RBB Bancorp (RBB) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the RBB Bancorp Third Quarter 2026 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. And we will open the floor for your questions after the presentation. If you wish to join the queue to ask a question at any time, you can press star 1. Should you wish to remove yourself from the queue, press star 2. It is now my pleasure to turn the floor over to your host, Rebecca Rico. The floor is yours.

Thank you, Soe. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's results for the third quarter of 2026. With me today are President and CEO, Johnny Lee, Chief Financial Officer, Lynn Hopkins, and Chief Credit Officer, Jeffrey Yeh. 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 will open the call to your questions. I would ask that everyone please refer to the disclaimer regarding forward-looking statement in the investor presentation and the company's SEC. Filings. Now I would 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. We are pleased to report a strong third quarter. Net income increased 25% from the prior quarter to $12.6 million or $0.74 per share and our return on average assets improved to 1.17%. Our results included a gain on sale of our office building in Brooklyn, but the underlying drivers of our performance were higher net interest income, solid loan growth, and continued improvement in credit quality. These results also show how far RBB has come over the past 2 years. Compared to third quarter of 2024 earnings per share has increased 90% Our return on average assets has improved 63%. And our return on average tangible common equity has improved 69%. For the 9 months of the year, diluted earnings per share is up 60% from the same period last year. Loan growth returned in the third quarter as we expected. Loans held for investment increased $90 million or 11% annualized driven by steady origination volume and lower payoffs in loan sales. We also completed our first full quarter of operations at our new LPO the San Francisco Bay Area. And we are encouraged by the early response from clients in that market. Our pipelines remain strong across the franchise, and we expect to continue these positive trends to finish the year. Credit quality continue to improve. Nonperforming assets declined 11% during the quarter, and over the past 2 years NPAs are down 36%, while criticized and classified loans are down 48%. We continue to work toward the resolution of our only OREO property which migrated from nonperforming loan to-- last quarter. The funding side, retail deposit growth of $63 million allowed us to reduce wholesale deposits by $59 million and wholesale funding now represent less than 2% of total deposits. Over the past 2 years, we have grown savings and money market balances by 86% and reduce our cost of interest bearing deposits by more than 100 basis points. Our capital position remains a source of strength During the quarter, we completed the partial redemption of our subordinate debt and continue to repurchase shares under our buyback program. Over the past 2 years, tangible book value per share has increased 11% while shares outstanding have declined by 5%. Overall, we believe the third quarter reflected the progress we have made in improving RBB's earning power. And we are well positioned as we head into the end of 2026. With that, I will hand it over to Lynn to talk about 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 third quarter 2026 financial performance. The $2.5 million increase in net income in the third quarter compared to the second quarter was primarily driven by higher net interest income, $2.7 million pretax gain on the sale of our Brooklyn office building, and a lower effective tax rate. The building gain added approximately $0.12 to diluted earnings per share. Apart from the gain, our core earnings continued to strengthen, supported by loan growth and a wider net interest margin. Including the gain, pretax, pre provision income increased 23% from the second quarter and 25% from the third quarter of 2025. I would like to take a moment to provide some additional detail on the building sale. During the quarter, we had an opportunity to sell a building we owned in Brooklyn that housed our New York loan operations center. We occupied 2 of the building's 5 floors so the property was larger than what we needed for our operations. The sale generated net proceeds of approximately $7.4 million that we have been able to redeploy. We are leasing back the space we currently occupy through the end of the year after which we will transition our loan operations team to a new location. This was an opportunistic transaction for the benefit of our future operations. Net interest income was $31.8 million for the third quarter, an increase of 6% from the second quarter and 8% from the third quarter of 2025. Higher average loan balances and higher interest recoveries on nonaccrual loans accounted for $1.5 million of the $1.7 million linked quarter increase. The remainder came from a special dividend of $320 thousand and 1 more day in the quarter. Our net interest margin expanded 10 basis points to 3.6% for the third quarter and increased 18 basis points from the third quarter of 2025. The yield on average loans increased 10 basis points to 23, and our average cost of funds declined 3 basis points to 2.97. Which reflected the July 1 redemption of $40 million of our subordinated debt. We estimate the FHLB special dividend contributed approximately 3 basis points to the margin this quarter, and nonaccrual interest recoveries contributed approximately 7 basis points. Our average cost of deposits declined 2 basis points to 2.79 for the quarter, with the federal funds rate increasing 25 basis points during the third quarter our period end weighted average rate on total deposits increased a few basis points to 2.82. We continue to manage deposit pricing carefully while new loan production at an average yield of 4.36 during the third quarter continues to support overall earning asset yields. Noninterest income was $5.1 million for the third quarter, an increase $2.1 million from the second quarter due mostly to the gain on the sale of the Brooklyn building. Excluding that gain, noninterest income declined $100 thousand due mostly to lower gains on sale of loans as we retained more of our loan production on the balance sheet this quarter. Noninterest expense was $19.5 million for the third quarter, an increase of $526 thousand from the second quarter due mainly to higher compensation and occupancy costs. These increases reflect a full quarter of our operations, for our new San Francisco Bay Area LPO and the impact of the Brooklyn building sale. Our efficiency ratio improved to 53% which is 434 basis points better than the same quarter last year. Looking ahead, we expect our quarterly noninterest expense rate to be around $19 million Our effective tax rate was approximately 25% for the third quarter, reflecting the benefit of federal production tax credits purchased during the quarter we now estimate our effective tax rate will be approximately 27% for the full year. Turning quickly to the balance sheet. Loan growth during the quarter was led by single family residential mortgages, which increased $78 million along with an $8 million increase in construction and land development loans. Third quarter originations totaled $154 million and payoffs and paydowns declined 24% from the second quarter. We ended the quarter with a loan to deposit ratio of approximately 100%. Total deposits for $3.4 billion at September 30 and were stable compared to the prior quarter. Nonmaturity interest bearing deposits increased $47 million and retail time deposits increased $52 million while our noninterest bearing deposits declined $35 million partially reflecting the movement of balances into interest bearing accounts during the quarter. On average, noninterest bearing deposits increased from the second quarter to approximately 17% of average total deposits for the third quarter. Nonperforming assets $38.7 million or 91 basis points of total assets at September 30. Nonperforming loans declined $4.9 million, mostly through payoffs and paydowns. to 55 basis points of total loans, and REO was unchanged at $19.8 million. The allowance for loan losses stood at $44 million or 1.30% of loans held for investment. At quarter end and our allowance coverage of nonperforming loans increased to 234%. We recorded a $500 thousand provision for credit losses in the quarter, due mainly to loan growth partially offset by improved credit quality trends. Net charge offs were $122 thousand or 1 basis point of average loans on an annualized basis. Our tangible book value per share increased to $27.44 at September 30, an increase of 6% from a year ago. Even as we continued to return capital to shareholders, through share repurchases and dividends, We repurchased $4.5 million of common stock in the quarter, reducing shares outstanding by approximately 1%. Our capital ratios remain strong with tangible common equity to tangible assets ratio of 11.05%. And a CET1 ratio of 17.9%. This concludes my prepared remarks. Operator, we are now ready to take questions.

The floor is now open for questions. If you wish to join the queue to ask. We do ask if listening on speakerphone today, please pick up your handset while asking your question to provide optimal sound quality. And if you press star 1 earlier during the call today, please press star 1 again to ensure our equipment has captured your signal. Please hold 1 moment while we poll for questions. And your first question will be from Liam Colehill at Hub Group. Please go ahead, Liam.

Hi. Thanks for taking my questions. Here's the recent rate hike impacted borrower demand? And do you expect further hikes to impact originations moving forward?

Hi, Liam. This is Johnny. Yeah. Certainly, little bit of headwind, but overall, I think many of our borrowers are now on commercial side particularly recognizes the high rate environment. At least we are not faced with the sort of, I will just say, lesser or so, the challenges that we had encountered during the first half and maybe first part of Q3 where we were challenged with trying to compete with the below 6, sort of rate and the fire fix. We see lesser of that. So it allows us the ability to have to defend or, you know, go as aggressively as, you know, as we may have to compete for deals. So that is helpful. But at the same time, certainly, with the high rate environment, some borrowers are just kind of stepping back, taking a closer look at the landscape, and sometimes they want to renegotiate certain terms and conditions. Thank you. I guess moving to the other side of your origination question, I noticed payoffs declined substantially this quarter. Do you anticipate payoffs remain near current levels especially given how low they are?

Yeah. And maybe I can chime in as well.

So, yeah, we do, expect payoffs to slow-- to, get tempered, kind of trending downward. Given, again, you know, the high rate environment. I think some that typically may want aggressive-- more aggressive rates are not pushing those below 6 anymore out there as much. So we do see. We do anticipate pay downs and payoffs to-- I would just add to Johnny's comment regarding being temporary is appropriate.

I think the other thing that we observed in the first half of this year was some strategic payoffs as we have continued to improve credit quality and those have also tempered as well. Oh, that makes sense. Thank you. And last 1 for me. And with the loan to deposit ratio kind of in that 100% realm right now, Where are you comfortable keeping that ratio moving forward? Sure. So we have been managing the loan to deposit ratio around the 100% mark maybe call it high 90s. I think we, with our capital levels, continue to remain comfortable at 100%. And I think that is managed to a large extent with our production levels that we just kinda talked about and also some loan sales. We had a little bit less in loan sales in the third quarter, which I think pushed up on our loan to deposit ratio a little bit. I think we expect loan sales in the fourth quarter to maybe be higher than what we saw in the third quarter.

Great. Well, thank you for taking my questions. I will step back.

Thank you. Thanks, Liam.

Next question is from Matthew Clark at Piper Sandler. Please go ahead.

Good morning, everyone.

Hi, Matthew.

Hi, Matthew. Just on that point,

On that point on gain on sale, expecting it to step back up, Roughly $500 thousand is the right way maybe to think about it from a run rate perspective. Just trying to make sure in the ballpark.

So a couple of things. I think everyone knows that our loan sales are combined between our SBA loan sales, which you can sell a little and get a lot because the premiums are there in the marketplace. So we would expect to participate there. And then on the mortgage loan sales, I think that we have to sell quite a bit. The premiums continue to be very thin. I think that the way we look at it, there is probably an opportunity to return to the levels that we saw in the first part of this year. Maybe first quarter, but not necessarily the second quarter. Which is a little bit outsized. So you know, we are a taker in the market there. We believe our mortgage product continues to be priced competitively. So it should give us an opportunity to sell some of our loans.

Got it. Okay. Great. And then on the new originations, $154 million, 6.3%. Can you give us a sense of you know, types of loans that are in there? Just thinking through kind of the growth in loans this quarter was largely SFR. So I just want to get a sense for and it sounded like you felt like there was some good momentum going into Q4. Just your thoughts on loan growth in general.

Hi, Matthew. This is Johnny. So, yeah, Q3, I would say, approximately 2/3 of the growth was contributed by SFRs. But we also see growth in C&I and C&D loans, so your construction loans. 1 positive thing we see on C&I is. and C&D loans is that by number of counts, if you will. You know, we have much larger number of new borrowers or new loans. Hopefully, you know, as they utilize these C&I, C&D credits that hopefully that can contribute to our next loan growth source here in the near future. Okay.

And then just on the margin, and kind of digging into it a little bit, I know you have got, what, 52% of your loans are variable rate, but those include ARMs. And so trying to get at what portion of your loan portfolio, you know, you know, resets with the Fed? And then how should we think about your interest bearing deposit beta, assuming we get another rate hike here in December?

Sure. So thanks for starting with the loan portfolio. So about 52% is variable. We do kind of look at what reprices over the next 2 years. I would share that about 2/3 of that population is eligible to reprice in the first year. So they do not all immediately reprice. there is various repricing dates. But based on the structure of our loans, they do have the opportunity over the next year. This does help contribute to what we tend to be liability sensitive in the near term. It does shift us to something that looks a little bit more asset sensitive as rates rise and our loans continue to reprice into a higher rate environment. So turning to the liability side, we think about our interest bearing deposits and the betas there. I think over the last year, our betas have been maybe around 50%. But given the expectation of rate increases and kind of looking at the brokered CD market, I think things have priced in the rate increases. So I expect the near term to be a little bit higher than that. And then we will moderate over time. So you know, there is a lot of pressure on the cost of liquidity right now. Is my general comment. So I think over time, it will moderate, Matthew. But in the near term, it is gonna provide a little bit of pressure.

Okay.

So thinking about that 3.06 kind of adjusted margin ex the interest recoveries and the special FHLB divvy, a little pressure on that. Kind of normalized margin maybe hanging around 3%, or do you think you might start getting below 3?

I do not have a crystal ball.

I think there is a lot of there is a lot of things that are going to support our net interest margin. So in addition to the fact that we have about so out of the 52%, I would say 2/3 reprices over the 1-year. We are also participating in new loan originations in the current environment. I think there will be comments on, you know, the pipeline looks strong. I think to Johnny's point, we have C and I and construction loans that will be originating in the current rate environment. So there are things that continue to push up on the loan yield and the earning asset yield in the absence of interest recoveries or a special FHLB dividend. And then on the funding side, yes, I think that things will be more expensive, but it does take time for that to come through. I think there is an opportunity for our net interest margins to be above 3%, but it does know, take participating in the current interest rate environment on the earning asset side. Yep. Got it.

Thank you.

Next question comes from Kelly Motta at KBW. Please go ahead.

Hi. Thank you so much for the question. I apologize if missed it here. Lynn, can you just quantify the amount of the interest recovery that impacted NIM in the quarter?

Kelly, it was around $700 thousand we were able to recapture some interest on the payoff of a nonperforming loan.

Got it. that is helpful. And then as I think about, you guys have continued to make progress on credit recovery story. In higher for longer, as you kind of look at what is left to be done, how are you guys thinking through whether at the margin, if you are seeing any incremental headwinds on the credit side from borrowers and the potential to slow there. Thanks.

Kelly, if I am understanding your question, I think at this point, RBB's nonperforming assets at this point are very well understood that they are kind of down to 3 primary assets.

And we are looking carefully at, you know, what we would classify as criticized and classified and criticized loans. Is that. Am I understanding your question correctly?

Yeah. I mean, I guess you still have what is left to work out there, I guess, the potential. If you are seeing any kind of, like, potential incremental headwinds from, I guess, you know, the rest of the portfolio.

Right. So I think that is how we would look at criticized and classified loans. And those have continued to decrease, and we monitor them carefully in the current environment. I would say, generally, you know, no. there is always some credit that you have to be managing that risk. But that is an area that we think is you know, under control. Dare I say. Got it.

that is helpful. And then I guess a lot of the growth here was driven by single family residential during the quarter. Obviously, you guys have a differentiated product that is as you say, very competitively priced. But as you look ahead, what is the overall pipeline for growth And is there any changes in mix given kind of the rate environment we are in?

Hi, Kelly. This is Johnny. So I would say, obviously with our Northern California LPO now the teams are sort of completely in place. We see a great deal of momentum there, and much of the growth from there is going to be very much all commercial. Loans of the CNI, CRE, even including construction. So we do see that contribution is making very you know, making a very positive contribution. For us. So that hopefully will help us sort of, you know, change the mix a little bit, I guess, overall. So, especially single family resi loans are, you know, typically Q4, you know, regardless, even without the rate hike, if you will, typically Q4 does, you know, seasonally, seasonality-wise, it is up to a degree slower. On the SFRs, but we do have a very strong pipeline on the commercial side right now. That I think will hopefully be able to change our mix a little bit.

Great. Thank you. I will step back.

Thank you.

Next question comes from Andrew Terrell at Stephens. Please go ahead.

Hey. Good afternoon.

Hey, Andrew. Maybe I just wanted to start just checking in on kind of the expectation around the expense run rate. And you guys have managed expenses very well throughout this year. Just what type of expense growth you are targeting? And if you could talk about any specific drivers, like, where you are most focused from an investment perspective right now? Andrew, I was tracking the first half of your question. Was the second half related to noninterest expense as well? Can you just repeat that? Yeah. Sorry. Just, you know, expectation kinda near term on expense run rate. And then just bigger picture, you guys have managed low single-digit expense growth this year so far. Is that still kind of the right ballpark? And can you talk about what areas of investment you are most focused in right now? Great. Okay. Thank you. Sorry. I did not hear the end of the. it is the first time. No problem. So the expectation of our run rate based on where we have been making investments and able to grow, as we mentioned, this is our first full quarter with the loan production office in Northern California, so those are included in our run rate at this point in time. I think there is an expectation that our REO costs can moderate a little bit. We were catching up as we brought that onto the balance sheet this quarter. We also had some costs associated with bringing in the production tax credits. And that translated to more income to the bottom line. But showed up maybe in some of our professional fees. We also think that some of our compensation costs will be reflective of our. Reflective of our growth. But we had a couple of things in there this quarter that might show that going down a little bit in the fourth quarter. Obviously, January is always a big month between raises, insurance premiums resetting, and tax, there is definitely some things that we expect to go down. The last 1 I would comment on is our data processing. We have spoken a bit about those costs. there is an expectation that we will have an opportunity to improve our run rate in that particular category. And that should show up potentially in the fourth quarter but more likely, first quarter of 2027. The building sale we have a little bit of additional cost in that particular line item as we are leasing space instead of owning it. The offset to that was higher interest income. We will deploy the proceeds there. So there is a lot of different things that add up to our expectations of being around $19 million, call it plus or minus, you know, $100 thousand-$200 thousand. So sorry. it is not a short answer, but a lot going on. And to your point, we work very hard to manage our overhead Yeah. No. I really do appreciate all the all the added color there. If I go back to just 1 question around the margin, if I look at your time deposit costs as of the third quarter, 3.60ish or so. Lynn, it sounded like pretty, you know, intense competition if you are looking against kind of the brokered market, or I would just imagine, in some of your local markets as well? Can you help frame just where new deposits are at today or where you feel like pricing, specifically on the time deposit side, needs to be in order to maintain or grow balances? Sure. So to your point, CD balances or CD rates, what we are observing in the market, 12-month money is very popular. 6 month money is priced probably just over 4%. 6-month, 1-year money given the expectation of rate hikes. Is up over. In the brokered market, up over 4.50. So competing for those dollars relative to our balance sheet, you know, we are definitely well over 4%. In that area. But as I mentioned earlier, a big part of our loan portfolio in addition to loan production is able to also participate in repricing So it is moving up significantly. In the deposit pricing category. Yep. Got it. Okay. Then just last 1 for me. it is good to see go ahead. I think 1 additional comment, which I think speaks to loan production. We focus on short term rates, which does impact call it, funding, right? The liabilities tend to reprice more immediately. And can create a bit of a headwind But the way it is getting addressed is through the repricing of our loan portfolio. But the long end of the curve is not moving up quite as aggressively, so curve seems to potentially be flattening out. Not perfect, but that does support additional production to then move generally this environment. So that is, I think, what will be a natural hedge against some of the deposit pricing. But you know, funding costs, will go up. That is unavoidable in the near term. Yep. Got it. And if I could just ask 1 last 1. Mean, it was good to see the sub debt redemption this quarter as a use of capital. You still got a pretty incredible capital position. The asset quality has improved significantly over the past couple of years. You know, your margins are better. ROA is better, but your stock is still trading, you know, a little bit below tangible book value. I guess when you when you put all that together, I know you are you are limited by liquidity a bit, but would you ever consider a tender offer? Are there other means to you know, rightsize or leverage the capital base a bit? Just would love to hear your thoughts there. Sure. No, thanks for the question. To your point, we do have a lot of capital. There is potential for leveraging that. I am not sure that I think we needed to put a few things in place, which is getting our credits to be think, better understood to your point, sustainable earnings I think the participation in our stock buyback program has been you know, consistent. And we are looking, I think, at the sub debt as well as maybe an opportunity to know, rightsize that relative to our balance sheet. But I do not know if I would say a tender offer on our stock at this point in time. Appreciate that we are trading below tangible book, so it is an attractive investment Got it. Thanks for taking the questions. Yeah.

Thank you.

Thank you. Next question comes from David Feaster at Raymond Private Wealth Management. Please go ahead.

Morning, and I am pleased to see what a solid quarter it was. I like the way that things continue to improve. I did have a couple of questions that have been answered already, but I have a couple of more on the asset quality on the balance sheet. First 1 is, the large REO item. Can you describe that further? What sort of mixed use project it is? How far along is it towards completion, what are your what are your expectations for the timing and exit from that?

Hi, David. it is Lynn. I think we have shared that this REO is or was a 60% or so completed construction project in the Los Angeles area by 1 of the major sports venues. it is now moving through its nonperforming asset life as an REO It is now listed for sale above the carrying value that we have on our books. And given the size of the project, we are expecting that we will have an opportunity to exit it the first half of next year. Well, that would be a positive. Moving on more into the asset quality, You noticing any common threads among substandard and other criticized loans, for example, are they, running into problems due to fuel prices or other things rather? I am just asking if there is any common themes or threads it is a good question, and we look at that as well. And at this point, we have not identified any common threads for the assets that we are looking at or managing. Last question. The somewhat of a decline, not major, but notable decline in securities held. Seems to be a little bit puzzling given the way that, the bond yields have risen in the recent quarter? Do you expect to start adding back to the securities to take advantage of the higher bond yields? Or is there a plan on that at all? So, yes, I did notice we are down just a little bit quarter over quarter. So we do actively manage the portfolio. I appreciate that there is higher yields. I think that we made a concerted effort and put the duration on inside of our loan portfolio. We always keep a bit of commercial paper, which gives us flexibility I think, in the securities portfolio. But your comment regarding higher yields in the market and taking an opportunity to add something in securities portfolio. Is a good 1.

Last question. Any comments Are you pleased or disappointed? Any other comments on the new San Francisco Bay Area loan production office? How is that 1 going?

No. Hi there. This is Johnny. No. So far so good. Everything's tracking very positively. We are very pleased with the team. Yeah. They are making great contributions already right out of the gate. I am all done, and thank you for posting a great quarter. Thanks, David.

Thank you, David.

At this time, we have no other questions registered. I will turn the call back to Johnny Lee.

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