Prepared remarks
Please note this conference is being recorded. I will now turn the conference over to your host, Rebeca Rico, Investor Relations. Ma'am, you may begin.
Thank you, Rebeca. Good day, everyone, and thank you for joining us today. We are pleased to report another solid quarter of earnings and continued progress across the key metrics we have been focused on. We generated net income of $10.1 million, or $0.59 per share, which represents a 13% increase from the same quarter in 2025, as we improved credit quality, grew loans and deposits, and took capital actions. While net income decreased $1.2 million compared to the prior quarter, this decrease relates mostly to REO sales during the first half of 2026, as we resolve our non-performing assets. We did make further progress on credit quality during the quarter, with non-performing assets declining 11% to 1.02% of total assets. Loan originations accelerated in the second quarter with $159 million of new loans at an average yield of 6.3%. Our lending pipelines remain healthy across the franchise, and we expect continued progress on loan growth in the second half of the year.
On that note, I want to highlight an exciting development in our franchise expansion into Northern California. We recently announced the opening of a loan production office in Burlingame and hiring of a commercial banking team in the San Francisco Bay Area that will be led by John Curtis. John brings over 37 years of financial services experience, including serving as President and CEO of the Bank of the Orient, and has a strong track record of building high-performing lending organizations. The San Francisco Bay Area is home to one of the largest Asian-American communities in the United States, and we believe this team and the loan production office will help us expand our commercial banking business in a market that is a natural fit for RBB. Deposits grew $50.8 million in the quarter. Our deposit mix continued to improve, with non-interest-bearing deposits increasing to 17.5% of total deposits and continued reductions in our reliance on wholesale funding.
Our steady growth in core funding, combined with our strong regulatory capital, help position us to redeem $40 million of our subordinate debt on July 1st, which will reduce interest expense in future quarters. Overall, we believe the second quarter demonstrated continued progress in improving RBB's fundamental earnings power. We are on track for a strong second half of 2026. With that, I'll hand it over to Lynn to talk about the results in more detail. Lynn?
Thank you, Johnny. Please feel free to refer to the investor presentation we have provided as I discuss the company's second quarter of 2026 financial performance. Net income for the second quarter was $10.1 million, or $0.59 per diluted share. This compares to $11.3 million or $0.66 per diluted share in the first quarter, and $9.3 million or $0.52 per diluted share in the second quarter of 2025. The decline in net income from the first quarter was due primarily to $1.1 million in lower gains from REO sales as we continued to resolve our non-performing assets. The year-over-year improvement of approximately 13% in earnings per share reflects the impact of share repurchases and the sustained progress we have made in growing net interest income and reducing credit costs over the past year. Net interest income was $30.1 million for the second quarter, compared to $30.5 million in the first quarter.
The decrease was primarily due to lower FHLB dividend income and higher subordinated debt service, offset in part by a lower cost of deposits. We received a special FHLB dividend of $430,000 in the first quarter versus no special dividend in the current quarter. Our $120 million in subordinated debt repriced from its fixed 4% rate to a floating rate of 6.98% effective April 1st, which added approximately $830,000 of incremental interest expense in the second quarter. At the same time, deposits have repriced lower and the cost of average interest-bearing deposits declined 5 basis points to 3.34%. Our net interest margin was 3.06% for the second quarter, down 9 basis points from 3.15% in the first quarter. The primary drivers were the sub-debt repricing in the second quarter and the FHLB special dividend we received in the first quarter. On a year-over-year basis, our net interest margin improved 14 basis points reflecting the cumulative benefit of our deposit repricing efforts and improved earning asset yields.
On July 1st, we completed the partial redemption of $40 million of our subordinated notes at 100% of par, plus accrued interest, for a total payment of approximately $40.7 million. The redemption, combined with the new 1 million share repurchase program announced in June, reflects our strong capital position and commitment to optimizing our capital structure. As a side note, our cash balances at June 30th were elevated compared to prior quarter-end levels, as we had accumulated cash in advance of the sub-debt redemption. Non-interest income was $3.0 million for the second quarter, compared to $4.3 million in the first quarter. The $1.3 million decrease was due mainly to the lower gains on sale of REO. In addition, the first quarter included a $484,000 recovery on a previously charged-off acquired loan and $360,000 of interest income on tax refunds related to federal tax credits. There were no similar items in the second quarter.
These decreases in non-interest income were offset in part by higher gains on sale of loans of $640,000. Non-interest expense was $19 million for the second quarter, a modest decrease from $19.3 million in the first quarter. We expect our expense base will continue to track within the $18 million-$19 million range we have mentioned in the past. The efficiency ratio was 57.5% for the second quarter, compared to 55.4% in the first quarter, with the increase driven primarily by lower non-interest income. Second quarter new loan originations increased 21% from the first quarter. Loans held for investment of $3.3 billion at June 30th were stable quarter-over-quarter. Our loan to deposit ratio ended the quarter at 98%, as strong deposit growth supported loan originations. Total deposits grew $51 million to $3.4 billion, with retail deposits increasing $94 million and wholesale deposits declining $44 million.
Non-Interest Bearing Deposits increased to $592 million, representing 17.5% of total deposits, up from 15.8% at the end of the first quarter. We recorded zero provision for credit losses in the second quarter, compared to a $200,000 reversal in the first quarter and a $2.4 million provision in the same quarter last year. Net charge-offs totaled just $83,000 in the second quarter, or essentially 0% of loans on an annualized basis. Non-performing loans declined $20.8 million, or 47%, from the prior quarter to $23.8 million. The primary driver was the transfer of a $19.4 million credit to REO. This credit is our largest non-performing asset, and we continue to move it through the resolution process. Special mention and substandard loans declined 16% to $82 million from $97 million at March 31st. Criticized and classified assets have improved meaningfully over the past year, and we believe the portfolio continues to trend in the right direction.
Our allowance for credit losses remained essentially flat at $43.7 million, and as a result of the decline in non-performing loans, the allowance coverage of non-performing loans improved significantly to 184% at June 30th. The allowance represents 1.32% of loans held for investment, which we believe is appropriate given the improving credit trends. Book value per share increased to $31.15, and tangible book value per share increased to $27.23, or approximately 1.5% higher when compared to March 31st. Our capital ratios remained strong with a CET1 ratio of approximately 18% and a TCE to tangible assets ratio of approximately 11%. We were pleased to announce that our board authorized the repurchase of up to 1 million shares of our common stock, representing 6% of shares outstanding. Our board's decision was due to the company's strong capital position and reflects the work we've done resolving non-performing assets and returning the bank to higher profitability. This concludes my prepared remarks. Operator, we are now ready to take questions. Thank you.
Questions and answers
Thank you. Ladies and gentlemen, at this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Thank you. Our first question is coming from Brendan Nosal with Hovde Group. Your line is live.
Hey, good morning, folks. Hope you're doing well.
Hi, Brendan.
Hi.
Maybe just starting off here on the net interest margin. I guess sequential pressure this quarter as expected given the sub-debt move from fixed to floating. Looking ahead to the third quarter and the tail end of this year, can you just walk through margin dynamics and where you think margin will land in the third quarter, just given the partial repayment of the debt issuance?
I think the net interest margin still has an opportunity to improve based on opportunities for loan growth. Also retiring a portion of the subordinated debt should also bias the margin back up. We continue to monitor our deposit costs very closely. The average cost of deposits for the quarter were higher than the spot rate at the end of the quarter. I think costs will continue to be relatively the same or slightly improved. There is an expectation that the loan production that we talk about in our materials will come through as net loan growth in the second half of the year. We have been liability sensitive. With rates likely higher for longer, I think it'll have a neutral impact on our funding sources while the earning asset side probably has a chance to improve. I think just around where we were able to achieve in the first quarter, and above where we are in the second quarter.
All right. That's really helpful, Lynn. Maybe on a related note, can you just talk about the competitive backdrop for core funding, and how it's evolved over the past couple of months across your footprint?
I'll start with a couple of comments. From a competitive landscape, I think we all recognize that the market has generally moved up. We started the quarter with deposit rates being kind of the high end around the 3.75% mark and kind of ended the quarter with wholesale funding being closer to 4%, maybe even 4.15%. We've seen that reflected in our competitors' pricing as well when you go out and look at different specials. We've been successful inside our marketplace with our customers, pricing in that higher end between those 3.75% to 4%. We've also had success bringing in some non-maturity deposits and we did grow non-interest-bearing deposits as well. It remains very competitive and it moved up towards the end of the quarter compared to the beginning. Our biggest opportunity continues to be how we grow non-interest-bearing deposits.
The market is obviously still very competitive as far as deposits are concerned. What we launched a couple of months ago in Q2 with the Flex Savings has been helping us to retain many customers at a lower cost.
Okay, perfect. I'm going to sneak one more in there. Just on the new loan production office and new lending team in Northern California. How should those of us on the outside benchmark breakeven times and the portfolio size that you think can be achieved in the medium term from the group that you've added there?
What I would say is this team brings a lot of relationships that we expect to bring to RBB in the Northern California region. This is a new team with combined experience and a very strong network within the communities. With this team on board, I would expect, hopefully during the second half of the year, to contribute to our commercial loan growth. Hopefully that will move us to mid to higher single-digit growth marks on a medium-term basis. That's what I would be expecting of them.
I do think the addition of the loan production office and the team will help. We have had strong originations and production; it has just been more than offset by loan sales, payoffs and paydowns, which has included strategic decisions to allow certain credits to refinance away. At one point there was an idea that rates might come down; now we see higher for longer, so we have let some loan activity go to others. When we think about loan growth in the second half of the year relative to a flattish first half, production might be mildly higher than what we saw, and we expect refinancing and payoffs to be lower. Maybe we are at that mid-single-digit range on an annualized basis; it might be a little higher. We expect it to contribute, but I don't know that we're prepared to say specifically what the LPO's portfolio size will be.
Yes.
Maybe I can just comment that I see their pipeline is very healthy.
Okay. That's helpful.
Thank you. Our next question is coming from Kelly Motta with KBW. Your line is live.
Good morning. Thanks for the question. Congrats on getting the capital plan out there back in June. I think you have about 6% of your shares authorized as part of that repurchase program. You guys obviously have a ton of capital and have been making progress on the credit front. I'm wondering the appetite and pace we should be expecting now that this is out. Thank you.
Thanks, Kelly. As far as appetite, I think we've demonstrated and we still believe investing in ourselves is a good use of our capital. Our appetite is healthy. We have traded a little bit below tangible book, and we're right around that level now with the second quarter results out. I think we'll pay attention to opportunities relative to our stock price.
Okay. Great. You noted that the move to OREO, that's one of your larger problem assets. Presumably there'll be some sort of workout on that. Any updated thoughts on the cadence? Obviously progress has been made; I assume you want to get that off your books probably ASAP. Thank you.
ASAP is a good way to think about it. As the loan moved from a non-performing loan to OREO, we did view the OREO value as appropriate. It is supported by a recent as-is appraisal. We also recognize that this is a large, partially completed construction project, and it will require the right buyer. We also appreciate that time is a factor. Considering all of that, we would be looking for a resolution in the second half of this year. We appreciate it is still complicated.
Okay. Got it. I guess lastly for me, clearly you have the new team coming on and a new location in Northern California. Wondering as you look ahead and think about where you stand now, any additional areas that you're looking to build out on in terms of the footprint in order to support growth and vis-à-vis how we should be thinking about that in the expense base? Thanks.
More immediate, since we just hired this team, the focus is on making this team successful given the very healthy pipeline they have. We're not looking beyond that at this time, Kelly. We're focused on being well established in the Northern California region and making sure this commercial team gets the support they need.
Got it. Lynn, do you have any color or commentary on the expense run rate? It's been pretty consistent the past couple quarters now. Any gives and takes here?
The run rate has been consistent and for now it should remain at a fairly consistent level. There are some opportunities down the road as we make technology decisions and as credit continues to work itself out. In the near term, we're probably right about this level.
Got it. I'll step back. Thank you so much.
Thank you, Kelly.
Thank you. Our next question is coming from Matthew Clark with Piper Sandler. Your line is live.
Good morning, everyone.
Hi, Matthew.
Can you just update us on the CDs coming due over the next couple of quarters here and the roll-on, roll-off rates?
Sure. For CDs, we introduced the Flex Savings. The percent of CDs as a part of our balance sheet is a little bit lower. At the end of the quarter, we had about $1.5 billion in CDs that would mature within the next 12 months, and they have an average price of about 3.60%. Just shy of 40% are able to mature or reprice in the third quarter. The ones that are coming due in the near term are around a 3.70% cost. They have an opportunity to reprice into the current environment to the extent that we replace them with retail funding. The lower-costing CDs are maturing in the fourth quarter and into next year. That's when we may see a bit more impact to the cost of funds. At the same time, that's when we would probably see the impact to the earning assets coming in at a higher yield as well. Regarding Flex Savings, that product has some attractive qualities to it, and we've been very successful pricing it in the high threes without moving into the wholesale funding rate level.
Got it. Okay. On the retail deposit growth this quarter, really strong. Can you give us a sense for how much of that you would attribute to seasonality and also how much of that was from new versus existing customers?
We did have attractive non-interest bearing deposit growth in the quarter. A large portion of it has some seasonality to it. Some balances were included at June 30th and some of those dollars were used directly after quarter end. A portion of the growth is staying in non-interest bearing and then a portion is moving over to a non-maturity interest-bearing product. Non-interest bearing deposits will likely moderate; the period imbalance was a little high. We have customers that have large balances in there doing business and we expect some in-and-out movement, and the average to migrate up. We expect to be higher, just probably not the full $65 million that came through quarter end to quarter end.
Okay. On gain on sale, you sold more loans than I think most of us probably expected. Is that maybe a pull forward? How should we think about the volume of loan sales going forward and whether or not that gain on sale revenue might reset here in the back half?
I'll answer it in two parts. On SBA, we have a regular cadence there. There's a good pipeline in production and a strong secondary market. The premiums are attractive and the volume in the first and second quarter may indicate some consistency. On the mortgage portfolio, volumes are higher and premiums are lower, so that is a bit different. We're happy to keep mortgages on the books because they have attractive yields. We've also tried to manage the balance sheet to keep mortgage and commercial portfolios roughly a 50/50 split. To the extent that we have really strong production, it gives us an opportunity to package up more loans and sell them. It was probably on the larger side relative to what a typical quarter loan sale would look like, so maybe not a pull forward as much as an opportunistic execution.
Okay. Just back to the expense guide. You reiterated the $18 million-$19 million, but it sounded like you're guiding more toward the higher end of that range. Is that fair? Or what would get you closer to $18 million? Where's the source of relief here? Or should we not expect any?
That's a fair comment. Opportunities in the future relate to our core system and other technology investments, which have the potential to lower our run rate while we invest. Another opportunity lies in professional service fees as we continue to resolve credit. Those are our two primary opportunities. At the same time, we're adding folks to increase production and improve the quality of production. For now, we're probably at the higher end of the range.
Got it. Okay, the last one for me, just on the share buyback this quarter. Can you give us the weighted average price that you bought shares back?
I apologize. I do not have that with me at the moment.
If not, the number of shares you bought back, we can back into it.
It's just around 4 million. I apologize; I think I left that note on my desk. I'll have to follow up in a moment with that question. I would share that the majority of the shares that were repurchased in the second quarter related to the authorization that was outstanding from last year. That leaves the majority of the program we just announced still outstanding as of June 30th. I will pull those other pieces of information while we're on the call.
Okay. No worries. Thank you.
Thank you. Our next question is coming from Jackson Laurent from Stephens. Your line is live.
Hey, good morning. This is Jackson on for Andrew Terrell.
Hi, Jackson.
Most of my questions have already been asked, just one for me on origination yields. I know you guys have talked pretty consistently about staying disciplined on pricing, and it was good to see yields stay pretty flat quarter-over-quarter. Just wondering if you'd give us some updated color on how competition has been shaping up for credit in your markets, if any of the dynamics have changed since we last spoke in April.
Generally it hasn't changed much, Jackson. It's still fairly intensive on the commercial side. Five-year fixed loans, for example, are around 5.25% to 5.5% on average in the market. We have been trying to stay consistently disciplined on our commercial pricing. We look at each deal from a relationship standpoint. If it's just a single transaction without potential ancillary depository opportunities or fee income, we want to stay above the 6% mark rather than competing at sub-market rates.
Got it. Thank you. That's all I had. Thank you for taking the questions.
Thank you.
Thank you. Our next question is coming from Tim Coffey with Brean Capital. Your line is live.
Thank you. Morning, everybody. Regarding the competitiveness of deposit pricing and your loan outlook: as we think about the loan-to-deposit ratio, are we bumping up against the level you feel most comfortable at?
Thanks, Tim. We have run the balance sheet in the high 90% loan-to-deposit ratio range, and we are comfortable there. As far as bumping up against it, some have suggested that, as long as there's appropriate risk management, you can operate above 100% now. Given our balance sheet and lower reliance on wholesale funding, and some growth opportunities, there is still opportunity to operate in the high 90% loan-to-deposit ratio range. I'm not sure it will change materially, but we're comfortable here.
I ask because the last time we saw rates move higher, the loan-to-deposit ratio did move above 100%. If we do see rates go higher and there's more opportunity to book higher yields on earning assets or loans, would you consider going above 100, or is that a hard ceiling?
It's not a hard ceiling, but we also want to be mindful of the marketplace and perception. We did deleverage at one point to bring the ratio down, but there may be opportunity to operate above 100% as you point out. Just to circle back on the repurchase question: it looks like we repurchased about 181,000 shares in the quarter at an average price around $24.65 to $24.75.
Speaking on capital returns, any thoughts on increasing the quarterly cash dividend?
I think we're looking at it. We needed to prioritize getting these capital actions in place. As we look forward, it's something we would consider.
Lynn, can you remind me about the tax rate again? Is it permanently going to be at this level it's been at the last couple of quarters?
We are looking at opportunities that are out there. Until there is something more definitive, our effective tax rate is around the 28% level.
Okay, great. Those are my questions. Thank you.
Thanks, Tim.
Thanks, Tim.
We have a question from Kelly Motta with KBW. Your line is live.
Hi, I apologize. Matt Clark took my question on the movement on non-interest bearing deposits, so I'm good. Thank you.
All right.
Thanks, Kelly.
Thanks, Kelly.
As we have no further questions in the queue at this time, I would like to turn the call back over to Mr. Johnny Lee for any closing remarks.
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. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.