RBB Bancorp

ANALYSIS OF RESULTS OF OPERATIONS

Financial Performance

Average Balance Sheet, Interest and Yield/Rate Analysis

The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (“TE”) basis by adjusting interest income utilizing the federal statutory tax rate of 21% for 2024 and 2023. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. For additional information see “Capital Resources and Liquidity Management” and Part I, Item 3.* "Quantitative and Qualitative Disclosures about Market Risk*" included in this Report.

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the periods presented. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

The following table summarizes the extent to which changes in (1) interest rates and (2) volume of average interest-earning assets and average interest-bearing liabilities affected by our net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average yield/rate.

Net Interest Income/Average Balance Sheet

Net interest income was $24.9 million for the first quarter of 2024, compared to $25.7 million for the fourth quarter of 2023. The $792,000 decrease in net interest income was due to higher interest expense of $755,000 and lower interest income of $37,000. The increase in interest expense was due to higher average rates paid on total interest-bearing liabilities, which are mostly average interest-bearing deposits, offset by lower average balances of total interest-bearing liabilities, including the favorable impact of our $55.0 million redemption of subordinated notes in the prior quarter. The increase in interest expense included a $1.4 million increase in interest expense on deposits due to a 24 basis point increase in the average rate paid on interest-bearing deposits and a $19.7 million increase in average interest-bearing deposits. The decrease in interest income included a $345,000 decrease in interest and fees on total loans due mostly to a $36.8 million, or 1.2%, decrease in the average balance of total loans outstanding as loan production moderated in the current interest rate environment.

Net interest margin was 2.69% for the first quarter of 2024, a decrease of four basis points from 2.73% for the fourth quarter of 2023. The decrease was due to the 16 basis point increase in the total cost of funds exceeding the 10 basis point increase in the yield on average total interest-earning assets. The yield on average total interest-earning assets increased to 5.92% for the first quarter of 2024 compared to 5.82% for the fourth quarter of 2023 due mainly to an 11 basis point increase in the yield on average total loans to 6.07% for the first quarter of 2024 compared to 5.96% for the fourth quarter of 2023. The 16 basis point increase in the overall cost of funds was due primarily to a 24 basis point increase in the average cost of total interest-bearing deposits to 4.32% in the first quarter of 2024, offset by the positive impact of our $55.0 million redemption of subordinated notes during the fourth quarter of 2023. The cost of total interest-bearing deposits increased due primarily to repricing deposits as a result of the higher interest rate environment and peer bank deposit competition. In addition, while average noninterest-bearing deposits decreased $7.2 million, the ratio of average noninterest-bearing deposits to average total funding sources remained unchanged from the prior quarter at 16%.

Net interest income was $24.9 million for the first quarter of 2024, compared to $34.1 million for the first quarter of 2023. The $9.2 million decrease in net interest income was primarily due to higher interest expense of $10.3 million offset partially by higher interest income of $1.1 million. The increase in interest expense was due to higher average rates paid on interest-bearing deposits, and a change in the mix of total deposits. The increase in interest income was primarily due to higher market rates, offset by a change in the mix of interest earning assets including lower average loan balances as compared to the same quarter last year.

Net interest margin was 2.69% for the first quarter of 2024, a decrease of 101 basis points from 3.70% for the first quarter of 2023. The decrease was primarily due to a 157 basis point increase in the cost of interest-bearing deposits, partially offset by an increase in the yield on interest earning cash, investment securities, and loans. The cost of interest-bearing deposits increased due to increased market rates including the Federal Reserve raising the target Federal Funds Rates during 2023 and peer bank deposit competition. The Federal Reserve increased the target Federal Funds Rate 100 basis points since the end of 2022, including 50 basis points since the end of first quarter of 2023. The weighted average Federal Funds Rate was 5.33% for the first quarter of 2024 compared to 4.65% for the first quarter of 2023.

Interest and fees on total loans for the first quarter of 2024 were $45.5 million compared to $49.9 million for the first quarter of 2023. The $4.4 million decrease was primarily due to a $324.2 million decrease in the average balance of total loans outstanding. The decrease in the average loan balance was primarily due to strategic loans sales and moderated loan production to improve the risk profile of the loan portfolio and strengthen overall on-balance sheet liquidity in response to market conditions during 2023. For the three months ended March 31, 2024 and 2023, the yield on total loans was 6.07% and 6.06%.

Interest expense on deposits increased to $27.8 million for the first quarter of 2024 as compared to $15.7 million for the first quarter of 2023. The $12.1 million increase in interest expense on deposits was primarily due to the increase in the average rates paid on interest-bearing deposits and a $270.5 million increase in average interest-bearing deposits. Average interest-bearing deposits increased, in part, to help offset a decrease in noninterest-bearing deposits as we worked to lower concentration risk in our deposit portfolio coupled with the impact of customers preferring their deposit balances in higher yielding deposit products in response to higher market interest rates. Average noninterest-bearing deposits decreased $170.0 million to $528.3 million in the first quarter of 2024 from $698.4 million in the first quarter of 2023. Average noninterest-bearing deposits as a percentage of total average deposits was 16% for the first quarter of 2024 compared to 23% for the first quarter of 2023.

Provision for Credit Losses

We recorded no provision for credit losses for the first quarter of 2024 compared to a reversal of provision for credit losses of $431,000 in the fourth quarter of 2023. The provision for credit losses for the three months ended March 31, 2024, included a reversal of provision for loan losses of $31,000, offset by a provision for credit losses for unfunded commitments of $31,000. The overall provision for credit losses for the first quarter of 2024 took into consideration several factors including: lower specific reserves, changes in the loan portfolio mix, credit quality metrics, including higher nonperforming loans at the end of the first quarter of 2024 compared to the end of 2023, and ongoing uncertainty in the economic indicators such as inflation and the outlook on market interest rates.

We recorded a provision for credit losses of $2.0 million for the first quarter of 2023 compared to no provision for the first quarter of 2024. There were $184,000 in net loan charge-offs in the first quarter of 2024, as compared to $157,000 in net loan charge-offs in the first quarter of 2023. The higher provision during the first quarter of 2023 was reflective of increases in classified loans during the first quarter of 2023 that increased the qualitative factors in the our CECL model.

Noninterest Income

The following table sets forth the major components of our noninterest income for the periods presented:

Noninterest income for the first quarter of 2024 was $3.4 million, a decrease of $4.0 million from $7.4 million in the fourth quarter of 2023. The decrease was due primarily to the CDFI ERP award of $5.0 million recognized in the fourth quarter of 2023 with no similar income in the first quarter of 2024. This decrease was partially offset by gains on the transfer of two loans to other real estate owned (“OREO”) of $560,000 and higher net gains on the sale of OREO of $221,000 (both of which are included in “Gain on OREO”). There were three loans transferred to OREO totaling $2.5 million during the first quarter of 2024, of which one OREO with a carrying value of $1.4 million was sold. We also recognized a higher gain on sale of loans of $196,000.

Noninterest income increased $1.0 million to $3.4 million for the first quarter of 2024, compared to $2.4 million for the same quarter in the prior year. The increase was primarily attributable to a $724,000 increase in gain on OREO, as described above, and a $283,000 increase in gain on sale of loans, offset partially by a $142,000 decrease in loan servicing income, net of amortization. The decrease in loan servicing income is due to a decrease in average loans being serviced, offset by the impact of lower pre-payments on such loans due to higher market rates.

The following table presents information on loans servicing income for the periods presented:

During the three months ended March 31, 2024, we were servicing SFR mortgage loans for other financial institutions, FHLMC and FNMA as well as servicing SBA loans. The decline in the respective servicing portfolios is due to lower amounts of loans sold with servicing retained combined with the underlying loan portfolio activity of loans from the first quarter of 2023 through the first quarter of 2024.

The following table presents loans serviced for others as of the dates indicated:

The following table presents information on loans sold and gain on loans sold for the periods presented:

Noninterest Expense

The following table sets forth major components of our noninterest expense for the periods presented:

Noninterest expense for the first quarter of 2024 was $17.0 million, an increase of $576,000 from $16.4 million for the fourth quarter of 2023. This increase was due primarily to higher salaries and employee benefits expenses of $1.1 million, partially offset by lower legal and professional fees of $411,000 and lower insurance and regulatory assessments of $140,000. The increase in salaries and benefits is attributed to the timing of taxes and benefits, which are higher in the first quarter of the year. The number of full-time equivalent employees was 371 at March 31, 2024 compared to 376 at December 31, 2023. The decrease in legal and professional expenses from the fourth quarter of 2023 was due in part to higher legal recoveries of $65,000 as the first quarter included $165,000 in recoveries compared to $100,000 in the fourth quarter of 2023 coupled with lower external auditor fees.

Noninterest expense decreased $1.9 million to $17.0 million in the first quarter of 2024 compared to $18.9 million for the first quarter of 2023. The $1.9 million decrease was primarily due to a decrease in legal and other professional expenses of $2.1 million, other expenses of $333,000, and marketing and business promotion expense of $128,000, partially offset by an increase in insurance and regulatory assessments of $478,000. The decrease in legal and professional expenses was due mostly to lower legal expenses and external consulting and audit fees related to the previously disclosed internal investigation that was subsequently resolved. Marketing and business promotion expense decreased due to decreases in advertising and CRA donation expenses. Other expenses includes board of director compensation costs, which decreased $270,000 due to the reconstitution of the board after the first quarter of 2023. Insurance and regulatory assessments increased due mostly to a $435,000 increase in our FDIC assessment due in part to the consent order issued in October 2023.

Income Tax Expense

We recorded an income tax provision of $3.2 million and $5.0 million, reflecting an effective tax rate of 28.8% and 29.4%, for the three months ended March 31, 2024 and December 31, 2023. Income tax included an $8,000 expense for stock options exercised for the three months ended March 31, 2024 and December 2023.

We recorded an income tax provision of $3.2 million and $4.6 million, reflecting an effective tax rate of 28.8% and 29.4%, for the three months ended March 31, 2024 and 2023. Income tax included an $8,000 expense for stock options exercised for the three months ended March 31, 2024 and a $5,000 benefit for the same period in 2023.