RBB Bancorp — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results. RBB Bancorp is a bank holding company whose Royal Business Bank serves business and individual customers across California and several other U.S. markets.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $55.6 million | $46.4 million | $166.3 million | $128.3 million |
| Interest expense | $28.0 million | $7.4 million | $72.7 million | $17.8 million |
| Net interest income | $27.6 million | $39.0 million | $93.6 million | $110.6 million |
| Provision for credit losses | $1.4 million | $1.8 million | $3.8 million | $3.0 million |
| Noninterest income | $2.8 million | $2.5 million | $7.6 million | $8.9 million |
| Noninterest expense | $16.9 million | $16.7 million | $54.3 million | $50.4 million |
| Net income | $8.5 million | $16.7 million | $30.4 million | $46.7 million |
| Diluted EPS | $0.45 | $0.87 | $1.60 | $2.41 |
| Net interest margin, tax-equivalent | 2.87% | 4.31% | 3.31% | 3.95% |
- Q3 net income fell 49.1% year over year; nine-month net income fell 35.0%. Management attributed the declines chiefly to higher deposit costs and lower net interest income.
- Average cost of interest-bearing deposits rose 301 basis points year over year in Q3. Average interest-bearing deposits increased $651.7 million, while noninterest-bearing deposits declined $393.5 million year over year in the quarter.
- Q3 efficiency ratio was 55.59% versus 40.22%; nine-month ratio was 53.64% versus 42.16%.
- Net cash from operating activities was $60.1 million for the nine months, versus $71.3 million a year earlier. Investing activities provided $89.9 million (prior year used $152.6 million); financing activities provided $97.3 million (prior year used $438.8 million). Cash and cash equivalents ended at $330.8 million, up $247.2 million from year-end 2022.
Balance sheet, liquidity and capital
- At September 30, total assets were $4.07 billion, deposits $3.15 billion, gross loans $3.12 billion, net loans $3.08 billion, and shareholders’ equity $502.5 million.
- Loans held for investment declined 6.5% from December 31, 2022, to $3.12 billion. Commercial real estate loans fell $147.9 million and commercial and industrial loans fell $73.6 million; single-family residential loans rose $41.2 million.
- Deposits increased $176.4 million from year-end, but the mix shifted: noninterest-bearing deposits fell $226.3 million to $572.4 million, or 18.1% of deposits. Time deposits increased about $410 million. Brokered time deposits were $320.7 million.
- Estimated uninsured deposits were $1.32 billion, including $548.1 million of uninsured time deposits. Management reported $1.1 billion of additional FHLB borrowing capacity, $92.0 million of unsecured federal funds lines and $41.9 million of Federal Reserve Discount Window capacity; no borrowings were outstanding on those latter facilities.
- FHLB advances were $150 million, long-term debt net of issuance costs was $174.0 million, and subordinated debentures were $14.9 million. Management intended to redeem $55 million of 2028 subordinated notes on December 1, 2023.
- Capital ratios remained well above stated minimums: consolidated Tier 1 leverage 11.68%, CET1 17.65%, Tier 1 risk-based 18.22%, and total risk-based 26.24%. The Bank was reported as well-capitalized.
Credit quality, changes and unusual items
- Allowance for credit losses was $42.4 million, or 1.36% of loans, versus $41.1 million and 1.23% at year-end. Nine-month net charge-offs were $2.9 million, compared with net recoveries of $87,000 a year earlier.
- Nonperforming loans rose to $40.1 million, or 1.29% of loans, from $23.5 million, or 0.71%, at year-end. Nonperforming assets were 0.99% of assets versus 0.61%. The filing reports no loans 90 days or more past due and still accruing.
- Real estate lending is a substantial concentration: single-family residential loans were 48.2% of loans and commercial real estate 37.3%. Management cited increases in classified loans as a factor in the allowance assessment.
- Available-for-sale securities were $354.4 million and carried $37.1 million of pretax unrealized losses, compared with $31.3 million at year-end. Management attributed the losses primarily to market-rate and spread movements, stated it did not intend to sell and did not record an allowance for credit losses on AFS securities.
- Q3 noninterest income included a $190,000 gain on sale of other real estate owned. Nine-month legal and professional expense rose $2.6 million, including $1.8 million of legal costs related to the company’s voluntary cooperation with SEC requests for information; auditor fees also increased $923,000.
- RBB and Gateway mutually terminated their proposed acquisition agreement on September 28, 2023, with no penalty or liability disclosed. RBB received a $5.0 million CDFI Equitable Recovery Program grant in September; income recognition is deferred pending performance goals.
Outlook, risks and contingencies
- No quantified earnings or balance-sheet guidance is provided. Management said it expected to manage liquidity in light of banking-sector disruption and anticipated deposits to grow alongside loans. It reported sufficient capital and no expected need for additional liquidity as of September 30.
- Management’s interest-rate model projected higher net interest income under parallel rate increases over the following year, but lower economic value of equity if rates rose. Results are model-based and depend on assumptions.
- After quarter-end, effective October 25, 2023, the Bank consented to an FDIC/California DFPI order concerning its AML/CFT compliance program. Required actions include enhanced oversight staffing, policies, controls, customer due diligence, training and independent testing, and correction of cited program deficiencies. The order does not require a penalty, additional capital or increased liquidity; failure to comply could prompt further enforcement or penalties. The Bank neither admitted nor denied alleged BSA violations.
- Management concluded disclosure controls and internal control over financial reporting were ineffective because of five identified material weaknesses, covering related-party transaction controls, journal entries/payables and IT access, CECL assumptions and IT access, control staffing, and infrequent transactions including grant recognition. The filing says these did not cause a material misstatement in the reported periods; remediation was underway but not yet demonstrated to be effective.
- Goodwill of $71.5 million was not impaired in management’s September analysis, but estimated fair value exceeded carrying value by 9.6%. The filing identifies potential impairment, interest-rate, liquidity, credit, real-estate, regulatory, cybersecurity and other risks.
Investor verification points
- Track deposit pricing, the continued shift from noninterest-bearing balances to time deposits, brokered funding and uninsured-deposit levels.
- Monitor net interest margin, asset yields and deposit costs as rates and competition change.
- Review delinquency, nonaccrual, classified-loan and charge-off trends, particularly CRE and residential exposures, and the adequacy of the credit-loss allowance.
- Confirm completion and regulatory acceptance of AML/CFT Consent Order requirements, and assess potential compliance costs or further action.
- Follow remediation and independent validation of the disclosed material weaknesses in financial reporting controls.
- Verify the planned $55 million subordinated-note redemption, capital and liquidity impacts, and progress against CDFI grant conditions.