RBB Bancorp Common Stock 2026 Q3 Earnings Call

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. Then we will open 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 would 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.

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 two years. Compared to the 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 nine 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 and loan sales. We also completed our first full quarter of operations at our new LPO in 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 continued to improve. Non-performing assets declined 11% during the quarter, and over the past two 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 non-performing loan last quarter.

On the funding side, retail deposit growth of $63 million allowed us to reduce wholesale deposits by $59 million, and wholesale funding now represents less than 2% of total deposits. Over the past two years, we have grown savings, NOW and money market balances by 86% and reduced 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 sub-debt and continued to repurchase shares under our buyback program. Over the past two 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 of 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, the $2.7 million pre-tax 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, pre-tax, 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 operation center. We occupied two of the building's five 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 non-accrual loans accounted for $1.5 million of the $1.7 million linked quarter increase.

The remainder came from a special dividend of $320,000 and one more day in the quarter. Our net interest margin expanded 10 basis points to 3.16% 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 6.23%, and our average cost of funds declined 3 basis points to 2.97%, which reflected the July 1st redemption of $40 million of our sub-debt. We estimate the FHLB special dividend contributed approximately 3 basis points to the margin this quarter, and non-accrual 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 6.30% during the third quarter continues to support overall earning asset yields. Non-interest income was $5.1 million for the third quarter, an increase of $2.1 million from the second quarter, due mostly to the gain on the sale of the Brooklyn building. Excluding that gain, non-interest income declined $600,000, due mostly to lower payoffs and loan sales as we retained more of our loan production on the balance sheet this quarter. Non-interest expense was $19.5 million for the third quarter, an increase of $526,000 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 non-interest expense run 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, and we now estimate our effective tax rate will be 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 to $78 million, along with an $8 million increase in construction and land development loans. Third quarter originations totaled $154 million, and payoffs and pay downs declined 24% from the second quarter. We ended the quarter with a loan to deposit ratio of approximately 100%. Total deposits were $3.4 billion at September 30th and were stable compared to the prior quarter.

Non-maturity interest-bearing deposits increased $47 million and retail time deposits increased $52 million, while our non-interest-bearing deposits declined $35 million, partially reflecting the movement of balances into interest-bearing accounts during the quarter. On average, non-interest-bearing deposits increased from the second quarter to approximately 17% of average total deposits for the third quarter. Non-performing assets totaled $38.7 million, or 91 basis points of total assets at September 30th. Non-performing loans declined $4.9 million, mostly through payoffs and pay downs 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 investments at quarter end, and our allowance coverage of non-performing loans increased to 234%. We recorded a $500,000 provision for credit losses in the quarter, due mainly to loan growth, partially offset by improved credit quality trends.