Company Overview
RBB Bancorp is a diversified financial holding company based in Los Angeles, California, with a focus on serving the Asian-American community. The company's primary subsidiary, Royal Business Bank, provides a range of banking products and services to small and medium-sized businesses, as well as individuals, through its network of branches in California, Nevada, New York, Illinois, New Jersey, and Hawaii.
Established in 2008, RBB Bancorp has grown to become a significant player in the regional banking landscape, driven by a strategic acquisition strategy and a commitment to serving the unique financial needs of its target market. The company was officially founded as RBB Bancorp in 2011, operating as the parent company of Royal Business Bank. Since its inception, RBB Bancorp has completed six whole-bank acquisitions and one branch acquisition, starting from July 2011 through January 2022. These acquisitions were accounted for using the acquisition method of accounting, with the operating results of the acquired entities included in the consolidated financial statements from their respective acquisition dates.
In 2018, RBB Bancorp achieved a significant milestone by becoming a minority depository institution (MDI). This designation, as defined by the FDIC, applies to federally insured depository institutions 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 status has been historically beneficial for the company, providing access to technical assistance and potentially enhancing its ability to serve its target market.
Despite the challenges posed by the COVID-19 pandemic, RBB Bancorp has successfully navigated through this period, maintaining its focus on serving the Asian-American community while continuing to expand its branch network and lending capabilities. The company's strategic acquisitions have strengthened its presence in key markets, contributing to its growth and diversification.
Financials
RBB Bancorp's financial performance has been a mixed bag in recent years. In the fiscal year 2022, the company reported net income of $64.3 million, or $3.33 per diluted share, on total revenue of $160.1 million. This represented a significant improvement over the previous year, driven by a 20% increase in net interest income and a 3% rise in non-interest income. The company's return on average assets (ROAA) and return on average equity (ROAE) for the year were 1.66% and 13.30%, respectively.
However, the company faced some challenges in 2023 and 2024. In fiscal year 2023, RBB Bancorp reported revenue of $134.27 million and net income of $42.47 million. The company generated operating cash flow of $51.29 million and free cash flow of $50.64 million during this period.
In the fourth quarter of 2024, RBB Bancorp reported revenue of $57.3 million and net income of $4.4 million, or $0.25 per diluted share. This represented a decrease compared to the prior quarter, primarily due to an increase in the provision for credit losses, which the company is actively addressing.
For the first nine months of 2024, RBB Bancorp reported net income of $22.3 million, or $1.22 per diluted share, on total revenue of $174.7 million. While the company's net interest margin (NIM) remained relatively stable at 2.68% during this period, a rise in interest expenses and a higher provision for credit losses weighed on the bottom line.
Credit Quality
The company's credit quality metrics have been a point of concern. As of September 30, 2024, RBB Bancorp's non-performing loans (NPLs) totaled $60.7 million, or 1.52% of total assets, up from $31.6 million, or 0.79% of total assets, at the end of 2023. The increase was primarily due to the migration of a $26.5 million construction and development (C&D) loan to non-accrual status in the third quarter of 2024. The company's allowance for credit losses (ACL) as a percentage of total loans held for investment increased to 1.56% at the end of the third quarter, from 1.41% at the end of the second quarter.
To address these credit challenges, RBB Bancorp has taken several measures, including the formation of a special team dedicated to resolving the non-performing loans. The company is also focusing on prudent loan underwriting and credit risk management to mitigate the impact of any potential economic headwinds.
Liquidity
Despite these credit-related concerns, RBB Bancorp remains well-capitalized, with a Tier 1 leverage ratio of 12.19% and a total risk-based capital ratio of 24.80% as of September 30, 2024, both well above the regulatory well-capitalized thresholds. The company's tangible book value per share stood at $24.64 at the end of the third quarter, up from $23.48 at the end of 2023.
As of the fourth quarter of 2024, RBB Bancorp reported a debt-to-equity ratio of 0.62 and cash and cash equivalents of $431.37 million. The company has substantial available credit lines, including $92 million in Federal Funds Lines (undrawn), $47 million through the Federal Reserve Discount Window (undrawn), and $766.7 million in FHLB Borrowing Capacity (with $200 million drawn).
Future Outlook
Looking ahead, RBB Bancorp is cautiously optimistic about its growth prospects. The company's loan pipeline remains healthy, with $126 million in loan production during the fourth quarter of 2024. However, the management team has acknowledged the challenges posed by the current interest rate environment and has emphasized the need to balance growth with prudent risk management.
For 2025, RBB Bancorp is targeting low to mid-single digit loan growth, with growth expected to be more weighted towards the second half of the year. The company anticipates its net interest margin to continue expanding in the near-term as deposit costs reprice lower, though this may flatten out later in the year as higher funding costs impact the margin.
In terms of expenses, RBB Bancorp expects its run rate to be slightly above the $17.5 million level seen in 2024, with potential for higher expenses in the first quarter of 2025 due to the timing of payroll taxes. The company is also considering another stock buyback program in 2025, after focusing on resolving credit issues in the last quarter of 2024.
In terms of geographic diversification, RBB Bancorp's loan portfolio is heavily concentrated in California and New York, which accounted for 81.4% of the total loan book as of September 30, 2024. The company has expressed its intent to explore opportunities for expansion in the San Francisco Bay Area, a market with a significant Asian-American population. This aligns with RBB's M&A strategy, which remains focused on acquiring other Asian American banks in its core markets to strengthen its branch network and expand its footprint.
RBB Bancorp's management team has also been proactive in addressing the company's succession planning. In December 2024, the company announced that Johnny Lee, the current President and Chief Banking Officer of Royal Business Bank, will be appointed as the President of RBB Bancorp and the President and Chief Executive Officer of the bank, effective January 1, 2025. This transition will ensure a smooth leadership change and continuity in the company's strategic direction.
Business Segments and Loan Portfolio
RBB Bancorp operates as a bank holding company for its wholly-owned banking subsidiaries, Royal Business Bank and RBB Asset Management Company. The company provides a range of business-banking products and services predominantly to Asian-centric communities through its full-service branch locations.
The bank's loan portfolio consists primarily of loans to small and middle-market businesses as well as individuals. RBB's loan offerings include commercial and investor real estate loans, business loans and lines of credit, Small Business Administration (SBA) 7(a) and 504 loans, mortgage loans, and trade finance.
As of September 30, 2024, total loans held for investment (HFI) were $3.09 billion, an increase of 2% from the $3.03 billion reported at December 31, 2023. This growth was driven by an $84.8 million, or 7.3%, increase in commercial real estate (CRE) loans, partially offset by decreases in single-family residential (SFR) mortgages, SBA loans, construction and land development loans, commercial and industrial (C&I) loans, and other loan categories.
The CRE loan portfolio, which includes owner-occupied and non-owner occupied CRE, multi-family residential, and SFR mortgage loans originated for a business purpose, represented 40.5% of the total loan portfolio as of September 30, 2024. The weighted average loan-to-value ratio for the CRE portfolio was 56.9% at the end of the third quarter.
SFR mortgage loans, which made up 47.7% of the total loan portfolio, decreased by $14.4 million, or 1%, during the first nine months of 2024 due to higher payoffs and paydowns relative to originations. The weighted average loan-to-value ratio for the SFR portfolio was 55.8%, and the weighted average FICO score was 763 as of September 30, 2024.
Deposit Base
Deposits are another key component of RBB's business, totaling $3.09 billion as of September 30, 2024, a decrease of 2.6% from the $3.17 billion reported at December 31, 2023. This decrease was primarily due to a $119.9 million, or 10.1%, reduction in time deposits, partially offset by a $33.4 million, or 5.3%, increase in non-maturity deposits. Noninterest-bearing demand deposits made up 17.6% of total deposits at the end of the third quarter, compared to 17.0% at the end of 2023.
Conclusion
Overall, RBB Bancorp faces a mix of challenges and opportunities as it navigates the evolving banking landscape. While the company's credit quality concerns warrant close monitoring, its strong capital position, diversified revenue streams, and experienced management team position it well to capitalize on growth opportunities in its target markets. The company's focus on serving Asian-centric communities, coupled with its strategic expansion plans and prudent risk management approach, provide a solid foundation for future growth. Investors will need to closely follow the company's progress in resolving its non-performing loans, its ability to maintain a balanced approach to growth and risk management, and its success in executing its strategic initiatives in the coming years.