Business Overview and History

RBB Bancorp (NASDAQ:RBB) is a bank holding company headquartered in Los Angeles, California, with a rich history of serving the Asian-American community. Founded in 2007, RBB Bancorp has grown to become a respected player in the regional banking industry, known for its strong customer relationships, prudent risk management, and commitment to supporting the communities it serves.

RBB Bancorp was founded in 2011 as a bank holding company registered under the Bank Holding Company Act. The company’s principal business is to serve as the holding company for its wholly-owned subsidiaries, Royal Business Bank and RBB Asset Management Company. RBB Bancorp operates through Royal Business Bank, which provides a full range of commercial banking services to small and medium-sized businesses, as well as individuals, primarily in the Asian-American communities of California, Nevada, New York, Illinois, New Jersey, and Hawaii.

The bank offers commercial and investor real estate loans, business loans and lines of credit, Small Business Administration (SBA) loans, mortgage loans, trade finance, and a full range of depository accounts. RBB Bancorp has operated as a minority depository institution (MDI), defined as a federally insured depository institution where 51% or more of the voting stock is owned by minority individuals or a majority of the board of directors is minority, and the community served is predominantly minority. This designation has been historically beneficial to the company, and they have continued to maintain it.

The company’s roots can be traced back to 2007, when it was established as a minority depository institution (MDI) to serve the growing Asian-American population in Los Angeles County. Over the past 17 years, RBB Bancorp has successfully navigated a dynamic market environment, completing six whole-bank acquisitions and one branch acquisition since 2011. These strategic transactions have allowed the company to expand its geographic footprint and diversify its revenue streams, while remaining true to its core mission of supporting the businesses and individuals in the communities it serves.

As of September 30, 2024, RBB Bancorp reported total assets of $4.0 billion, gross loans held for investment (HFI) of $3.1 billion, total deposits of $3.1 billion, and total shareholders’ equity of $509.7 million. The company’s loan portfolio is well-diversified, with commercial real estate loans accounting for 40.5% of total loans, single-family residential mortgages at 47.7%, and commercial and industrial loans at 4.2%.

Financial Performance and Ratios

RBB Bancorp’s financial performance has been generally solid, with the company reporting net income of $42.5 million for the fiscal year ended December 31, 2023, compared to $64.3 million in the prior year. The decrease in net income was primarily due to a higher provision for credit losses and an increase in non-interest expenses.

Some key financial ratios for RBB Bancorp as of December 31, 2023, include:

These ratios demonstrate the company’s sound financial footing, with strong capitalization, healthy profitability, and efficient operations. The company’s consistent performance has enabled it to maintain a strong market presence and continue investing in growth opportunities.

Quarterly Performance and Outlook

For the third quarter of 2024, RBB Bancorp reported net income of $7.0 million, or $0.39 per diluted share, compared to $7.2 million, or $0.39 per diluted share, in the previous quarter. The company’s net interest margin increased by 1 basis point to 2.68% during the quarter, supported by growth in the loan portfolio and stabilizing funding costs.

Loan growth during the third quarter was moderate, with total loans HFI increasing by $44 million, or 5.8% on an annualized basis. This growth was driven by $175 million in loan production at a weighted average rate of 7.26%. Management expects loan growth to continue at a modest pace, gradually accelerating as the company adds more experienced commercial lenders to its team.

The company’s asset quality metrics showed some deterioration in the third quarter, with non-performing loans increasing to $60.7 million, or 1.52% of total assets, from $31.6 million, or 0.79% of total assets, at the end of 2023. Management has indicated that they are actively working to resolve these non-performing loans and expect a majority of them to be resolved by mid-2025.

Regulatory Matters and Consent Order Termination

In October 2023, RBB Bancorp’s subsidiary, Royal Business Bank, was subject to a Consent Order issued by the Federal Deposit Insurance Corporation (FDIC) and the California Department of Financial Protection and Innovation (DFPI) regarding deficiencies in the bank’s Anti-Money Laundering/Countering the Financing of Terrorism (BSA/CFT) compliance program.

However, the company is pleased to announce that on August 21, 2024, the Consent Order was terminated, following the successful resolution of the identified deficiencies. This milestone represents a significant achievement for the company, as it demonstrates its commitment to maintaining a strong compliance culture and operating within the regulatory guidelines.

Risks and Challenges

Despite the company’s resilience and solid financial performance, RBB Bancorp faces several risks and challenges that investors should consider:

Competition: RBB Bancorp operates in a highly competitive banking environment, with larger regional and national banks vying for the same customer base. The company’s ability to maintain its market share and profitability depends on its ability to respond effectively to these competitive pressures.

Regulatory Environment: As a financial institution, RBB Bancorp is subject to extensive regulations and oversight by various federal and state agencies. Changes in the regulatory landscape could impact the company’s operations and profitability.

Technology and Cybersecurity: The company’s reliance on technology and the increasing threat of cyber attacks pose risks to its operations and customer data. Maintaining robust cybersecurity measures is crucial to mitigating these risks.

Macroeconomic Conditions: The company’s performance is influenced by broader economic trends, such as interest rate fluctuations, inflation, and overall economic activity in its key markets. A significant economic downturn could adversely affect the company’s asset quality and profitability.

Financials

RBB Bancorp’s financial performance has remained stable despite challenging market conditions. The company’s total assets stood at $4.0 billion as of September 30, 2024, with gross loans held for investment of $3.1 billion and total deposits of $3.1 billion. The company’s net income for the fiscal year ended December 31, 2023, was $42.5 million, reflecting a decrease from the previous year primarily due to higher provision for credit losses and increased non-interest expenses.

For the most recent fiscal year (2023), RBB Bancorp reported revenue of $134.27 million, net income of $42.47 million, operating cash flow of $51.29 million, and free cash flow of $50.64 million. In the most recent quarter (Q3 2024), the company reported revenue of $30.29 million, up from $29.78 million in Q3 2023. Net income for Q3 2024 was $7.00 million, down from $8.47 million in Q3 2023. The decrease in net income was primarily due to a $3.30 million provision for credit losses in Q3 2024 compared to a $1.40 million provision in Q3 2023. This was partially offset by higher noninterest income, including a $2.80 million recovery on a fully charged-off loan.

Operating cash flow for Q3 2024 was $31.93 million, up from $18.62 million in Q3 2023, while free cash flow increased to $32.22 million from $18.71 million in the same period.

Liquidity

RBB Bancorp maintains a strong liquidity position, with a diverse funding base and access to various sources of liquidity. As of September 30, 2024, the company reported total shareholders’ equity of $509.7 million, providing a solid capital cushion. The bank’s liquidity ratios remain well above regulatory requirements, ensuring its ability to meet short-term obligations and fund loan growth.

The company’s debt-to-equity ratio stood at 0.66 as of September 30, 2024, indicating a conservative capital structure. Cash and cash equivalents amounted to $349.39 million at the end of Q3 2024. RBB Bancorp has access to several credit lines, including a $966.70 million FHLB secured line of credit (with $200.00 million outstanding), a $47.00 million FRB secured line of credit, and $92.00 million in federal funds arrangements (with no outstanding balance).

The company’s current ratio of 1.07 and quick ratio of 1.00 demonstrate its ability to meet short-term obligations comfortably.

Product Segments and Loan Portfolio

RBB Bancorp operates through several key product segments:

Real Estate Loans: As of September 30, 2024, construction and land development loans totaled $180.20 million, accounting for 5.8% of total loans held for investment (HFI). Commercial real estate loans, including non-farm and non-residential real estate, multifamily residential, and single-family residential loans for business purposes, amounted to $1.25 billion, or 40.5% of total loans HFI. Single-family residential mortgages constituted the largest portion of the real estate loan portfolio at $1.47 billion, representing 47.7% of total loans HFI.

The commercial real estate loan portfolio is diversified across property types, with the largest concentrations in mobile homes (22.1%), mixed-use properties (17.2%), and apartments (15.3%). Geographically, 52.4% of commercial real estate loans are secured by collateral in California, 13.5% in New York, and 4.5% in Nevada. The weighted average loan-to-value ratio for the commercial real estate portfolio was 56.9% at origination.

Commercial and Industrial (C&I) Loans: C&I loans, which include lines of credit, commercial and industrial term loans, mortgage warehouse lines, purchased receivables, and international trade discounts, totaled $128.86 million, or 4.2% of total loans HFI as of September 30, 2024.

Small Business Administration (SBA) Loans: RBB originates mostly SBA 7(a) variable-rate loans, which decreased to $48.09 million, or 1.6% of total loans HFI, at the end of the third quarter of 2024. The company generally sells the 75% guaranteed portion of the SBA loans it originates.

Overall, RBB’s loan portfolio has seen modest growth, increasing 2.0% to $3.09 billion as of September 30, 2024, compared to $3.03 billion at the end of 2023. The allowance for loan losses stood at $43.69 million, or 1.41% of total loans HFI, as of the third quarter of 2024, up from 1.37% at the end of the prior quarter.

Geographic Performance

RBB Bancorp primarily operates in the Southern California, New York City, Chicago, Las Vegas, Edison, New Jersey, and Honolulu markets. While the company does not provide a detailed breakdown of financials by geographic region, its diverse presence across these markets allows for a balanced approach to growth and risk management.

Guidance and Future Outlook

Based on the company’s recent performance and management commentary, RBB Bancorp expects its net interest margin to have the opportunity to expand over the next few quarters with the anticipated decline in short-term market interest rates. The company anticipates loan balances to continue growing at a moderate pace, with gradual acceleration as they continue to hire more seasoned commercial lenders.

Management intends to maintain a prudent approach to loan growth, focusing on credit quality and relationships that will generate reasonable and sustainable returns. They expect to resolve the majority of their non-performing loans by mid-2025, which should improve asset quality metrics.

Conclusion

RBB Bancorp has established itself as a resilient community bank, with a strong track record of serving the Asian-American market in its core geographic regions. The company’s prudent risk management, diversified revenue streams, and commitment to compliance have enabled it to navigate the challenges of the banking industry and deliver consistent financial performance.

As RBB Bancorp continues to adapt to the evolving market landscape, its focus on maintaining strong customer relationships, investing in technology, and prudently managing its loan portfolio will be crucial to its long-term success. The recent termination of the Consent Order and the company’s efforts to resolve non-performing loans demonstrate its commitment to addressing challenges head-on.

With a solid capital base, diverse funding sources, and a clear strategy for measured growth, RBB Bancorp appears well-positioned to capitalize on opportunities in its target markets. However, investors should closely monitor the company’s ability to execute on its plans for loan growth and margin expansion while maintaining strong asset quality in the face of ongoing economic uncertainties.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.