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Johnny Lee

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 he 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 prune and profitly 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. Non-performing assets totalled $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 in the loan that migrated to nonaccrual status. At year end, we had eight MP LS 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.
Then we will provide some additional details about our substandard and non-performing loans. But I want to emphasize that we are focused on resolving them as quickly as possible while minimizing the impact to earnings in capital, it will take time, but we feel comfortable. We have a good handle on them and can work effectively to resolve them.

Rebeca Rico

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, three of our investor presentation as a summary of our fourth quarter results. As David mentioned, net income was $4.4 million or $0.25 per deleted share.
We did see the net interest margin we've been expecting with NIM increasing eight basis points to 276 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 FHOB advances that will mature in the first quarter.
Non interest 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 accrual. 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 off on three loans, moved to held for sale on 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 five and six have additional color on our loan portfolio and yield. 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 seven point 7-Eleven slide. Seven 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 in the third quarter was mainly due to the $26.4 million C&D loan that migrated to non approval status offset by paydowns and payoffs of $6.7 million and partial charge off $2 million.
The charge offs related almost entirely to the three loans moved to held for sale in the fourth quarter. They're 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 two performing CRE loans totalling $11.8 million after the borrowers paid their delinquent property taxes. Otherwise there were three other CRE loans totalling $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 totalled $100 million and included $81 million of non performing loans and $19 million of loans on accrual status. This included $11.7 million related to AC&D loan on a completed multi family project that was in the process of transitioning to permanent financing at the end of the year. Since that time, we received a pay down 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 investment increased by 15 basis points to 1.56% inclusive of specific reserves. While the coverage ratio of our allowance for loan losses to non-performing 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 two basis points to 1.35% at the end of the year. Slide. 13 has details about our deposit franchise total deposits remain stable from the third quarter at $3.1 billion. It's a minor movement between categories.
Our average all in cost of deposits decreased by 30 basis points to 335 in the fourth quarter including an estimated quarter and spot rate of 315 tangible book value per share decreased slightly to 2,451 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.

Question and Answer Session

Operator

Thank you, ladies and gentlemen. At this time, we will be conducting our question and answer session.
(Operator instructions)
Our first question is coming from Brendan Nosal, Hovde Group.

Brendan Nosal

Hey, folks, I hope you're doing well. And 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 you over the migration? How close to completion the project is, how much drawn commitment is left on kind of that project and, and any evaluation of whether there needs to be an additional advance of funds to get the project over the finish line?

Rebeca Rico

Sure, I'll start and then I'll turn it over to credit and that was a huge question. I think some analysts guessed it because this move to non approval 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.

Brendan Nosal

Okay, that's helpful.

David Morris

Anything else, Brandon?

Brendan Nosal

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

Rebeca Rico

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

Brendan Nosal

All right, great. Thanks for taking the questions.

Operator

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

Matthew Clark

Hey, good morning. Well, thanks for the questions. Just a few questions around the margin. Lindy, the average margin December maybe on an adjusted basis for any noise on credit and then just remind us how much you have in CD ES coming due in the first and second quarter, the rates on those and where do you expect them to renew at?

Rebeca Rico

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 five basis points. If we look to the first and second quarter, we had in the first quarter, we have about $650 million of CDS that have a weighted average maturity of about 460. We estimate that those would have an opportunity to come into the market. Now closer to a 4,410 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. 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 that 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 that play. I think one of the biggest drivers are 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.

Matthew Clark

Great. Thank you. And then just on the growth outlook, can you give us a sense for where the pipeline is, year-over-year or you know, 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?

Johnny Lee

Hi Matt, this is Johnny. So I can maybe just provide a little bit of a highlight. So ever since last year in a given time when you know, we have about, I would say $225 million average at any given time that we're looking at in our pipeline. Obviously, our efforts are trying to identify the ones that fits our sort of credit standards and ensuring that they're generating proper returns to us. Obviously we will get through that, but pipeline has always been staying healthy in that respect, we average around that range.
So we are, for better quality credit, 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 yet we measure determine the pricing based on risk profile, right? So the better quality credits that we feel that it's going to build great relationships for us in 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 selection if you will, and making sure that we are bringing a good relationship that's going to help us, continue to expand on and grow the bank.

Rebeca Rico

I think in the 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. You know, we were up at about 175 in the third quarter, a little bit lower, 126 in the fourth quarter. And then the pipeline's been building a little bit here for the first quarter. So, I think you know we're looking at kind of leveraging off those levels from a production standpoint and then obviously, net growth has been a little bit contingent on, what prepayments we see.

Matthew Clark

Okay. You know, low single digit though, seems like a reasonable assumption for the year with maybe a single family being flat to down.

Rebeca Rico

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

David Morris

Probably still early right now to, but I guess overall, we're trying to maintain, yeah, I would say mid low to mid low, single digits, I think, certainly reasonable. But the again, we do have a lot of deals that we're looking at any given time in the pipeline. So it's just a matter of how aggressively you want. We want to compete on those deals to generate where to secure these relationships. 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 and secure relationships.

Matthew Clark

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?

Rebeca Rico

So, in the fourth quarter we were kind of up a little bit above the, I think during 2024 we were kind of 17 to 17.5. And in the fourth quarter, we were a little bit higher than 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 a million dollar 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.

Matthew Clark

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 stubborn, stubbornly high with kind of the work out on the credit side?

Rebeca Rico

Yeah, 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.

Operator

Our next question is coming from Andrew Terrell, Stephens.

Andrew Terrell

Good morning. This is Jackson Loren 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 non interest bearing deposits, moving forward.

Rebeca Rico

Let me just, you're focused on the increase in non interest bearing deposits.

Andrew Terrell

Yes. Correct.

David Morris

What I gave you the non interest bearing deposits specifically, what we did near the in the fourth quarter, there was one or two larger sort of commercial client that brought in the deposits. So these are our efforts in continue to try to develop and expand and I so I would say, as we bring in last year, brought in some new commercial lenders, also continue to build 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 non-interest bearing deposit generation as well.

Rebeca Rico

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

Andrew Terrell

Well, I think Johnny just answered it. I was just kind of looking for expectations moving forward on non interest bearing deposits. So thank you for that. 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.

David Morris

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

Andrew Terrell

Great. Thank you for taking my questions.

Operator

(Operator instructions)
Our next question is coming from Kelly Motta, KBW.

Kelly Motta

Hi, good morning. Thanks for the question. I did want to circle back on credit. I appreciate all the detail on the sides and looks like construction. It's your three biggest NPL S And it looks like almost a quarter 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 you know, potentially mitigate problems ahead? Have you done a deep dive into the construction book as well and, and relative comfort level? And the rest of it and then kind of third part of that question is I you provided some loan to values on your, your NPLS. I'm assuming those are updated valuations given, CND 92% weighted average LTV in NPL. But also also just just wanted to confirm that.

Rebeca Rico

Sure, I'll start with the last one we are looking at as current evaluations 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 cecil process. I think as far as your question 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 a third of our quarter or a third of our construction portfolio. I think Johnny mentioned that it, we looked at it, those are just before 2022 maybe 2020-2021 loans. I don't think they're loans similar to those in the portfolio. And.

Johnny Lee

But I'll give you a little more color. The characteristics of these loans were, they were done during COVID, they were initiated or originated and during COVID and they had problems with getting materials problems with getting things people to complete the projects and so forth. So 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.

Kelly Motta

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 five. Is that still a reasonable time line here? Just wondering how you're thinking about this, resolution process playing out. I think the release mentions you're looking to kind of minimize losses while as you work through. So, just from a high level, it seems like that's the 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.

Johnny Lee

Given that we just put on this large look, on nonperforming, we're probably pushing that out to probably the end of 2025 to get all of these addressed. HI do believe we're working hard on these where we have two of them that are on this list on 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.

Kelly Motta

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?

Johnny Lee

Well, we're trapped, we're working on both items right now. But clearly cleaning up the MPAS 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 leads 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 banks, bankers and so forth to see if they're interested in and joining us and so forth. Okay, while I'm still here.

Kelly Motta

Got it. Thank you for all the, all the color. I just wanted to walk, walk through those pieces. I'll step back.

Operator

We have a question from [Tim Coffee with Johnny].

Okay, thanks morning everybody. 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 programs that were initiated during the quarter to bring those deposit costs down. Was it just, kind of the final efforts of of hard work. Can you kind of give me some color on what brought the cost down?

Lynn Hopkins

Sure. So I am going to give a lot of credit out to our branch network 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. So just barely 4% at the end of the year. So a lot of local deposits, but you know, the interest rate environment was walking down and we saw, 50 basis points in September and then another 50 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 months CD product. So we have a very nice ladder and as it matures, it reprices into the current environment. So 92% of our CD is now mature within the next 12 months.
And you know, 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 re-price. And I mentioned earlier, $650 million has a weighted average price of about 460 that has an opportunity to re price 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 re price into the environment. Even if they are fully priced at a 12 month CD at about 4%.
So, but as I mentioned, the FHL, the advances, we'll see that in the second quarter, which 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. Thank you and Johnny, if I can talk a little about kind of the pace of loan growth expected through 2025 you aim for the low to mid single digits for the year. Is it expected that or is it reasonable to think that growth might be heavier in the second half of the year than the first half?

Johnny Lee

Well, obviously from the get go starting in January 1st, I've been pushing the loan production, but I think typically Q-1 is maybe a little bit slower, but then I do expect, getting Q-2, Q-3 to really ramp up.

Lynn Hopkins

I think also Tim. And don't know what everyone is seeing out there, but, the feds on pause right now, fed fund futures indicate maybe, maybe March or June. And then again the second part of the year, the curve ended up being a little steeper in the longer term. So I think we're still navigating through a little bit of change. So I think earlier, we mentioned, 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 with 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.

David Morris

I'll just add that, I'll just add that. Obviously, we were able to successfully bring in some more additional talents on the commercial 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 sorry, 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 understand some things, 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?

David Morris

Sure. No I appreciate the question. That's a good question. And, actually, since last year we've you know, actively looked through our portfolio with all the audience 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 two to start having that dialogue conversation, just kind of get a feel of what the are the borrowers may be, planning to do or what their thought is. But unfortunately maybe because of the, high interest costs, some of our borrowers, we have excess funds on hand, sometimes they just decide to just go and pay these loans off.
And then obviously, there's some by our own business decision, we decided to let go, we feel potentially may be problematic. And then, yeah that's, we always try to stay ahead by looking ahead at these bars and see if we can get in front of them to, and establish some retention sort of strategy.

Lynn Hopkins

And then, half of our portfolio tim, is our mortgage mortgage products. And so I think we, some of it's commoditized, some of the 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 hybrid. So they reprice after five or seven years. So these aren't 30 year mortgages. So that some of our borrowers have sensitivity to the interest rate environment. So, trying to work to retain, retain that business as it moves from its fixed to floating period. So I'd say we have some programs there as well.

Okay, great. Well, thank you very much. Those are my questions.

Rebeca Rico

And then I'm sorry, go ahead, Jonny. We do have a closing the mark.

David Morris

Is that all?
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.

Operator

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.