 8 basis points, driven mostly by a 7 basis point decrease in the cost of deposits, which included a 12 basis point reduction in the average cost of interest-bearing deposits. For the year, net interest income increased by 13% to $112 million due to loan growth, relatively stable asset yields, and a 38 basis point decline in funding costs. Our spot rate on deposits was 290 at the end of the year, which was 6 basis points lower than the average cost of deposits in the fourth quarter. To this end, we expect to see some incremental improvement in deposit costs in the first quarter. But as Johnny mentioned, competition remains intense, so it is difficult to quantify what the impact will be. Fourth quarter noninterest income declined by $486,000 from the third quarter, which had included a $0.5 million gain related to one equity investment. During the fourth quarter, in addition to SBA loans, we sold $22 million of mortgages, which drove an increase in gain on sale, and we remain optimistic that our SFR production levels will continue to support ongoing loan sale activity. Compared to the fourth quarter of 2024, all categories of noninterest income increased, except for other income. Fourth quarter noninterest expenses increased by $282,000 mostly due to year-end accruals but were in line with expectations. Our operating expense ratio was stable from the third quarter at 1.80% of average total assets. First quarter expenses are expected to increase due to seasonal taxes and salary adjustments and then stabilize for the next few quarters in the $18 million to $19 million range as professional service fees are expected to moderate in 2026 compared to 2025. We also reduced the quarterly effective tax rate by 330 basis points in the fourth quarter when compared to the third quarter of 2025. This was mostly due to a reduction in the multistate blended tax rate and benefits from ongoing state tax planning. The overall 2025 effective tax rate benefited from purchased federal tax credits and state apportionment tax planning. The effective tax rate in 2026 is expected to be between 27% and 28%. Slides 6 and 7 have additional color on our loan portfolio and yields. As Johnny mentioned, originations have been strong at $145 million in the fourth quarter and $73 million for all of 2025, which was 32% higher than the originations we saw in 2024. Slide 7 has details about our $1.7 billion residential mortgage portfolio, which represents 50% of our total loan portfolio and consists of well-secured non-QM mortgages primarily in New York and California with an average LTV of 54%. Slides 10 through 12 have details on asset quality, which continues to improve. As Johnny mentioned, we did a lot of work to stabilize and resolve our NPAs in 2025. We believe we are appropriately reserved on our NPL and REO assets as we work towards their resolution. The provision for credit losses totaled $600,000 in the fourth quarter due mainly to charge-offs and loan growth, partially offset by the impact of positive changes in economic forecast and credit quality metrics. We expect future annual credit costs to be much lower now that credit has stabilized. Slide 13 has details about our deposit franchise. The decrease in total deposits during the fourth quarter of 2025 was due to a $42 million decrease in brokered deposits, offset by a $26 million increase in retail deposits which has supported our loan growth. Tangible book value per share increased 7.8% during 2025 to end the year at $26.42 while at the same time, returning over $25 million in capital to our shareholders through dividends and the repurchase of approximately 4% of our outstanding shares. Our capital levels remained strong with all capital ratios above regulatory and well-capitalized levels. With that, we are happy to take your questions. Operator, if you would please open up the call.

Our first question is coming from Matthew Clark with Piper Sandler.

Just want to start on the deposit beta this quarter, 30% in terms of interest-bearing. It sounds like competition is still pretty intense. How should we think about that beta going forward? Should you think you can hold that 30%? Or do you feel like that might come down throughout the year?

Matthew. Thank you. So the 30% for the linked quarters, I would say we're sort of just getting started. So kind of year-over-year, we were able to achieve, I think, closer to that 70%, and I think given that we still have a very large portion of our funding base and deposits that will mature over the next year. We think the deposit beta will continue to increase.

Okay. Great. And then just any update on your plans for the sub-debt leases in a going forward?

Yes, we have $120 million of subordinated debt that can be redeemed and will reprice on April 1 of this year. We are exploring opportunities to adjust it appropriately for our balance sheet and capital stack. If it were to reprice on its own, it would be slightly under 7%. However, the current market is more appealing, so we will consider a more comprehensive approach in addition to adjusting it for our balance sheet. This is where we currently stand.

Okay. Great. And then just last one for me on capital. You still have a lot of excess capital, how should we think about the buyback this year?

Yes. I feel like once we rightsize the sub-debt, I think there'll be an opportunity for us to be more active on a buyback program. I think one step at a time. I think at the end of 2025, we had to continue to be a little bit more inward-facing as we resolved credits wrapped up 2025. So I would expect both the sub-debt and then returning to being more active on the buyback.

Our next question is coming from Brendan Nosal with Hovde Group.

Maybe just starting on the margin. Definitely, I hear your comments earlier on the pace of deposit competition. But I guess when I look at the margin, the pace of improvement was a bit muted this quarter versus recent quarters. Can you maybe just talk about how you view the path of the margin as we move through '26?

Sure. Let me provide some additional insight into why we see an opportunity for deposit costs to decline further. Nearly all of our $1.7 billion in CDs will mature within the next year, with 40% maturing in the first quarter. The average yield on these is in the high threes, and funding costs have likely decreased to around 30%. Consequently, some of these will have the chance to reprice in line with the current interest rate situation, which we haven't fully experienced yet. Additionally, we've shifted a portion of our funding from traditional CDs to non-maturity interest-bearing products, which offer similar yields but provide more flexibility as rates are expected to continue declining. I'm not sure if this answers your question, Brendan, or if you're seeking more specific information.

Yes. No, that's helpful. I mean, is it fair to say, based on that outlook for downward funding cost repricing that there's room for the margin to continue to expand?

Yes. We are still, I would say, slightly liability sensitive, maybe a little bit more neutral than we've been in the past. You're absolutely right that from a NIM perspective, what we saw in the fourth quarter as our earning asset yields came down a little bit as liquidity repriced into the current environment and then our loan yield came down just slightly. I think there's still opportunity to hold our earning asset yield and our loan yields based on the shape of the yield curve, the repricing characteristics of our loan portfolio. But there's definitely downward pressure on it. It's not that without being very careful, especially since our loan-to-deposit ratio sits around 99%. So I think we're looking at having some attractive deposit beta. We're looking at NIM expansion. One of our biggest opportunities for NIM expansion is our nonperforming assets and continuing to resolve them. They held relatively flat kind of quarter-over-quarter, but we've made progress in, I think, ultimate resolution. So that would also have a positive impact on our net interest margin being able to return over $50 million to an earning asset status.

Okay. Okay. Great, Lynn. That's helpful. One more for me just on credit. First of all, congrats on the workout this quarter and the improvement in virtually all metrics. As we look forward, I get that there's a ton of moving pieces here, but can you just kind of talk in broad strokes on where you hope to see credit metrics by the time we sit here in 12 months and look back on 2026?

I'll talk. That’s quite, I would just say in a few quarters, we always stated that we're staying very laser-focused on resolving much of our classified, criticized credits and hopefully, this quarter's results demonstrates our ability to continue to move positively to get most of the results. So let's also keep on track on what we're doing right now. I would hope that certainly 12 months now, you'll see continuous improvements in our credit picture.

Yes. I think in addition to what Johnny stated, so our NPLs are well understood. 90% of them are represented by four relationships. Of those four relationships, three of them are continuing to make payments based on agreements, which is good because it continues to lower the balance towards what could be ultimate resolution. So we're really only focused on a few. I think that gives us a really good opportunity to get them worked out during 2026. We're optimistic that, that will happen in the first half of this year. But one of them is the partially completed construction project, which represents about half of that balance and that one will probably take the longest. So as we sit here a year from now with credit stabilized, we look to have sold our OREOs and to have these resolved. Obviously, there may be regular activity, but expect that these larger ones will be moved out.

Our next question is coming from Kelly Motta with KBW.

Maybe on loan growth, it slowed down a bit from the past two quarters to low single digits. Wondering if you could speak more to the pipeline where you're seeing opportunity? And if the decline was more of a function of payoffs or lower demand or just maybe some deposit constraints given your loan-to-deposit ratio and the competitive dynamics that you cited earlier in the call.

Kelly, this is Johnny. I think quite a combination of all the things that you have mentioned. But I mean, overall, again, obviously, we have some loan sales and we had some strategic exits on a couple of classified credits. And for loan sort of momentum, actually, we certainly want to do more, but compared to the previous year, overall, I think we're doing pretty well as far as keeping that momentum going. The pipeline is still relatively healthy right now, both for the commercial and the residential mortgage side. So I think even though Q4 seems a bit light, but I think overall on average, our new funded loans for commercial is about $65 million per quarter and mortgage is about $90 million per quarter. And looking at the pipeline right now, certainly, we feel very optimistic that we can continue to keep that pace.

I think as we sit here today, we are in as good as, if not better position at the same time last year when we were able to achieve over 8% annualized growth. I would comment, the fourth quarter loan growth was a little bit muted, but we did have a higher volume of loan sales, as Johnny mentioned. And we were working to resolve some substandard credits. So we were happy with those exits. I think with the interest rate environment, payoffs and paydowns can tend to come up a bit, but they are actually a little bit lower than in the third quarter. So we think that our ongoing production will fall through to net loan growth as we go forward. But I think those things just kind of had a little bit downward pressure, but I think all metrics are healthy to sit behind it.

Got it. Maybe last question for me on expenses. You've reported about $19 million in the quarter. Just looking into '26. I'm wondering if this is a good run rate to build off of? And any kind of puts and takes. Like I know legal and professional have been maybe more elevated than past years, probably related to the workout but should be presumably declining. And then any kind of thoughts for additional things we should be baking in as we look ahead to this year?

I understand. I'm looking at the same things. The run rate in the fourth quarter gives us a solid benchmark for our quarterly overhead needed to reach the production levels we achieved in 2026. It appears that compensation has increased somewhat to reflect the company's growth. Additionally, we have a management transition this year that we don't expect to happen again, which will allow us to allocate those funds toward a higher cost of doing business. You are right about the legal and professional costs. We believe there is potential for those expenses to decrease as credit stabilizes. While there is a noticeable increase when comparing 2024 to 2025, I don’t think that we need a similar increase to achieve mid- to high single-digit loan growth. There are also other avenues to increase revenue, even if expenses rise. In summary, we anticipate expenses will be in the $18 million to $19 million range. The first quarter appears to include around $0.75 million in extra costs related to pay raises and taxes, which should normalize after that.

Our next question is coming from Tim Coffey with Janney.

Then, I guess my first question for you would be, do you see this year as an opportunity to lower the loan-to-deposit ratio considering the potential to reduce interest expense through the course of the year as well as grow interest income?

Great questions. So I would say a couple of things. One, we lowered our reliance on wholesale funding. And I think it's relatively low and very manageable. So obviously, to lower the loan-to-deposit ratio, deposit growth would have to outpace our loan growth. And I think we're looking at some attractive loan growth in 2026. Our retail deposit growth did keep pace with our loan growth in 2025. So we would expect the same. I think pushing down significantly would maybe take some opportunistic loan sales that we would then put that benefit into the equity. But I would say, generally, I think there's some opportunity to maybe get into the mid-90s. But I don't know if it would get much lower than that, Tim.

I wasn't considering that you'd sell loans to achieve that. I expected you would be able to increase retail deposits more quickly. Johnny, as we mentioned earlier about the loan growth pipeline for this year, it looks like we will experience a year similar to the last one. What is the competitive landscape like for commercial real estate loans in your area right now?

Actually, competition is always there. But again, we want to be very strategic about the kind of relationships that we bring in. Certainly, the rate has a little bit more challenged as we're trying to maintain the yield that we had in, let's say, the prior first half of the year last year. But overall, I think we've been able to hold our ground pretty well, because we're a very relationship-driven bank. And so we look at each one of these prospects of contract that we are considering lending to. We look at the overall potential of the relationship, not just what we might be able to generate from a yield standpoint but any other additional ancillary businesses that might come along with it such as deposits, of course. So with that, I think from a relationship standpoint, we still are able to be fairly competitive. But again, the reality is, certainly, we always face competition on the rate side.

Yes. Okay. Yes. Are you seeing competitors undercutting the spreads on these loans relative to where the yield curve is?

Well, I think we are from a yield standpoint. We've actually given up quite a bit of business for sort of competitor against some of our peers who are offering these 5-year fixed rates below 5.75% on average or 5.5% to 5.75%, but by the way, so far, I think we're holding pretty well above the 6% or higher right now with a yield that were much of the pricing that we've been proposing.

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

Okay. 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, everybody.

Thank you. Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.