RBB Bancorp — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; it does not provide a clear standalone fourth-quarter income statement or cash-flow summary. RBB Bancorp is the holding company for Royal Business Bank, a community bank focused on commercial banking and Asian-American markets across California, Nevada, Hawaii, Illinois, New York and New Jersey.
Financial performance and condition
| Metric | FY 2022 / Dec. 31, 2022 | Prior comparable period |
|---|---|---|
| Net income | $64.3 million; diluted EPS $3.33 | FY 2021: $56.9 million; diluted EPS $2.86 |
| Net interest income | $149.6 million; net interest margin 4.02% | FY 2021: $124.3 million; margin 3.46% |
| Interest income / expense | $181.0 million / $31.4 million | FY 2021: $147.1 million / $22.7 million |
| Credit-loss provision | $4.9 million on the income statement; loan ACL provision before unfunded-commitment effects was $6.0 million | FY 2021: $4.0 million |
| Noninterest income / expense | $11.3 million / $64.5 million | FY 2021: $18.7 million / $58.2 million |
| Total assets | $3.92 billion | Dec. 31, 2021: $4.23 billion |
| Loans held for investment, net | $3.30 billion; gross loan balance $3.34 billion | Dec. 31, 2021 net: $2.90 billion |
| Deposits | $2.98 billion | Dec. 31, 2021: $3.39 billion |
| Shareholders’ equity | $484.6 million | Dec. 31, 2021: $466.7 million |
| Cash and cash equivalents | $83.5 million | Dec. 31, 2021: $694.4 million |
- Earnings and margins: Net income rose 13.0%. Net interest income increased $25.2 million, supported by loan growth and higher asset yields; rising deposit and borrowing costs partly offset the benefit. The efficiency ratio improved to 40.13% from 40.67%.
- Cash flow: Operating activities provided $93.8 million; investing activities used $260.2 million and financing activities used $444.5 million. Cash and cash equivalents fell $610.8 million during the year.
- Liquidity and funding: The Bank reported $1.1 billion of additional FHLB borrowing capacity, $92.0 million of unsecured federal funds lines and a $12.0 million Federal Reserve Discount Window line; no federal funds or Discount Window borrowings were outstanding at year-end. It had $70.0 million of short-term and $150.0 million of long-term FHLB advances.
- Debt: Borrowings totaled approximately $408.3 million, including $220.0 million of FHLB advances, $173.6 million of subordinated notes and $14.7 million of subordinated debentures.
- Capital: Consolidated ratios were 11.67% Tier 1 leverage, 16.03% CET1, 16.58% Tier 1 risk-based and 24.27% total risk-based. The Bank was reported well-capitalized; its corresponding ratios were 14.89%, 21.14%, 21.14% and 22.40%.
- Credit quality: Nonperforming loans were $23.5 million, or 0.71% of HFI loans, versus $20.7 million in 2021; nonperforming assets were $24.1 million, or 0.61% of assets. The loan ACL was $41.1 million, 1.23% of HFI loans. Net charge-offs were approximately zero as a percentage of average HFI loans.
Material changes versus FY 2021
- Net interest income grew 20.3%, while net interest margin expanded 56 basis points. Average yield on earning assets increased 78 basis points; average cost of interest-bearing liabilities rose 37 basis points.
- HFI net loans grew 13.7%, principally from a $459.5 million increase in single-family residential mortgages and $64.1 million in CRE loans. SFR mortgages rose to $1.46 billion, or 43.9% of loans; CRE was $1.31 billion, or 39.3%.
- Deposits fell 12.0%. Noninterest-bearing deposits declined $492.7 million to $798.7 million and represented 26.8% of deposits, down from 38.1%. Time deposits increased $397.2 million. Management attributed outflows in part to reduced concentration in certain relationships, customers seeking higher yields and $451.7 million of withdrawals by digital-currency businesses.
- Noninterest income declined 40.0%, mainly because loan-sale gains fell $8.1 million as SFR loan sales and originations weakened in the higher-rate environment. Servicing income increased $1.5 million as prepayments slowed.
- AFS securities declined to $256.8 million from $368.3 million and carried a $31.3 million pretax unrealized loss, versus $2.4 million a year earlier. Accumulated other comprehensive loss increased to $21.7 million.
- Shareholders’ equity rose 3.8%; net income and option exercises were partly offset by dividends, $19.8 million of stock repurchases and lower AFS securities values. The company repurchased 902,526 shares for $19.8 million during 2022.
Outlook, risks and unusual items
- Management describes plans for organic growth and acquisitions that meet its criteria, with a focus on loan and deposit growth. It did not provide quantitative earnings or balance-sheet guidance in the supplied filing text.
- The pending Gateway Bank acquisition, announced in 2021 for approximately $22.9 million, remained subject to regulatory approvals and other conditions; its agreement expiration was extended to September 30, 2023. RBB completed its acquisition of a Honolulu branch in January 2022, assuming $81.7 million of deposits and acquiring $7.4 million of performing loans; it recognized $2.3 million of goodwill.
- Key risks include concentrated commercial real estate and real-estate-collateralized lending, a large non-qualified SFR portfolio and dependence on a limited secondary-sale market, deposit concentration and uninsured balances, liquidity and funding costs, rate sensitivity, inflation and economic deterioration, cybersecurity, regulatory compliance and the LIBOR-to-SOFR transition. Uninsured deposits were estimated at $1.21 billion at year-end; 135 depositor relationships exceeding $2 million represented about 43.5% of deposits.
- Rising rates supported modeled near-term net interest income sensitivity: a parallel +100-basis-point shock was estimated to increase one-year NII by 4.21%. The filing also reports a 3.51% decrease in modeled economic value of equity under an immediate +100-basis-point shock. These are model estimates, not forecasts.
- Controls and audit: The financial-statement audit opinion was unqualified, but the auditor issued an adverse opinion on internal control over financial reporting. Four material weaknesses were reported: related-party transaction controls, segregation of duties and IT access controls, CECL assumptions and review controls, and the control environment/staffing. Management said remediation was underway but controls had not operated long enough to conclude the weaknesses were remediated. The auditor identified CECL and completeness of related-party transactions as critical audit matters.
- Legal and professional expense increased, in part due to a previously disclosed special investigation led by the board. The filing gives no clear description of its subject or outcome. The company reported no litigation reserves at year-end; management did not expect pending matters to have a material effect, while noting outcomes are uncertain.
- RBB adopted CECL on January 1, 2022, recording a $2.1 million increase in the loan ACL and a $1.0 million increase in the unfunded-commitment reserve; the net-of-tax transition adjustment reduced opening retained earnings by $2.2 million.
Important facts for investors to verify
- Whether deposit outflows and the decline in noninterest-bearing balances continued after year-end, and how RBB funded subsequent loan growth.
- Current uninsured and concentrated depositor exposures, including the remaining size and behavior of digital-currency-related deposits.
- Credit trends in CRE, construction and SFR portfolios; the status of loans entering nonaccrual and adequacy of the CECL allowance under changing economic assumptions.
- The fair-value and liquidity implications of the AFS securities portfolio’s unrealized losses, including whether securities sales become necessary.
- Progress in remediating the four ICFR material weaknesses and any effects on reporting reliability or related-party disclosures.
- Gateway acquisition approvals, closing timetable, final consideration and expected integration effects; also verify the impact of continuing higher funding costs on net interest margin and earnings.
- Reconcile noninterest expense disclosures: the audited income statement reports $64.5 million for 2022 and $58.2 million for 2021, while portions of MD&A describe the increase as $5.2 million and also present a $6.3 million increase. The filing text does not clearly reconcile this difference.