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Greetings, and welcome to the RBB Bancorp Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Ms. Rebeca Rico. 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 2024. With me today are Johnny Lee, David Morris, Lynn Hopkins, and Jeffrey Yeh. 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 the call over to RBB Bancorp's Chief Executive Officer, David Morris. David?

Thank you, Rebeca. Good day, everyone, and thank you for joining us today. First, as a bank headquartered in Los Angeles, it's important to acknowledge the tremendous devastation and impact to many Southern California communities due to the wildfires. We are proud of our team's effort to support the affected communities and are committed to assisting with the long recovery process. We've partnered with nonprofit organizations serving low to moderate income communities, collecting donated supplies in our branches and donated $30,000 to provide essential services to affected families.

While many in Southern California have been impacted by the fires, we are grateful our Royal Business Bank team is safe, and we are not aware of any significant exposure to the bank's loan portfolio or the bank's operations. We reported fourth quarter net income of $4.4 million or $0.25 per share. The decrease in earnings compared to the prior quarter relates mostly to credit, which we are actively addressing and will discuss in detail on today's call.

On a more positive note, the net interest margin increased by 8 basis points due primarily to a 33 basis point decline in the cost of interest-bearing deposits, which was a welcome reversal to an extended period of increases. Loan balances declined in the fourth quarter, but as Johnny will explain, we are confident that growth will resume in the coming quarters. Deposits declined slightly from the last quarter, but we did see a $20 million increase in noninterest-bearing deposits.

Finally, before I hand it over to Johnny, I'd like to congratulate him on his new role as President and Chief Executive Officer of RBB, Royal Business Bank. I am confident that the bank is well positioned to succeed under his leadership. And while I look forward to retirement, I will remain on the Board of Directors of both RBB Bancorp and Royal Business Bank, where I will continue to offer my support to Johnny and the rest of the team. Johnny?

Thank you, David. I appreciate the confidence the Board has in me and look forward to continue to build shareholder value as we serve the financial needs of the Asian American community. I would also like to personally thank David for his leadership and contributions as the Chief Executive Officer of Royal Business Bank and for his willingness to remain on the Board of Directors where his inputs and guidance will ensure a smooth transition.

RBB is a relationship-driven business bank, which combines the lending expertise of a large bank with the speed and personalized service of a community bank to provide a full suite of financial services to individuals and small- to medium-sized enterprises. We achieved $126 million of loan production in the fourth quarter, and after consideration of loans sold, total loans declined about $28 million. We continue to see surprisingly high levels of paydowns due to aggressive refi offers from competitors and borrowers who repaid loans using their own funds.

Due to last year's successful efforts to hire experienced commercial lenders and broaden our lending capabilities, we have maintained and grown a healthy pipeline, so we do expect to resume loan growth in the coming quarters. While we are confident in our ability to prudently and profitably grow loans over time, we are also focused on resolving a number of nonperforming loans, the majority of which were originated prior to 2022.

Starting on Slide 9 of the investor presentation, we provide some additional details on credit. Nonperforming assets totaled $81 million or 2% of total assets at the end of the fourth quarter. The $20 million increase from the third quarter was mainly due to $26 million C&D loans that migrated to nonaccrual status. At year-end, we had 8 NPLs that were greater than $1 million, including the C&D loan that was moved to nonperforming after going past due in early January. It is secured by a mixed-use construction project near major sports and entertainment venue in Los Angeles.

Lynn will provide some additional details about our substandard and nonperforming loans, but I want to emphasize that we are focused on resolving them as quickly as possible while minimizing the impact to earnings and capital. It will take time, but we feel comfortable we have a good handle on them and can work effectively to resolve them. Lynn?

Thank you, Johnny. Please feel free to refer to the investor presentation we have provided as I share my comments on the company's fourth quarter of 2024 financial performance.

Slide 3 of our investor presentation has a summary of our fourth quarter results. As David mentioned, net income was $4.4 million or $0.25 per diluted share. We did see the net interest margin we've been expecting with NIM increasing 8 basis points to 2.76% due to the decrease in the cost of deposits, offset by the impact of an increase of on-balance sheet liquidity. The higher liquidity was due to the timing of loan production and in anticipation of $150 million in FHLB advances that will mature in the first quarter.

Noninterest income was $2.7 million in the fourth quarter, following a $2.8 million recovery of a fully charged-off acquired loan that temporarily elevated the third quarter results. Fourth quarter noninterest expenses were relatively stable, increasing by $297,000 to $17.6 million due to an increase in legal and professional expenses, mostly due to year-end accruals. The provision for credit losses was $6 million compared to $3.3 million in the prior quarter. The fourth quarter provision was primarily due to partial charge-offs on 3 loans moved to held for sale in the fourth quarter and an increase of $4.5 million in specific reserves for the C&D loan, which migrated to nonperforming as of year-end. The fourth quarter provision also took into consideration the size of our loan portfolio and improved economic forecast and our general credit quality trends.

Slides 5 and 6 have additional color on our loan portfolio and yields. The overall loan portfolio yield decreased 10 basis points to 6.03%, with the decrease attributed to an 18 basis point decrease in the CRE loan yield due to higher prepayment fees in the third quarter. As Johnny mentioned, fourth quarter loan production totaled $126 million and had an average yield of 7.11%.

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 LTV of 56%. The $20.4 million increase in nonperforming loans from the third quarter was mainly due to the $26.4 million C&D loan that migrated to nonaccrual status, offset by paydowns and payoffs of $6.7 million and partial charge-offs of $2 million. The charge-offs related almost entirely to the 3 loans moved to held for sale in the fourth quarter. They are all under contract and are expected to be sold in the first quarter.

Special mention loans decreased $12.2 million and totaled $65.3 million at the end of the fourth quarter. The decrease was primarily due to upgrades on 2 performing CRE loans totaling $11.8 million after the borrowers paid their delinquent property taxes. Otherwise, there were 3 other CRE loans totaling $13.4 million that are current but remain classified as special mention due to unpaid property taxes.

The $44 million C&D loan on a completed hotel that was downgraded in the third quarter is current and its property taxes have been paid, but it remained on special mention as it is still awaiting its certificate of occupancy. Substandard loans totaled $100 million and included $81 million of nonperforming loans and [ $19.3 million ] of loans on accrual status. This included $11.7 million related to a C&D loan on a completed multifamily project that was in the process of transitioning to permanent financing at the end of the year. Since that time, we received a paydown of $1.5 million, and it has been refinanced with a new CRE loan.

The ratio of our allowance for loan losses to total loans held for investments increased by 15 basis points to 1.56%, inclusive of specific reserves, while the coverage ratio of our allowance for loan losses to nonperforming loans held for investment decreased to 68% from 72%. When we exclude specific reserves and individually reviewed loans, the ratio of our allowance for loan losses to loans held for investment and those not individually evaluated was up 2 basis points to 1.35% at the end of the year.

Slide 13 has details about our deposit franchise. Total deposits remained stable from the third quarter at $3.1 billion, with some minor movement between categories. Our average all-in cost of deposits decreased by 30 basis points to 3.35% in the fourth quarter, including an estimated quarter-end spot rate of 3.15%. Tangible book value per share decreased slightly to $24.51 as earnings were offset by a $4.2 million increase in accumulated other comprehensive losses and $2.9 million in dividends paid to our shareholders. Our capital levels remain strong with all capital ratios above regulatory well-capitalized levels.

With that, we are happy to take your questions. Operator, please open up the call.

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

Congratulations to David and Johnny on the announcement not too long ago. Maybe starting off here on the $26 million C&D loan. Can you just give us kind of a little more color on a few things? Like just kind of curious what drove the migration, how close to completion the project is? How much undrawn commitment is left on kind of that project? And any evaluation on whether there needs to be an additional advance of funds to get the project over the finish line?

Sure. I'll start, and then I'll turn it over to credit. That was a huge question. I think some analysts guessed it because this moved to nonaccrual, so close to the end of the quarter, we took a little bit extra time to make sure that we could get the right estimate of fair value done. It did involve working with an appraiser and also our fund control since the project is in completion. It is over 50%, but I don't know if getting into all of those specifics is kind of necessary in the sense that it is $26.5 million outstanding. We're working with those parties. I think we've taken a $4.5 million specific reserve to get to what we estimate the fair value is as of year-end.

Anything else, Brendan?

Yes. And then maybe turning to capital for a moment. I think you folks completed the [ 1 million ] share buyback earlier in 2024 during the third quarter. Just kind of curious for any thoughts around appetite for another repurchase program or just capital allocation decisions in general as you move through this year.

Sure. Yes, thanks for recognizing what we were able to complete in 2024. I think we would be interested in looking at a stock buyback again in 2025. I think we needed to focus on credit kind of in the last quarter here. And then we can look back at starting up the stock buyback again.

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

Just a few questions around the margin. Lynn, do you see the average margin in December maybe on an adjusted basis for any noise on credit? And then just remind us how much you have in CDs coming due in the first and second quarter, the rates on those and where do you expect them to renew at?

Sure. So there's a few things at play that you pointed out. So I'll try to walk through a few of them. I would say relative to the fourth quarter, the NIM itself is moving up over the course of the quarter as our CDs continue to price down into the current rate environment. So it's a little bit higher, call it, about 5 basis points. As we look to the first and second quarter, we -- in the first quarter, we have about $650 million of CDs that have a weighted average maturity of about $460 million. We estimate that those would have an opportunity to come into the market now closer to a [ $400 million, $410 million ] idea.

At the same time, we do have the FHLB advances, which are only $150 million are maturing in the March time frame. They are priced at $118 million. We look to replace those with retail deposits, wholesale deposits and potentially some FHLB advances, but they'll obviously be priced higher than what they're maturing at. I think we'll see the impact of all of this more in the second quarter. So the first quarter has an opportunity to continue to expand because we are liability sensitive. And then once those funds reprice, the NIM may flatten out a little bit from there. Also with the Fed may be on pause till June, then as rates, if they move down further would have -- the NIM would have an opportunity to start expanding again maybe in the second half of the year.

So I think those are the things at play. I think one of the biggest drivers of our net interest margin will be loan production, which we have some visibility to the pipeline, and that also has a positive impact on our net interest margin.

Great. And then just on the growth outlook, can you give us a sense for where the pipeline is year-over-year or relative to the prior quarter, maybe on a percentage basis? And kind of what are you assuming for loan and kind of core deposit growth this year?

Matt, it's Johnny. So I can maybe just provide a little bit of a highlight. So ever since last year, I think we have, I would say, $200 million, $225 million on average at any given time that we're looking at in our pipeline. Obviously, our efforts are trying to identify the ones that fit our sort of credit standards and ensuring that they're generating proper returns to us. Obviously, we will get through that. But the pipeline has always been staying healthy in that respect at average around that range.

So we are -- for better quality credits, we are being more flexible as far as aggressively allowing our [ REMs ] to aggressively pursue those relationships a little bit on the pricing side. But obviously, we measure -- determine the pricing based on risk profile, right? So the better quality credits that we feel that's going to build great relationships for us on the long-term, we will go more aggressively on those rates. But overall, the pipeline has always been healthy. It's just a matter of our selection, if you will, and making sure that we are bringing in good relationship that's going to help us continue to expand on and grow the bank.

I think in the investor deck, Page 9, at the bottom, we put in the production that we were able to achieve in the third and fourth quarter. We were up at about $175 million in the third quarter, a little bit lower, $126 million in the fourth quarter. And then the pipeline has been building a little bit here for the first quarter. So I think we're looking at kind of leveraging off of those levels from a production standpoint. And then obviously, that growth is then a little bit contingent on what prepayments we see.

Okay. Low single-digit though seems like a reasonable assumption for the year with maybe single-family being flat to down?

I don't know if I'm going to be able to comment on all of those numbers. Go ahead.

Probably still early right now to -- but the -- I guess, overall, yes, we're trying to maintain, I would say, low to mid to low single-digits, I think, is certainly reasonable. But the -- again, we do have a lot of deals that we're looking at, at any given time in the pipeline. So I guess it's just a matter of how aggressively we want to compete on those deals to generate sort of the -- to secure these relationships. I mean we can give up on our credit standard, underwriting standards or be more price aggressive, but certainly, we do our best to avoid that. We don't want to compromise on credit. That's for sure. But we are willing to be a little bit more aggressive on the pricing side in order to secure relationships.

Okay. Great. And then last one for me, just on the expense run rate going forward into the new year here. What kind of range should we assume?

Sure. So in the fourth quarter, we were kind of up a little bit above the -- I think during 2024, we were kind of $17 million to $17.5 million. And in the fourth quarter, we were a little bit higher than that. I think as we turn the page to 2025, we brought on some new people looking at maybe some modest growth and initiatives. I think the expenses might be a little bit above that $17.5 million run rate. Obviously, first quarter kind of get the timing of payroll taxes. So it's probably a little bit higher than that in the first quarter.

Okay. Great. And then just on the legal professional line, should we expect more meaningful relief in that going forward? Or do you think that's going to remain kind of stubbornly high with kind of the workout on the credit side?

Yes, I think that's probably a fair statement. We've got a little bit of a road to walk down related to that in 2025.

Our next question is coming from Robert Terrell with Stephens.

This is Jackson Laurent on for Andrew Terrell. If I could just start off on deposits. I was wondering if you'd give us a little bit more color on what drove the strength in [ NIBs ] this quarter? And then just what your expectations are for noninterest-bearing deposits moving forward?

So you're focused on the increase in noninterest-bearing deposits?

Yes, correct.

Okay.

The noninterest-bearing deposits, specifically, we did -- in the fourth quarter, there was 1 or 2 larger sort of commercial client that brought in the deposits. So these are our efforts in obviously continue to try to develop and expand on our C&I [indiscernible]. So I would say as we bring in -- last year, we brought in some new commercial lenders and also continue to build out the talent there. So as we bring in these new lenders, certainly the expectation that they would be able to continue to contribute to our noninterest-bearing deposit generation as well.

And sorry, Jackson, the second half of your question, can you repeat it?

Well, I think Johnny just answered it. I was just kind of looking for expectations moving forward on noninterest-bearing deposits. And then I guess last one for me. Can you just remind us your interest on M&A in this environment and if the strategy overall has changed?

The strategy has not changed. We are continuing to look at other Asian American banks in our market areas to strengthen our branch network and go into San Francisco Bay Area. So it has not changed at all.

Our next question is coming from Kelly Motta with KBW.

I did want to circle back on credit. I appreciate all the detail on the slides. And it looks like construction, it's your 3 biggest NPLs, and it looks like almost 1/4 of the construction book is in NPL right now. Have you made any changes? Is it idiosyncratic? Any changes you've made in order to potentially mitigate problems ahead? Have you done a deep dive into the construction book as well and relative comfort level in the rest of it?

And then kind of third part of that question is, you provided some loan to values on your NPLs. I'm assuming those are updated valuations given C&D 92% weighted average LTV in NPL, but also just wanted to confirm that.

Sure. I'll take the -- I'll start with the last one. We are looking at as current valuations as possible since they did make it to NPL. We do get current valuations and try to get them at fair value as we go through our CECL process. I think as far as your question on kind of the deep dive, I think we have done some additional work to make sure that we understand those. You're right that it represents about 1/3 of our -- 1/4 to 1/3 of our construction portfolio. I think Johnny mentioned that we looked at it, those are just before 2022, maybe 2020, 2021 loans. I don't think there are loans similar to those in the portfolio. And...

I'll give you a little more color. The characteristics of these loans where they were done during COVID. They were initiated or originated during COVID, and they had problems with getting materials, problems with getting people to complete the projects and so forth. So that's where they stem from and so forth. And we are looking to make sure if we have any more, we have identified them and try to shore them up now before they go any further.

Okay. That's helpful. And I think maybe on the last quarter call or the call before, we were talking about kind of working through some of these legacy credit issues and hopefully kind of cleaning the slate by mid-2025. Is that still a reasonable time line here? Just wondering how you're thinking about this resolution process playing out. I think the release mentioned you're looking to kind of minimize losses as you work through. So just from a high level, it seems like that's kind of this last leg of this nice remediation work you've done over the past couple of years. So just trying to put some guideposts as to how we can think through this timing.

Okay. Given that we just put on this large loan on nonperforming. We're probably pushing that out to probably the end of 2025 to get all of these addressed. I do believe we're working hard on these. We have 2 of them that are on this list on sole deals that we hope to close within the next couple of weeks actually. So we're hoping that we'll begin to see this number go down.

Got it. Maybe last question for me to round it out. You kind of alluded to -- you've gotten through the buyback authorization this quarter and did a good job with that and have talked a little bit about M&A. Is it fair to say like the near-term focus is on the resolution of these NPAs and then you can kind of return to your strategy or you do have a ton of capital? Are you able to juggle kind of both that one?

Well, we're working on both items right now. But clearly, cleaning up the NPAs is a very high issue. We have a special team now working on that, that's reporting directly to the DLC. The team meets twice a week. I mean, get into the weeds here. But it's very important for us to do that. But clearly, we're working on both. I'm still meeting with people, other bankers and so forth to see if they're interested in joining us and so forth, okay, while I'm still here.

We have a question from Tim Coffey with Janney.

Lynn, if I can start with you and talk a little bit about deposit costs. I guess the rate of change in the quarter was a bit more than I had anticipated. Was it programs that were initiated during the quarter to bring those deposit costs down? Was it just kind of the final efforts of hard work? Can you kind of give me some color on what brought those costs down?

Sure. So I am going to give a lot of credit out to our branch network. It is a lot of hard work to bring in our deposits in the communities and branches where we're located. We brought down our wholesale funding percent to just barely 4% at the end of the year. So a lot of local deposits, but the interest rate environment was walking down, and we saw 50 basis points in September and then another 50 basis points during the fourth quarter. So what we saw in the fourth quarter was really the benefit of the September cuts.

And a lot of our deposits, which we've talked about in the past are basically 12 month CD product. So we have a very nice ladder. And as it matures, it reprices into the current environment. So 92% of our CDs now mature within the next 12 months. And with the weighted average interest rate on those is 4.30% kind of top end non-brokered is around 4%. So it has the opportunity to just naturally reprice. And I mentioned earlier, $650 million has a weighted average price of about $460 million, and that has an opportunity to reprice in the first quarter of 2025.

So I think we're seeing -- this is why we say we're liability sensitive. We're seeing them just reprice into the environment even if they are fully priced at a 12 month CD at about 4%. But as I mentioned, yes, the FHLB advances, we'll see that in the second quarter, which will -- they'll kind of offset each other, if you will, which will be nice to not have a big impact there. And then with loan production, we still have an opportunity to maintain our NIM or continue to grow it this year.

Okay. Great. And Johnny, if I can talk a little bit about kind of the pace of loan growth expected through 2025, aiming for the low to mid single-digits for the year, got it. Is it expected that -- is it reasonable to think that growth might be heavier in the second half of the year than the first half?

Well, obviously, from the get-go starting January 1, I've been pushing the loan production. But I think typically, Q1 is maybe a little bit slower, but then I do expect getting Q2, Q3 to really ramp up.

I think also, Tim, I don't know what everyone else has seen out there, but the Fed is on pause right now. Fed fund futures indicate maybe March or June. And then again, in the second part of the year, the curve ended up being a little bit steeper in the longer-term. So I think we're still navigating through a little bit of change. So I think earlier I was mentioning low to mid single-digits. I think it is probably still a little bit of a challenging environment given the interest rate environment and some transition out there and talks to things like tariffs and other things that might impact the marketplace. So I think your comment is a good one, and I think that's what we're seeing right now as well.

Yes. I'll just add to that, obviously, we've able to -- we were able to successfully bring in some more additional talents on the commercial lending side at the beginning of this year. So hopefully, they will be able to contribute to our overall sort of strategic initiatives that we're driving.

Okay. Great. Appreciate that. And then, Johnny, just my last question. When it comes to mitigating payoffs, is the company -- or do you plan to employ any new strategies to slow that as much as you can? I mean, I understand some things are just out of your control. But if there are things that are in your control, are you -- what are you doing to get out in front of them?

Sure. No, I appreciate the question. That's a good question. And actually, since last year, we've actively looked through our portfolio with all the [ REMs ] with all our teams. And actually, we do try to look ahead, looking at the maturities and so on and trying to get ahead a quarter or 2 to start having that dialogue conversation, just kind of get a feel of what the borrowers may be planning to do, what their thought is. But unfortunately -- maybe because of the elevated high interest costs, some of our borrowers who have excess funds on hand, sometimes they just decide to just go and pay these loans off.

And then obviously, we -- there are some by our own business decision, we decided to let go that we felt potentially may be problematic. And then yes, that's -- we always try to stay ahead by looking ahead at these borrowers and see if we can get in front of them to establish some retention sort of strategies.

And then half of our portfolio, Tim, is our mortgage products. And so I think we -- some of it is commoditized, some of it is specialized. And I think there's opportunities there to try to be preemptive and encourage renewals in the current environment. I think as we know, a portion of it is their hybrids. So they reprice after 5 or 7 years. So these aren't 30 year mortgages. So some of our borrowers have sensitivity to the interest rate environment. So trying to work to retain that business as it moves from its fixed to floating period. So I'd say we have some programs there as well.

Thanks, Tim. And then I'm sorry, go ahead, Johnny. If you do have any closing remarks.

Okay. Is that all the questions?

Yes. That's it.

Okay. Well, 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.

Thank you, ladies and gentlemen. This does conclude today's call, and you may disconnect your lines at this time, and we thank you for your participation.