RBB - RBB Bancorp: Oversold Strong Deposit Base 5% Yield

2023-07-16 03:55:59 ET

Summary

• RBB is a smaller California-based regional bank that has gotten caught in the industry sell-off.
• The firm's deposit base is still growing, and earnings are holding up fine.
• RBB has had significant changes in the management team, investors should take that into account.
• I see the stock as oversold and worth at least $16 if not more going forward.

RBB Bancorp ( RBB ) is a California-based regional bank focused on serving Asian-American communities. Like many smaller banks, RBB shares have plunged in 2023, and I see a potential value opportunity here. Let's dive into the bank's story and outlook.

RBB's mission was to fill a perceived hole in the market. Its management team, which consists of bankers with a long career history in both Asia and California, realized that there were underserved customers in the California market in the wake of the 2008 financial crisis. As per the bank's website , management:

"[I]dentified an opportunity resulting from the 2007 credit crisis to capitalize on the general dissatisfaction that many customers had with the nature and level of services that were being provided by existing Asian-American and Chinese-American banks. These bankers observed that first generation Chinese immigrants were not well-served by existing banks."

As there are thousands of community and regional banks in the United States, I always appreciate when one comes to market with a unique angle or business strategy. It's also noteworthy that RBB was founded in 2008; nowadays we see very little new bank formation in the United States. So I'm always intrigued by the newer firms that have entered the arena at a time when most other banks are looking to consolidate.

RBB launched its IPO in 2017 and shares began trading around $23/pop. The stock had a fairly uneventful run over the next five years, generally settling around the $20 mark. That changed, however, with the regional banking crisis from earlier this year; RBB shares have lost nearly half their value over the past year and made all-time lows this spring. While the stock has bounced, it is still barely above the prior 2020 trough price:

This raises the question: Is RBB's distinct business model and opportunity worth investing in today?

RBB Business Overview

As there has been very little coverage of this bank either at Seeking Alpha or elsewhere recently, it's worth giving a quick overview of the business.

RBB, which is short for Royal Business Bank, was founded in 2008 and is headquartered in Los Angeles. It is primarily a business-oriented bank focused on serving the Chinese-American community. The bank goes to where its clients are, rather than staying within California exclusively. To that point, while RBB has a dozen branches in Southern California, it is also present with traditional branches in New York, Chicago, Nevada, New Jersey, and Hawaii.

The bank has four principal lines of business:

• Commercial Real Estate (“CRE”)
• Commercial & Industrial (“C&I”)
• 1-4 Single Family Residential (“SFR”)
• SBA Lending (“SBA”)

The bank has grown rapidly thanks in part to acquisitions; its total balance sheet grew from $1.0 billion in 2015 to $3.9 billion in 2022. The bank earns above-average returns on assets and equity. This appears to be in large part thanks to its unusually low efficiency ratio (like golf, lower is better) indicating that RBB has a tighter grip on costs than most other rival banks.

RBB's Recent Earnings

RBB's Q1 earnings report came out in late April. It was a bit of a disappointment, with earnings per share of 58 cents coming in well short of expectations which were for a 72 cent profit. That also represented a significant decline year-over-year, as the company had earned 74 cents per share for the same quarter of 2022.

At first glance, it might seem like RBB is suffering from the same issues hitting the rest of the regional banking industry. However, the drop in earnings was in significant part due to a rise in legal and professional costs which came about due to the recent changes in the management team.

Unlike many regional banks, RBB hasn't had any issues with its deposit base. The company saw a 5.8% increase in its deposit base in Q1, which should put to rest fears of any run on its deposits. While its net interest margin did slip, it is still at a healthy 3.7% overall, which is in-line with what RBB had been generating prior to 2022.

Overall, RBB has seen a huge spike in earnings over the past two years:

It wouldn't be surprising if the firm's earnings power dips back toward $2/share or $2.50/share until the yield curve inversion clears up and RBB can start expanding its net interest margin again. However, I'd argue the plunge in RBB's stock price seems rather excessive compared to the state of the firm's profits, deposit base, and forward outlook, as RBB typically traded around $20/share back when it was only earning $2/share per year.

That said, there is one other important matter. Investors should also consider the recent changes in management. Former CEO Alan Thian resigned due to a personal conduct matter. A Seeking Alpha post noted that:

"[I]nternal investigation conducted by a special committee of the Board of Directors that found violations of company policies and procedures, including those relating to personnel decisions, as well as resulting adverse effects on officer and employee morale."

The matter did not have any adverse financial impact on the company. David Morris, who was the bank's CFO since 2010, was elevated to the CEO position.

Further to that, in June 2023, the company brought in Johnny Lee to be the firm's new president and Chief Banking Officer. Lee worked previously for a decade as Senior Managing Director and Head of International and Commercial Banking at East West Bancorp ( EWBC ), overseeing a $7 billion commercial loan book there. I believe this is a prudent hire for RBB, as East West is a much larger player in the space, and RBB shares have sharply underperformed East West recently; this could help close the gap.

RBB Stock Verdict

RBB is a smaller regional bank, it's in California, and there has been a recent shake-up in the management team. I understand why investors might be skeptical. But I wouldn't dismiss the bank merely off of those factors.

I think it's important to consider that one of those larger banks with a similar business model, East West, has performed very well relative to the sector:

Over the past year, East West has produced a total return of only negative 8%, whereas the S&P Regional Banking ETF ( KRE ) is down 21%, and RBB is off fully 36%.

Given that investors appreciate the strength of East West's customer base and lending strategy during the current industry downturn, arguably there should be significant upside for RBB as well once investors get around to looking at the smaller California banks that are operating in the same lane. Indeed, to that point, RBB's deposit base has been remarkably strong during the current banking panic. RBB will see a downturn in earnings given the unfavorable yield curve, but as long as the deposits stick around, profitability will take care of itself in due time.

This might lead to the question why I don't own RBB stock in that case. That's because I own Hope Bancorp ( HOPE ), which is another of the Los Angeles-based banks that is focused on providing services to immigrant communities. Hope is larger than RBB and has a longer public track record. Hope shares are also down 31% over the past year, and I see that as a significant overreaction, with Hope shares at seven times forward earnings and offering a 6.3% dividend yield.

That said, for investors that are comfortable with buying smaller-cap regional bank stocks in the current market and which don't mind the recent change in management, I see RBB as being attractive as well.

On a fairly conservative outlook where earnings drop back to pre-pandemic levels and investors merely assign an 8x P/E multiple to that, it'd still result in a $16 stock price, which would be 27% upside from here. And if you think that RBB can maintain the higher net interest margins it has earned recently and/or that shares should be worth closer to 10 or 12 times earnings, that would create substantially greater share price upside.

In the near-term, there's an attractive 5.1% dividend yield, especially as banks with a strong growth track record such as this one rarely offer nearly 5% starting dividend yields.

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