RBB Bancorp — Q1 2024 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2024. RBB Bancorp is a bank holding company whose Royal Business Bank serves businesses and individuals, with a focus on Asian-American communities across several U.S. markets. Figures below are in U.S. dollars; financial amounts are in millions unless otherwise noted.
Financial performance and condition
- Earnings: Net income was $8.0 million and diluted EPS was $0.43, versus $11.0 million and $0.58 in Q1 2023, and $12.1 million and $0.64 in Q4 2023.
- Interest income and margin: Interest and dividend income was $54.8 million, up from $53.8 million year over year. Net interest income was $24.9 million, down from $34.1 million. Net interest margin was 2.69%, versus 3.70% a year earlier and 2.73% in Q4 2023. Deposit pricing pressure was the primary factor in the year-over-year NII decline.
- Credit provision and expenses: No net provision for credit losses was recorded in Q1 2024, compared with a $2.0 million provision in Q1 2023. Noninterest income was $3.4 million and noninterest expense was $17.0 million. The efficiency ratio was 60.07%, compared with 51.86% in Q1 2023.
- Balance sheet: At March 31, total assets were $3.878 billion, loans held for investment were $3.027 billion, deposits were $3.028 billion, and shareholders’ equity was $514.0 million. Versus year-end 2023, assets declined $148.0 million, loans declined $4.5 million, and deposits declined $146.4 million.
- Credit quality: The allowance for loan losses was $41.7 million, or 1.38% of loans. Nonperforming loans rose to $35.9 million (1.19% of loans) from $31.6 million (1.04%) at year-end; nonperforming assets were $37.0 million. Net charge-offs were $184,000. No loans 90 days or more past due remained on accrual.
- Liquidity and funding: Cash and due from banks fell $162.1 million to $269.2 million. Deposits declined largely due to a $208.0 million reduction in wholesale deposits; noninterest-bearing deposits were nearly unchanged at $539.5 million. The loan-to-deposit ratio increased to 98.6% from 94.2%. RBB reported $150 million of FHLB advances, maturing in Q1 2025, and $92 million of federal funds borrowing capacity plus $43.9 million of Federal Reserve borrowing capacity, with no amounts drawn on those lines.
- Debt and capital: Borrowings, including FHLB advances, long-term debt and subordinated debentures, totaled approximately $284.2 million. The company reported strong capital ratios: Tier 1 leverage 12.16%, CET1 19.10%, Tier 1 risk-based 19.72%, and total risk-based 25.91%. Tangible book value per share was $23.68.
- Cash flows: Operating activities provided $4.8 million; investing activities used $16.5 million; financing activities used $150.4 million. Cash and cash equivalents declined $162.1 million during the quarter.
Material changes and unusual items
- Compared with Q1 2023, NII decreased $9.2 million as deposit interest expense rose $12.1 million; higher asset yields and interest income partly offset the increase. Average interest-bearing deposit cost rose to 4.32% from 2.75%.
- Q4 2023 noninterest income included a $5.0 million CDFI Equitable Recovery Program award; there was no comparable Q1 2024 income. Q1 2024 noninterest income included OREO-related gains, including a $560,000 gain on transfer of properties to OREO.
- Three properties related to one borrower were foreclosed on during Q1; one was sold and two were recorded as OREO. Nonperforming assets increased $5.4 million from year-end, while special-mention and substandard loan balances decreased in aggregate.
- Available-for-sale securities had a $30.2 million pretax net unrealized loss at March 31, versus $28.1 million at year-end, attributed primarily to higher market rates and spread changes. Management said it had no intent or requirement to sell impaired securities before recovery and recorded no securities credit-loss allowance.
- The board authorized repurchases of up to 1.0 million shares; 80,285 shares were repurchased during Q1 for $1.5 million. A $0.16-per-share dividend was declared in April, payable May 13, 2024.
Outlook, risks and controls
- The filing provides no quantitative earnings or operating guidance. Management said it did not anticipate a need for additional liquidity as of March 31, 2024.
- Key risks cited include compliance with the FDIC and California DFPI consent order, deposit competition and liquidity, interest-rate changes, credit quality and real-estate concentration, and economic and market uncertainty. California and New York together represented 80.8% of loans; single-family residential mortgages were 48.4% of the portfolio and commercial real estate 38.9%.
- Management reported that the previously identified material weaknesses in the control environment and infrequent-transaction controls were remediated during the quarter, with controls tested and operating effectively. Disclosure controls were assessed as effective at quarter-end.
- Management said ordinary-course litigation was not expected to have a material financial effect. The filing identifies the consent order as a continuing risk; potential additional regulatory action or compliance expense could affect results.
Important facts for investors to verify
- Progress and requirements under the FDIC/DFPI consent order, including related compliance costs and regulatory assessments.
- Deposit trends, wholesale funding reliance, deposit pricing and the 98.6% loan-to-deposit ratio, including the Q1 reduction in cash.
- Further changes in nonperforming loans, delinquencies, OREO and reserves, particularly in real estate-related exposures.
- Whether net interest margin stabilizes as deposits reprice and loan production and balances change.
- Potential effects of interest-rate movements on securities’ unrealized losses and modeled economic value; results depend on assumptions and may differ materially from actual outcomes.
- Execution and financial impact of the share repurchase authorization and declared dividend.