Johnny Lee

Thank you David.
As David mentioned loan school at a 5.8% analyzed rate in the third quarter supporting this growth was a very robust $175 million of loan production which comes after a strong second quarter loan production of $117 million.
Net loan growth has been tempered by payoffs and paydowns due primarily to borrowers, lack of further needs for their loans or their desire to wait until rates come down further before refinancing. Payoffs also included loans with higher potential credit risk that RBB wanted to exit and loans that were refinanced by other banks that offer aggressive rates and credit terms that we are not willing to match.
Absent a change in this dynamic, we expect our loan balances to continue to grow at a moderate pace which will gradually accelerate as we continue to hire more seasoned commercial lenders. We intend to continue growing loans and ARO matter by focusing on credit quality and relationships that will generate reasonable and sustainable returns for RBB.
Starting on slide 9 of the investor presentation, we provide some additional details on credit. Nonperforming loans total $60.7 million or 1.52% of total assets at the end of the third quarter, the $6.1 million increase on the second quarter was mainly due to two loans, totaling $13.3 million that migrated to nonaccrual status, offset by $6.1 million in full payoffs and $1.2 million in partial charge offs.
99% of our nonperforming loans are in our operating markets. So we feel comfortable that we have a good handle on them and can work effectively to resolve them. However, it will take a little time. Slide 10 has details about our nine MPLs that are greater than $1 million. The two new nonperforming loans are a $10 million C&D loan and a $3.3 million CRE loan.
The day long is on a completed mixed use commercial property that has a pending certificate of occupancy and remains well secured.
The CRA loan is well collateralized based on a recent appraisal. However, there is an environmental issue and power has stopped making payments as an action plan for remediation effort is put in place with respect to the increase in special mention and substandard loans. We are closely monitoring our bars performance including the status of unpaid property taxes to ensure we are capturing and measuring the risk in our loan portfolio.
This includes reporting special asset meetings, external credit review, active engagement with our borrowers. Our special mention loans increased $58 million in total of $77.5 million. At the end of the third quarter, the increase was primarily due to a $43.6 million C&D loan for a completed hotel construction project and five CRE loans that totaled $25.2 million.
All of these loans are current but they have unpaid property taxes which triggered the downgrade. We are working with bars to resolve their delinquent property taxes. In addition, an $11.7 million C&D will migrate to substandard. It is on a completed apartment project that is in process of stabilization and transition to bridge finance.
However, the process has taken longer than anticipated and there are also delinquent property taxes. Nonetheless, this loan remains current on its payment. Substandard loans totaled $79.8 million million at the end of third quarter.
The $16.8 million increase from the second quarter was primarily due to downgrades of three loans totaling $25 million in $11.7 million C&D loan with payments current and as previously described the $10 million C&D loan and $3.3 million CLE loan which migrated to nonaccrual status. This increase was offset by loan payoffs of $6.7 million charge offs of $1.2 million in upgrades and paydowns totaling $884,000.
With that, I'll hand it over to Lynn who can go into some more financial details about the course.

Lynn Hopkins

Thanks, Johnny. Please feel free to refer to the investor presentation we have provided as I continue to share comments on the company's third quarter of 2024 financial performance slide. Three of our investor presentation has a summary of our third quarter results.
As David mentioned that income was $7 million or $0.39 per deleted share which matches last quarter's EPS the 1 basis point increase in net interest margin to 268 was less than we had expected. But the loan production combined with stabilizing funding costs should support continued expansion.
Over the next few quarters, interest income increased $1.5 million with growth in loan interest income making up for a decline in interest earned on securities non interest income increased by $2.3 million to $5.7 million due mostly to a $2.8 million recovery on a fully charged off loan from an acquired bank scientist.
Expenses increased by $297,000 to $17.4 million due to higher salaries and other expenses which were partially offset by lower insurance regulatory and legal expenses slides. Five and six have additional details about our loan portfolio and yields commercial real estate loans as a percentage of total loans expanded modestly to 41% while C&D loans decreased to 6%.
Slide 7 has details about our $1.5 billion residential mortgage portfolio which consists of well secured non QM mortgages primarily in New York and California with average LTV of 56%.
Following up on John's comments about credit slide 12 walks through our allowance for credit losses which increased $2.1 million in the third quarter. The increase was due to a $3.3 million provision for credit losses including higher specific reserves of $2.5 million offset by net charge offs of $1.2 million specific reserves increased based on the decrease in the fair value of collateral for two properties related to one relationship.
The charge offs were primarily related to C&D loan and CRE loan which are written down to their estimated fair value and included in our largest non performing loan table on page 10 of the investor deck. The CRE loan had a carrying balance of $1.2 million at the end of the third quarter and has since been paid off with no further loss in early October.
The ratio of our allowance for credit losses or ACL, the total loans increased to 1.41% inclusive of the specific reserves. All the coverage ratio of our ACL to non performing assets decreased to 72% from 76%. This decrease was due in part to an increase in individually evaluated loans which did not require an additional allowance for loan losses offset in part by higher specific reserves.
513 has details about our deposit franchise total deposits increased from the second quarter to $3.1 billion with growth in all deposit types. While non interest bearing deposits remain stable.
Our average all in cost of deposits increased by four basis points from the second quarter to 3.63% in the third quarter including an estimated quarter end spot rate of 3.53%. Tangible book value per share increased to $24.64 due to earnings. The creative share repurchases and a recovery of AOCI offset by dividends of about $3 million.
We repurchased about 508,000 shares at an average price per share of $21.53 in the third quarter which completed the program authorized in February of this year.
Our capital levels remain strong with all capital ratios above regulatory well, capitalized levels with that. We are happy to take your questions operator if you could please open up the call.

Question and Answer Session

Operator

Certainly. The floor is now open for questions. (Operator Instructions)
Brendan Nosal, Hovde Group.

Brendan Nosal

Hey, good morning folks. I hope you're doing well.

Lynn Hopkins

Thanks, Brendan.

Brendan Nosal

Just want to start off on the, the margin here a little bit.

David Morris

We lost you.

Lynn Hopkins

Did we lose the whole line?

David Morris

We didn't hear that. Can you say that over again, please?

Brendan Nosal

Yeah, am I coming through now?
Yes. Okay, sorry about that. I just wanted to dig into the margin a little bit more given your, your comments for, you know, some expansion over the next few quarters. Just kind of curious, you know, what sort of magnitude are you thinking as we kind of move into 2025 on those dynamics?

Lynn Hopkins

Sure, I can make a couple additional comments about ourNIM. So we are, we are still positioned as a liability sensitive bank. I think that our spot rate at the end of the quarter being at three deposit rates being at 353 is an indication that our cost of deposits are going to trend downward. I think the key drivers for any nim expansion relates to the repricing of our CD portfolio. The majority of it reprices over the next 12 months and over the next quarter, $800 million has the opportunity to reprice and it has an average rate of just under 5%.
I think on the earning asset side, we've indicated that our loan production is coming in higher than our overall average loan rates.
Plus we have a large portion of our loan portfolio that's fixed or variable or hybrids that are sitting on their floors or not eligible to re price yet. And that's 60% or about two thirds of the portfolio.
So we're in a declining rate environment. I think as far as expansion, I don't know if I can comment exactly the magnitude. But I think the deposit spot cost is probably a good indication of the minimum amount. And then I think we would be cautiously optimistic. There would be room for more.

Brendan Nosal

Okay. That's that's helpful color. Thank you. Maybe pivoting to gain on sale of loans. I just kind of curious if you see any signs of life in the secondary market for that for that paper that would allow originations and production to increase and, and flow through the income.

Lynn Hopkins

Sure. So I'm I'll start and Johnny can add some additional color. So I think the the SB a premiums have been relatively consistent in the third quarter compared to the second quarter. Our volume was a little bit lower and and he can comment on the premiums and then on our mortgage banking product, those have been, I think relatively thin margins and the competitions have been there as well. So I think and John, if you want to add color on that.

Johnny Lee

Yeah. Well on SBS I again, so the gross premiums been AAG about 8% to 9% on average. So obviously that's a segment where we continuously want to drive more businesses and in our pipeline actually still looking relatively healthy at this stage.

Lynn Hopkins

I think on the mortgage side, they've been 101, maybe 102.

Brendan Nosal

Okay, fantastic. Thank you for taking the questions.

Operator

Matt Clark, Piper Sandler.

David Morris

Hey, Matt.

Matthew Clark

Hey, good morning everyone. How you doing? A few for me maybe just rounding out the margin conversation. Do you have the average margin in the month of September, Lynn?

Lynn Hopkins

Thought you might ask that question. So we would estimate our margin was moving up during the quarter and ending the, the last, the last month. I would say that because we placed some loans on non accrual and that occurred in September. Kind of normalizing for that. We were probably closer to a 275.

Matthew Clark

Okay. Got it. And then the you mentioned you have $800 million CDs coming off for just under 5%. What are your, what are your new offer rates or would you expect that to renew into?

Lynn Hopkins

So, I think, with, with the fed, having moved rates down, we look at the '2 month CD. Both in the wholesale market and the retail market. I would say, the offer rates have been between 5,070 basis points lower than the average that we see coming off.

Matthew Clark

Okay. And then what's your expectation for your deposit data through this easing cycle?

Lynn Hopkins

So far, it's, we've had the opportunity to move down the full 50 basis points that the, that the short term fed funds rate has come down, but it takes some time to come through the full deposit, the cost of our funds. So right now, I think it's pretty high beta relative to new deposit products.

Matthew Clark

Okay. Okay. And then, and then the security yields came down, I think 43 BPS to 413 and I think the balances are down $19 million or $20 million, I guess what, what went on there.

Lynn Hopkins

Yeah, so during the quarter, we had some commercial paper that we allowed for it to mature. We invested some of it in a longer duration securities and then a portion moved over to this the loan portfolio and then a little piece left in cash. So mostly commercial paper that was rolling over and with rates coming down, those, those returns also came down. So we were pivoting to other opportunities.

Matthew Clark

Okay. And then lastly, on the buyback, you just completed it. Any expectation to re up the buyback?

Lynn Hopkins

I think we're looking at it after taking down about $20 million this year so far. So we'll, we're seriously looking at it fair enough. Thank you.

Operator

Kelly Motta, KBW.

David Morris

Hey, Kelly. How are you?

Kelly Motta

Good morning. Thanks. I am good. Thanks for the question. I, I guess maybe starting with expenses just a couple of items there. I noticed your insurance and right assessment was down quite a bit. Wondering if that is a good, I think it was about 650,000 bucks if that's a good run rate or any, any, drivers of that. I'm not sure if that has to do with the resolution of the regulatory order you had in your quarter.

Lynn Hopkins

Sure, Kelly, thanks for the question. I think for that particular line item. We've reached a place where that might be a good indication of our near term run rate.

Kelly Motta

Got it helpful and then the salaries and benefits ticked up. I know you had some, greater production. Wondering if, you know, if you could provide any color as to, what drove that? If, you know, you've been adding new producers and, and any thoughts on how that could trend here in the next couple of quarters as you balance profitability and supporting the growth, you see.

Lynn Hopkins

Sure. So I think the higher salary and benefits is reflective of the higher loan production. It was mostly associated with incentives as we come down to the last part of the year. You know, I think without commenting necessarily on that single line item, I think overall expenses have been trending between $17 million and $17.5 million million.
So I'd expect kind of going forward given, you know, ongoing investment in ourselves, including, you know, higher production. You know, maybe we would trend at the higher end of the range. But I expect our overhead range to stay, stay there.

Kelly Motta

Got it. That's, that's really helpful. All right. And II, I was hoping I appreciate the color on the call about the credit migration you've had. The release says you're looking, you expect resolution of, of some of this migration to occur kind of by mid next year.
Can you expand on, on what you're doing there? MP A s are a little bit higher. They're about 2% of what scenario, just kind of what what, what you're working on their expectations for charge offs and what, what does kind of a more normalized range of, of, of credit look like for you?

Johnny Lee

Hi Kelly, this is Johnny. So right now we're working on the the nine MPLs that exceeding 1 million and we are expecting roughly 70% of it to hopefully come up within mid year next year. They're all, we have pretty good visibility on the pathway and how those will be coming down through their trustee sales were you know, as the investors are prepared to take out or refinance these credits.

Lynn Hopkins

Also, I would have to add and Kelly, I would add to Johnny's comment you had said, you know, any expectations of additional charge offs. I think this visibility on, on these, this ones that he was commenting on. Currently we're we're not seeing, you know, charge offs there but it will take some time.

Kelly Motta

Got it. That's that's helpful. And then it was nice to see some, some loan production pick up. Your commentary said moderate amount of growth ahead and accelerating kind of thereafter where, what, where are you still seeing good opportunities and how are you guys thinking about, you know, the what's in the pipeline and, and kind of the outlook for, for growth as you manage that? Versus maybe it sounds like still working off some weaker borrowers out of the bank.

Johnny Lee

Oh, well, obviously the weaker borrows with I tell you, I'm sorry, Johnny again. Yeah, obviously we could borrows, you know, the we certainly any opportunity we have, we want to kind of match them out. But as far as the new production is concerned, our pipeline always been very healthy since I was beginning this year.
Obviously, we, we kind of, you know, picking our battles and where, where, where we should be, you know, fighting because of the, the certain areas of market segments of the market is still very competitive. So we're, we're sticking to our credit quality.
You know, first and making sure all this new process of looking at meets our credit standards, underwriting standards. Also the rate the pricing. Obviously, if you look at Q3, our growth has been predominantly from the CRE MFR based on the commercial side.
Obviously, we have some non-QN products that we are able to successfully find during Q3. We do see a lot, I do see a lot of the SBA side picking up. We do have a relatively healthy pipeline there. CNI trade finance typically, I mean, we see good traction there but those you know, typically take a little bit more time, but there's a healthy pipelines behind that as well.

Lynn Hopkins

So one, just additional comments, Kelly, you know, for the, for the fourth quarter, our annualized growth rate was about 6% overall supported by the $175 million of new production. So I think our comment about modest growth and kind of opportunities that we're seeing in our marketplace. I think it follows that trend is I think our general view.

Kelly Motta

Got it. Thanks so much for the questions. I'll step back.

Operator

Andrew Terrell, Stephens.

Andrew Terrell

Hey, good morning. I just wanted to follow up on some of the margin discussion briefly and specifically Lynn, going back to your comment around kind of the actions you've taken post. The fact, I think you mentioned, you know, seeing kind of 100% beta or 50 basis points off. Maybe some of the interest bearing deposits, can you just maybe expand upon that a little bit further?
I'm I'm just trying to compare that versus the, the 353 spot rate disclosure on the total deposits. It, it seems like if you know, most of the interest bearing went down, I guess outside of CDs went down by 50 basis points, you know, following immediately following the Fed, it feels like that that spot rate number should be lower. So I'm just trying to compare some of that commentary. So if you could elaborate further, I think it'd be helpful.

Lynn Hopkins

Sure. I mean, so the fed moved in September and then we took our measurement on September 30th. So remember 60% of our funding base is CDs. So we do have to wait for the C DS to mature before we can reprice them. So our current offering rates plus the opportunities as they come off are now 50 basis points to 70 basis points lower than the rate that's there at September 30th. So, so while we already saw 10 basis points in the spot rate at the end of the quarter, I think there's opportunity for larger change in the fourth quarter. Does that help?
Yeah, we wouldn't have seen it reflected as of September 30 and then the non maturity deposits, it's about 20% of our funding base. Those came down modestly but probably not at 100% beta, I think the CDs is our biggest opportunity.

Andrew Terrell

Yeah. Okay. So I should think about maybe the spot rate is inclusive of the actions you took on like the the non maturity deposit side and then, you know, you'll get a more material impact from the time deposit repricing and the the actions you took there in the fourth quarter.

Lynn Hopkins

Yes. And as rates continue to come down or if we expect them to you know, we have a CD ladder that matures over the next 12 months. So while I called out the fourth quarter, there's an equal amount maturing kind of in the first and second quarters next year and I would just say in the first quarter next year, the average rate coming off is still in the high four. So that has a big opportunity to move as well.

Andrew Terrell

Yes. Sure. Okay. And then can you just remind us post the I know there was some action taken with the commercial paper in the securities portfolio this quarter. Can you remind us, you know, at a period? And just what, what was the mix of the securities book that was floating rate in nature.

Lynn Hopkins

For the securities book, the amount that's floating rate? I will have to come back to you there. I only had my loan portfolio teed up. So the the commercial paper that came off was about 40 million dollars.
Hold on second.

Andrew Terrell

Yeah, no, no worries, no worries. And if I could just ask one more, you know, on just some of the commentary on the margin and, and the kind of positive progression from here, I'm curious if that contemplates any rate cuts or in the fourth quarter.
And I get that the balance sheet is liability sensitive, but it does feel like, you know that the timing of rate cuts or how quickly rate cuts occur will matter just given that the CD heavy nature of the the deposit base. And I'm I'm just curious, you know, if we were to get to incremental 25 basis point rate cuts during the fourth quarter just from a timing standpoint, could the could the margin, you know, be stable even leg down a little bit? Obviously understanding that give you kind of more of a benefit into 2025.

Lynn Hopkins

Sure. So let me make two comments. There one is you're getting at the magnitude by how much our net interest margins should have the opportunity to expand because we're liability sensitive. And I think that we will be able to take advantage of it because we have a good CD ladder.
I think my second comment is we have noticed that the that the wholesale market understands the interest rate environment and where rates are headed. And we've been able to, I think opportunistically, I use the wholesale funds to lower our overall cost of funds.
And I think that's probably an opportunity that's there again doing it in a modest amount. Our reliance on wholesale funds is significantly lower than last year. So I think those are the two places. So despite when the fed is moving rates, I think everyone can see where they're moving to. We're trying to take advantage of that and, and lower it as much as possible.

Andrew Terrell

Yeah. Okay. That makes makes sense and I appreciate it. Thank you all for taking the questions.

Lynn Hopkins

Thank you.

Operator

(Operator Instructions)
Matt Clark, Piper Sandler.

Matthew Clark

Hey, Thanks. I think you have some debt coming due in the first quarter, intra quarter. Can you just update us on the amount and your plans to refinance that?

Lynn Hopkins

Sure. Thanks Matthew, I can start. So we have $150 million of FHLB advances priced around $120 million that are coming due in March of next year. I think for plans to re price given we're in a declining rate environment, we should be able to take advantage of that. However, at the same time, we did put on $50 million putable advance. At the end of September, we were able to price that around 340, 345.
And it has a final for four years is the structure. There is a one time call. And again, we would look to something like that to help. I think refinance the $150 million. Plus we'll be looking at our own loan growth and opportunities to you know, grow deposits. So as of now, I think we're feeling pretty comfortable with the maturity of the $150 million. Advance, obviously $120 million is a very attractive rate. So we'll work hard to get more cost effective funding.

Matthew Clark

Great. Thank you.

Operator

That does conclude our Q&A session at this time. I would now like to turn the floor back over to David Morris for any closing remarks.

David Morris

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 again. Bye bye.

Operator

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