RBB Bancorp (NASDAQ:RBB) and its subsidiaries, Royal Business Bank (the “Bank”) and RBB Asset Management Company (“RAM”), collectively referred to herein as “the Company,” announced financial results for the quarter ended September 30, 2023.
The Company reported net income of $12.0 million, or $0.63 diluted earnings per share, for the quarter ended September 30, 2023, compared to net income of $10.9 million, or $0.58 diluted earnings per share, and $16.7 million, or $0.87 diluted earnings per share, for the quarter ended June 30, 2023 and September 30, 2022, respectively.
“We were pleased to be awarded with a $5 million Community Development Financial Institution (“CDFI”) Equitable Recovery Program (“ERP”) award by the US Treasury,” said David Morris, CEO of RBB Bancorp. “We believe it is a testament to our ongoing efforts to support the communities in which we operate.”
Mr. Morris continued, “We continued to make progress on our goal of reducing our loan to deposit ratio. We were also pleased to see stabilization in credit and a reduction in expenses in the third quarter.”
“We have done a good job managing through the market volatility and improving corporate governance,” said Dr. James Kao, Chairman of the Company. “The Board of Directors is confident that we now have the right strategy and people in place to continue to build shareholder value.”
Third Quarter 2023 Highlights Compared to Second Quarter 2023
- Net income increased to $12.0 million, or $0.63 diluted earnings per share.
- Net interest income decreased to $27.6 million.
- Noninterest income increased to $7.7 million and noninterest expense decreased to $16.9 million.
- Total loans held for investment decreased by $75.0 million and total deposits decreased by $21.3 million, resulting in a decrease in the net loan to deposit ratio to 97.6% from 99.3% at the end of the prior quarter.
- Return on average assets increased to 1.17%.
- Return on average tangible common equity increased to 11.04%. (1)
- Net interest margin decreased to 2.87%.
- The ratio of allowance for credit losses to total loans increased to 1.36% from 1.35% at the end of prior quarter.
- The Company's capital position remained strong with a ratio of 17.8% tier 1 common equity to risk-weighted assets.
- The Company will redeem $55 million of outstanding Fixed-to-Floating Subordinated Notes due in 2028 (the “2028 Subordinated Notes”) on December 1, 2023.
(1) Reconciliations of the non–U.S. generally accepted accounting principles (“GAAP”) measures are set forth at the end of this press release.
Net Interest Income and Net Interest Margin
Net interest income before provision for credit losses was $27.6 million for the third quarter of 2023, compared to $31.9 million for the second quarter of 2023. The $4.3 million decrease was primarily attributable to an increase in interest expense on time deposits and a decrease in interest and fees on loans, partially offset by increases in interest income on interest-bearing deposits and on investment securities. For the third quarter of 2023, average time deposits increased $70.8 million and the interest rate paid on time deposits increased 35 basis points to 4.33% from 3.98% in the second quarter of 2023.
Compared to the third quarter of 2022, net interest income before provision for credit losses decreased $11.4 million from $39.0 million. The decrease was primarily attributable to an increase in average interest-bearing deposits of $651.7 million and a 301 basis point increase in the interest rate paid on interest-bearing deposits, partially offset by an increase in average loans of $31.5 million and a 46 basis point increase in the yield earned on loans from 5.53% in the third quarter of 2022 to 5.99%.
Net interest margin was 2.87% for the third quarter of 2023, a decrease of 50 basis points from 3.37% in the second quarter of 2023 primarily due to a 36 basis point increase in the average cost of interest-bearing deposits from 3.47% in the second quarter of 2023 to 3.83% in the third quarter of 2023. Cost of interest-bearing deposits increased due to increasing market rates and peer bank deposit competition.
The Company will redeem on December 1, 2023 the 2028 Subordinated Notes at a redemption price equal to 100% of the principal amount of the 2028 Subordinated Notes plus accrued and unpaid interest to but excluding December 1, 2023. The 2028 Subordinated Notes have an aggregate principal amount outstanding of $55 million. From and after December 1, 2023, all interest on the 2028 Subordinated Notes will cease to accrue.
Noninterest Income
Noninterest income was $7.7 million for the third quarter of 2023, an increase of $5.2 million from $2.5 million in the second quarter of 2023. The increase was primarily driven by a $5.0 million CDFI ERP award received, a $194,000 increase in gain on sale of loans, and a $190,000 increase in gain on sale of other real estate owned (“OREO”), partially offset by a $110,000 decrease in wealth management commissions during the quarter.
Noninterest Expense
Noninterest expense for the third quarter of 2023 was $16.9 million, compared to $18.5 million for the second quarter of 2023. The $1.6 million decrease was primarily attributable to a $1.9 million decrease in legal and other professional fees, partially offset by a $417,000 increase in salaries and employee benefits expenses primarily due to new hires in the quarter. The decrease in legal and other professional fees were primarily due to the insurance coverage with respect to legal expenses related to the Company's voluntary cooperation with the Securities and Exchange Commission's (“SEC”) requests for information, as disclosed in the Company's Current Report on Form 8-K filed with the SEC on July 24, 2023, after all prior payments of the Company reached the $1.0 million retention amount.
Income Taxes
The effective tax rate was 29.8% for the third quarter of 2023, 29.5% for the second quarter of 2023, and 27.8% for the third quarter of 2022.
Loan and Securities Portfolio
Loans held for investment, net of deferred fees and discounts, totaled $3.1 billion as of September 30, 2023, a decrease of $75.0 million from June 30, 2023, and a decrease of $100.0 million from September 30, 2022. The decrease from June 30, 2023 was primarily due to a $49.4 million decrease in single-family residential mortgages, a $19.2 million decrease in commercial real estate loans, a $3.8 million decrease in commercial and industrial loans, a $3.0 million decrease in Small Business Administration (“SBA”) loans, and a $2.5 million decrease in other loans, partially offset by a $2.9 million increase in construction and land development loans. The decrease from September 30, 2022 was primarily due to a $93.7 million decrease in construction and land development loans, a $77.2 million decrease in commercial and industrial loans, a $56.6 million decrease in commercial real estate loans, an $11.5 million decrease in SBA loans, and a $10.0 million decrease in other loans, partially offset by a $149.0 million increase in single-family residential mortgages. In the first nine months of 2023, management decreased loan growth to lower the loan to deposit ratio and to strengthen the liquidity position of the Company.
As of September 30, 2023, the Bank’s total available-for-sale securities amounted to $354.4 million, including available-for-sale securities maturing in over 12 months of $259.4 million. As of September 30, 2023, the Bank recorded gross unrealized losses of $37.1 million on its available-for-sale securities compared to gross unrealized losses of $32.3 million as of June 30, 2023 with respect to its available-for-sale securities due to Federal Reserve Bank raised interest rate by 25 basis points in July 2023.
Liquidity and Deposits
Total deposits were $3.2 billion as of September 30, 2023, which reflected a decrease of $21.3 million or 0.7% compared to June 30, 2023, primarily due to a decrease in brokered deposits of $49.1 million, partially offset by an increase in time deposits of $31.7 million. As of September 30, 2023, the Company had $330.8 million in cash on the balance sheet, which is an increase of $84.5 million or 34.3% from June 30, 2023. In addition, the Company had $909.8 million in Federal Home Loan Bank borrowing availability, Fed fund lines of $92.0 million, $41.9 million in available funds from the Federal Reserve Bank's discount window and $261.2 million in available-for-sale securities that were unpledged.
Credit Quality
Nonperforming assets totaled $40.4 million, or 0.99% of total assets at September 30, 2023, compared to $42.2 million, or 1.04% of total assets at June 30, 2023. The $1.8 million decrease in nonperforming assets was due to loans that migrated to accrual status of $2.2 million, loans charged-off of $2.2 million, loan paydowns of $295,000, and one OREO of $293,000 that was sold, partially offset by loans that migrated into non-accrual status of $3.2 million, consisting primarily of commercial real estate loans and single-family residential mortgages.
Special mention loans totaled $31.2 million or 1.00% of total loans at September 30, 2023, compared to $24.2 million, or 0.76% of total loans at June 30, 2023. The increase is due to additional special mention loans of $9.3 million, consisting primarily of commercial real estate loans, partially offset by an upgrade to pass loans of $2.2 million.
Substandard loans totaled $71.4 million or 2.29% of total loans at September 30, 2023, compared to $74.1 million, or 2.32% of total loans at June 30, 2023. The decrease is due to loan paydowns of $3.2 million and upgrades to pass loans of $823,000, partially offset by additional substandard loans of $1.4 million, consisting primarily of single-family residential mortgages.
30-89 day delinquent loans, excluding non-accrual loans, increased $12.4 million to $19.7 million as of September 30, 2023 compared to $7.2 million as of June 30, 2023. The $12.4 million increase in past due loans was primarily due to a new delinquent commercial real estate loan of $16.1 million for one business day payment delay, which reverted back to current in October 2023. Offsetting the increase were loans that migrated back to past due for less than 30 days in the amount of $4.8 million, consisting primarily of single-family residential mortgages, loans that converted to non-accrual status in the aggregate amount of $835,000, and loan payoffs or paydowns of $575,000.
Total net charge-offs were $2.2 million for the third quarter of 2023, as compared to net charge-offs of $580,000 in the prior quarter and net recoveries of $127,000 in the same quarter last year.
Provision for credit losses were $1.4 million for the third quarter of 2023, as compared to $380,000 in the prior quarter and $1.8 million in the same quarter last year.
The allowance for credit losses totaled $42.4 million, or 1.36% of loans held for investment at September 30, 2023, compared with $43.1 million, or 1.35%, of loans held for investment at June 30, 2023.
Dividend Payout and Stock Repurchase
For the third quarter of 2023, the Board of Directors declared a common stock cash dividend of $0.16 per share, payable on November 10, 2023 to stockholders of record on October 30, 2023.
On June 14, 2022, the Board of Directors authorized the repurchase of up to 500,000 shares of common stock, of which 433,124 shares remain available. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with SEC Rules 10b5-1 and 10b-8. The Company did not repurchase any shares during the third quarter of 2023, and has not repurchased any shares since October 24, 2022 pursuant to this authorization.
Corporate Overview
RBB Bancorp is a community-based financial holding company headquartered in Los Angeles, California. As of September 30, 2023, the Company had total assets of $4.1 billion. Its wholly-owned subsidiary, the Bank, is a full service commercial bank, which provides business banking services to the Asian communities in Los Angeles County, Orange County, and Ventura County in California, in Las Vegas, Nevada, in Brooklyn, Queens, and Manhattan in New York, in Edison, New Jersey, in the Chicago neighborhoods of Chinatown and Bridgeport, Illinois, and on Oahu, Hawaii. Bank services include remote deposit, E-banking, mobile banking, commercial and investor real estate loans, business loans and lines of credit, commercial and industrial loans, SBA 7A and 504 loans, 1-4 single family residential loans, automobile lending, trade finance, a full range of depository account products and wealth management services. The Bank has nine branches in Los Angeles County, two branches in Ventura County, one branch in Orange County, California, one branch in Las Vegas, Nevada, three branches and one loan operation center in Brooklyn, three branches in Queens, one branch in Manhattan in New York, one branch in Edison, New Jersey, two branches in Chicago, Illinois, and one branch in Honolulu, Hawaii. The Company's administrative and lending center is located at 1055 Wilshire Blvd., Los Angeles, California 90017, and its finance and operations center is located at 7025 Orangethorpe Ave., Buena Park, California 90621. The Company's website address is www.royalbusinessbankusa.com.
Conference Call
Management will hold a conference call at 11:00 a.m. Pacific time/2:00 p.m. Eastern time on Tuesday, October 24, 2023, to discuss the Company’s third quarter 2023 financial results.
To listen to the conference call, please dial 1-888-506-0062 or 1-973-528-0011, the Participant ID code is 626566, conference ID RBBQ323. A replay of the call will be made available at 1-877-481-4010 or 1-919-882-2331, the passcode is 49264, approximately one hour after the conclusion of the call and will remain available through November 7, 2023.
The conference call will also be simultaneously webcast over the Internet; please visit our Royal Business Bank website at www.royalbusinessbankusa.com and click on the “Investors” tab to access the call from the site. This webcast will be recorded and available for replay on our website approximately two hours after the conclusion of the conference call.
Disclosure
This press release contains certain non-GAAP financial disclosures for tangible common equity and tangible assets and adjusted earnings. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Please refer to the tables at the end of this release for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measures to the GAAP financial measures.
Safe Harbor
Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to, business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic markets, including the tight labor market, ineffective management of the U.S. federal budget or debt or turbulence or uncertainly in domestic of foreign financial markets; the strength of the United States economy in general and the strength of the local economies in which we conduct operations; our ability to attract and retain deposits and access other sources of liquidity; possible additional provisions for loan losses and charge-offs; credit risks of lending activities and deterioration in asset or credit quality; extensive laws and regulations and supervision that we are subject to, including potential supervisory action by bank supervisory authorities; increased costs of compliance and other risks associated with changes in regulation, including any amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act; compliance with the Bank Secrecy Act and other money laundering statutes and regulations; potential goodwill impairment; liquidity risk; fluctuations in interest rates; the transition away from the London Interbank Offering Rate (LIBOR) and related uncertainty as well as the risks and costs related to our adopted alternative reference rate, including the Secured Overnight Financing Rate (SOFR); risks associated with acquisitions and the expansion of our business into new markets; inflation and deflation; real estate market conditions and the value of real estate collateral; environmental liabilities; our ability to compete with larger competitors; our ability to retain key personnel; successful management of reputational risk; severe weather, natural disasters, earthquakes, fires; or other adverse external events could harm our business; geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, including the conflicts between Russia and Ukraine and in the Middle East, which could impact business and economic conditions in the United States and abroad; public health crises and pandemics, including the COVID-19 pandemic, and their effects on the economic and business environments in which we operate, including our credit quality and business operations, as well as the impact on general economic and financial market conditions; general economic or business conditions in Asia, and other regions where the Bank has operations; failures, interruptions, or security breaches of our information systems; climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs; cybersecurity threats and the cost of defending against them; our ability to adapt our systems to the expanding use of technology in banking; risk management processes and strategies; adverse results in legal proceedings; the impact of regulatory enforcement actions, if any; certain provisions in our charter and bylaws that may affect acquisition of the Company; changes in tax laws and regulations; the impact of governmental efforts to restructure the U.S. financial regulatory system; the impact of future or recent changes in the Federal Deposit Insurance Corporation ("FDIC") insurance assessment rate of the rules and regulations related to the calculation of the FDIC insurance assessment amount; the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters, including Accounting Standards Update 2016-13 (Topic 326, “Measurement of Current Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses Model, which changed how we estimate credit losses and may further increase the required level of our allowance for credit losses in future periods; market disruption and volatility; fluctuations in the Bancorp’s stock price; restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure; issuances of preferred stock; our ability to raise additional capital, if needed, and the potential resulting dilution of interests of holders of our common stock; the soundness of other financial institutions; our ongoing relations with our various federal and state regulators, including the SEC, FDIC, FRB and California Department of Financial Protection and Innovation; our success at managing the risks involved in the foregoing items and all other factors set forth in the Company’s public reports, including its Annual Report as filed under Form 10-K and Form 10-K/A for the year ended December 31, 2022, and particularly the discussion of risk factors within that document. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.
RBB BANCORP AND SUBSIDIARIES | ||||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||||
(Unaudited) | ||||||||||||
(Dollars in thousands) | ||||||||||||
September 30, | June 30, | September 30, | ||||||||||
2023 | 2023 | 2022 | ||||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 330,791 | $ | 246,325 | $ | 134,179 | ||||||
Federal funds sold and other cash equivalents | — | — | 40,000 | |||||||||
Total cash and cash equivalents | 330,791 | 246,325 | 174,179 | |||||||||
Interest-bearing deposits in other financial institutions | 600 | 600 | 600 | |||||||||
Investment securities available for sale | 354,378 | 391,116 | 266,270 | |||||||||
Investment securities held to maturity | 5,214 | 5,718 | 5,735 | |||||||||
Mortgage loans held for sale | 62 | 555 | 1,185 | |||||||||
Loans held for investment | 3,120,952 | 3,195,995 | 3,220,913 | |||||||||
Allowance for credit losses | (42,430 | ) | (43,092 | ) | (36,047 | ) | ||||||
Net loans held for investment | 3,078,522 | 3,152,903 | 3,184,866 | |||||||||
Premises and equipment, net | 26,134 | 26,600 | 26,850 | |||||||||
Federal Home Loan Bank (FHLB) stock | 15,000 | 15,000 | 15,000 | |||||||||
Cash surrender value of life insurance | 58,346 | 57,989 | 56,975 | |||||||||
Goodwill | 71,498 | 71,498 | 71,498 | |||||||||
Servicing assets | 8,439 | 8,702 | 10,054 | |||||||||
Core deposit intangibles | 3,010 | 3,246 | 3,971 | |||||||||
Right-of-use assets- operating leases | 29,949 | 28,677 | 24,768 | |||||||||
Accrued interest and other assets | 87,411 | 66,689 | 63,278 | |||||||||
Total assets | $ | 4,069,354 | $ | 4,075,618 | $ | 3,905,229 | ||||||
Liabilities and shareholders' equity | ||||||||||||
Deposits: | ||||||||||||
Noninterest-bearing demand | $ | 572,393 | $ | 585,746 | $ | 916,301 | ||||||
Savings, NOW and money market accounts | 608,020 | 598,546 | 882,126 | |||||||||
Time deposits, $250,000 and under | 1,237,831 | 1,275,476 | 608,489 | |||||||||
Time deposits, greater than $250,000 | 735,828 | 715,648 | 552,754 | |||||||||
Total deposits | 3,154,072 | 3,175,416 | 2,959,670 | |||||||||
FHLB advances | 150,000 | 150,000 | 240,000 | |||||||||
Long-term debt, net of debt issuance costs | 174,019 | 173,874 | 173,441 | |||||||||
Subordinated debentures | 14,884 | 14,829 | 14,665 | |||||||||
Lease liabilities - operating leases | 31,265 | 29,915 | 25,701 | |||||||||
Accrued interest and other liabilities | 39,111 | 31,294 | 19,953 | |||||||||
Total liabilities | 3,563,351 | 3,575,328 | 3,433,430 | |||||||||
Shareholders' equity: | ||||||||||||
Shareholders' equity | 531,692 | 522,623 | 494,248 | |||||||||
Non-controlling interest | 72 | 72 | 72 | |||||||||
Accumulated other comprehensive loss, net of tax | (25,761 | ) | (22,405 | ) | (22,521 | ) | ||||||
Total shareholders' equity | 506,003 | 500,290 | 471,799 | |||||||||
Total liabilities and shareholders’ equity | $ | 4,069,354 | $ | 4,075,618 | $ | 3,905,229 | ||||||
RBB BANCORP AND SUBSIDIARIES | ||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||
(Unaudited) | ||||||||||||
(Dollars in thousands, except share and per share data) | ||||||||||||
