It is now my pleasure to turn the floor over to your host, Rebeca Rico. The floor is yours.
Thank you, Sylvie. 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.
Net charge-offs were $122,000, or one basis point of average loans on an annualized basis. Our tangible book value per share increased to $27.44 at September 30th, 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.
Thank you. The floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star one. We do ask if listening on speakerphone today, please pick up your handset while asking your question to provide optimal sound quality. If you pressed star one earlier during the call today, please press star one again to ensure our equipment has captured your signal. Please hold one moment while we pull for questions. Your first question will be from Liam Coohill at Hovde Group. Please go ahead, Liam.
Hi. Thank you for taking my questions.
Yes.
Has 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, a little bit of a headwind, but overall, I think many of our borrowers right now on the commercial side particularly recognize the higher rate environment. At least we're not faced with the, I'll just say lesser so, the challenges that we had encountered during first half and maybe first part of Q3, where we were challenged with trying to compete with the below six sort of rates at a five-year fix. We see lesser of that. So it allows us the ability to not have to defend or go as aggressively as we may have to compete for deals. So that's 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 may want to renegotiate certain terms and conditions.
Thank you. I guess moving to the other side of the origination question, I noticed payoffs declined substantially this quarter. Do you anticipate payoffs remain near current levels, especially given how low they are?
Yeah. Lynn maybe can chime in as well. So, yeah, we do expect payoffs to get tempered, kind of trending downward, given, again the high rate environment. I think there are certain borrowers that typically may want more aggressive rates are not pushing those below six anymore out there as much. So we do anticipate pay downs payoff to get tempered during the next couple of quarters or so.
I would just add to Johnny's comment regarding tempering is appropriate. I think the other thing that we observed in the first half of this year was some strategic payoffs as we've continued to improve credit quality, and those have also tempered as well.
That makes sense. Thank you. Last one from me. With the loan-to-deposit ratio kind of in that 100% realm right now, where are you comfortable keeping that ratio moving forward?
Sure. 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%. I think that's managed to a large extent with our production levels that we just kind of talked about. 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'll step back.
Thank you.
Thanks, Liam.
Next question is from Matthew Clark at Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Hi, Matt.
Just on that point. Hi, Lynn. On that point on gain on sale, expecting it to step back up. Roughly half a million is the right way maybe to think about it from a run rate perspective? Just trying to make sure we are in the ballpark.
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. We would expect to participate there. 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, say first quarter, but not necessarily the second quarter which is a little bit outsized. We are a taker in the market there. We believe our mortgage product continues to be priced competitively. It should give us an opportunity to sell some of our loans.
Got it. Okay, great. On the new originations, $154 million, 6.3%. Can you give us a sense of the types of loans that are in there? Just thinking through kind of the growth in loans this quarter was largely SFR, so just want to get a sense for. It sounded like you felt like there was some good momentum going into 4Q. Just your thoughts on loan growth in general.
Yeah. This is Johnny. Hi, Matthew. Q3, I would say approximately 2/3 of the growth was contributed by SFRs. We also see growth in C&I and C&D loans or construction loans. One positive thing we see on the C&I and C&D loans is by number of accounts, if you will. We have much larger number of new borrowers or new loans that hopefully as they utilize these C&I, C&D credits, that hopefully that can contribute to our net loans in the near future.
Okay. And then just on the margin and kind of digging into it a little bit. I know you've got, what, 52% of your loans are variable rate, but those include ARMs. Trying to get at what portion of your loan portfolio resets with the Fed. Then how should we think about your interest-bearing deposit beta, assuming we get another rate hike here in December?
Sure. Thanks for starting with the loan portfolio. About 52% is variable. We do kind of look at what reprices over the next two years. I would share that about two-thirds of that population is eligible to reprice in the first year. They don't all immediately reprice. There's 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 while 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. Turning to the liability side, when 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'll moderate over time. There's 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, I think it's going to provide a little bit of pressure.
Okay, so thinking about that 306 kind of adjusted margin ex the interest recoveries and the special FHLB dividend, a little pressure on that kind of normalized margin, maybe hanging around three. Or you think you might start dipping below three?
I don't have a crystal ball. I think there's 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 two-thirds reprices over the one year. We're also participating in new loan originations in the current environment. I think there'll be comments on the pipeline looks strong. I think to Johnny's point, we have C&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. 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's an opportunity for our net interest margin to be above 3%, but it does 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 I missed it here. Lynn, can you just quantify the amount of the interest recovery that impacted NIM in the quarter?
Kelly, it was around $700,000. We were able to recapture some interest on the payoff of a non-performing loan.
Got it. That's helpful. As we think about, you guys have continued to make progress on the credit recovery story. In higher for longer, as you kind of look at what's left to be done, how are you guys thinking through whether at the margin, if you're seeing any incremental headwinds on the credit side from borrowers and the potential to slow there? Thanks.
Kelly, if I'm understanding your question, I think at this point, RBB's non-performing assets at this point are very well understood that they're kind of down to three primary assets, and we're looking carefully at what we would classify as criticized and classified and criticized loans. Am I understanding your question correctly?
Yeah. I guess you still have what's left to work out there, I guess the potential-
Yeah
if you're seeing any kind of potential incremental headwinds from, I guess, the rest of the portfolio.
Right. I think that's how we would look at our criticized and classified loans, and those have continued to decrease, and we monitor them carefully in the current environment. I would say generally, no. There's always some credit that you have to be managing that risk. But that's an area that we think is under control. Dare I say.
Got it. That's helpful. 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 kind of as you look ahead, what's the overall pipeline for growth? Is there any changes in mix given the rate environment we're in?
Hi, Kelly, this is Johnny. I would say, obviously, with our Northern California LPO, now the teams are complete in place. We see a great deal of momentum there and much of the growth that from there it's going to be very much all commercial loans, be it C&I, CRE, even including construction. We do see that contribution making a very positive contribution for us. That hopefully will help us change the mix a little bit, I guess, overall. Especially single-family resi loans are typically Q4 regard even without the rate hike, if you will. Typically Q4 is seasonality-wise is typically 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 that mix a little bit.
Great. Thank you. I'll step back.
Thank you.
Next question comes from Andrew Terrell at Stephens. Please go ahead.
Hey, good afternoon. Hey, Lynn, maybe just wanted to start just checking in on kind of the expectation around the expense run rate. Then you guys, you've managed expenses very well throughout this year, just what type of expense growth you're targeting, and if you could talk about any specific drivers, like where you're most focused from an investment perspective right now.
Andrew, I was tracking the first half of your question. Was the second half related to non-interest expense as well? Can you just repeat that?
Yeah, sorry. Just expectation kind of near term on expense run rate and then just bigger picture, you guys have managed to 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're most focused in right now?
Great. Okay. Thank you. Sorry, I didn't hear the end of it the first time.
No problem.
The expectation of our non-interest expense run rate based on where we've been making investments and able to grow, as we mentioned, this is our first full quarter with the loan production office in Northern California. Those are included in our run rate at this point in time. I think there's 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 that showed up maybe in some of our professional fees. We also think that some of our compensation costs will be reflective of our growth. But we had a couple 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 taxes. There's definitely some things that we expect to go down. The last one I would comment on is our data processing. We've spoken a bit about those costs. There's an expectation that we'll have an opportunity to improve our run rate in that particular category. That should show up potentially in the fourth quarter, but more likely first quarter in 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 as we will deploy the proceeds there. There's a lot of different things that add up to our expectations of being around $19 million, call it plus or minus $100,000, $200,000.
Sorry it's not a short answer, but there's a lot going on. To your point, we work very hard to manage our overhead.
Yeah, no, I really do appreciate all the added color there. If I could go back to just one question around the margin. If I look at your time deposit costs as of the third quarter, 360-ish or so. Lynn, it sounded like pretty 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 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. Six-month money is priced probably just over 4%. One-year money, given the expectation of rate hikes is up over in the brokered market, up over 450. So competing for those dollars relative to our balance sheet, 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 one from me. It was good to see.
One 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 little 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 the curve seems to potentially be flattening out. Not perfect, but that does support additional production to then move generally into this environment. So that is, I think, what will be a natural hedge against some of the deposit pricing. But funding costs will go up. That is unavoidable in the near term.
Yep. Got it. If I could just ask one last one. 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. Your margins are better, ROA's better, but your stock is still trading a little bit below tangible book value. I guess when you put all that together, I know you're limited by liquidity a bit, but would you ever consider a tender offer? Are there other means to right size 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 think we'd need to put a few things in place, which is getting our credits to be, I think, better understood, to your point, sustainable earnings. I think the participation in our stock buyback program has been consistent. We are looking, I think, at the sub-debt as well as maybe an opportunity to right size that relative to our balance sheet. I don't know if I would say a tender offer on our stock at this point in time. Appreciate that we're trading below tangible books, so it is an attractive investment.
Got it. Thanks for taking the questions.
Yeah. Thank you.
Thank you.
Next question comes from David Hart at Grant's Private Wealth Management. Please go ahead.
Good morning, and I'm 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 one 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 expectations for the timing and exit from that?
Hi, David. It's Lynn. I think we have shared that this REO was a 60% or so completed construction project in the Los Angeles area by one of the major sports venues. It's now moving through its non-performing asset life as an REO. It is now listed for sale above the carrying value that we have on our books. Given the size of the project, we're expecting that we'll have an opportunity to exit it in the first half of next year.
Well, that would be a positive. Moving on more into the asset quality. Noticing any common threads among substandard and other criticized loans, for example, are they running into problems due to fuel prices or other things? Just asking if there is any common themes or threads in that.
Good question. We look at that as well. At this point, we haven't identified any common threads for the assets that we are looking at or managing.
Last question. 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?
Yes, I did notice we are down just a little bit quarter-over-quarter. We do actively manage the portfolio. 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 the securities portfolio is a good one.
Last question. Any comments? Are you pleased or disappointed? Any other comments on the new San Francisco Bay Area loan production office? How's that one going?
No. Hi there, this is Johnny. No. So far, so good. Everything's tracking very positively. We're very pleased with the team. Yeah, they're making great contributions right off 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.