RBB Bancorp — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. The filing also provides unaudited quarterly results, including fourth-quarter 2021. Amounts below are U.S. dollars; financial statement figures are rounded.
Business context
RBB Bancorp is the holding company for Royal Business Bank, a California-chartered bank focused on commercial banking for small and midsize businesses and individuals, with particular emphasis on Asian-American communities. Its lending includes commercial real estate (CRE), construction and development, commercial and industrial (C&I), residential mortgages, and SBA loans. The bank operated 23 branches across its markets at year-end; the Honolulu branch acquisition closed in January 2022.
Financial performance and position
| Metric | 2021 | 2020 | Change or context |
|---|---|---|---|
| Total revenue (interest income plus noninterest income) | $165.8 million | $153.2 million | Up 8.3% |
| Net interest income | $124.3 million | $104.8 million | Up 18.7% |
| Net income | $56.9 million | $32.9 million | Up 72.8%; diluted EPS was $2.86 versus $1.65 |
| Net interest margin | 3.46% | 3.52% | Down 6 basis points |
| Return on average assets | 1.48% | 1.03% | Improved |
| Efficiency ratio | 40.67% | 50.10% | Improved |
| Net cash from operating activities | $202.2 million | $124.5 million | Investing cash flow was $(504.2) million; financing cash flow was $801.7 million |
Fourth-quarter net income was $15.7 million, or $0.79 diluted EPS, compared with $11.1 million, or $0.56 diluted EPS, in fourth-quarter 2020.
- Balance sheet: Assets were $4.23 billion, up 26.2%; held-for-investment loans, net of allowance, were $2.90 billion, up 8.3%; deposits were $3.39 billion, up 28.5%; and shareholders’ equity was $466.7 million, up 8.9%.
- Funding and liquidity: Cash and cash equivalents totaled $694.4 million, up $499.7 million. Average total deposit cost fell to 0.40% from 1.01%; noninterest-bearing deposits were 38.1% of year-end deposits. Adjusted core deposits were reported as 87.5% of deposits. The bank had $150 million in FHLB advances and $187.5 million in subordinated debt and debentures. It reported $833.6 million of additional FHLB borrowing capacity, subject to collateral, and $92 million in unsecured federal funds lines with no amounts drawn.
- Credit quality: The allowance for loan losses was $32.9 million, or 1.12% of loans, versus $29.3 million, or 1.08%, a year earlier. The provision fell to $4.0 million from $11.8 million; net charge-offs were 0.01% of average loans. Nonperforming loans were $20.7 million, or 0.71% of loans, and nonperforming assets were 0.50% of assets. Loans 30–89 days past due, excluding nonaccrual loans, were $17.6 million, up from $8.9 million.
- Capital: The company reported a 10.21% consolidated Tier 1 leverage ratio, 14.86% CET1 ratio, and 23.15% total risk-based capital ratio. The bank’s ratios exceeded regulatory “well-capitalized” thresholds.
Material changes versus prior periods
- Profit rose substantially, driven by higher net interest income, increased loan-sale gains and lower loan-loss provisioning. Interest expense fell 33.9%, reflecting lower deposit rates and growth in noninterest-bearing deposits.
- Loan growth was concentrated in CRE and construction and land development. CRE loans rose about $244 million and construction loans about $116 million; SFR held-for-investment loans declined about $120 million. Construction and land development loans increased 62.3% to $303 million.
- Noninterest income increased 33.5% to $18.7 million, mainly from loan-sale gains. Noninterest expense declined 2.2% to $58.2 million, including lower occupancy and merger costs, partly offset by higher legal and professional, regulatory assessment, and data-processing expenses.
- The available-for-sale securities portfolio increased to $368.3 million from $210.9 million and moved from a $1.6 million pretax unrealized gain to a $2.4 million pretax unrealized loss, primarily reflecting interest-rate changes. No securities impairment charges were recorded.
- The company issued $120 million of subordinated debt in March 2021 and redeemed $50 million of prior subordinated debt. It repurchased $10.5 million of common stock and paid $9.9 million in dividends.
Outlook, risks and unusual items
- No company-wide earnings or financial guidance is provided. Management said the pending Gateway Bank acquisition, announced in December 2021, was expected to close in the second quarter of 2022 and to add mid-single-digit EPS accretion in 2022. The estimate assumes approximately 60% cost savings on Gateway’s noninterest expense and no revenue synergies; estimated tangible-book-value dilution was 1.8%, with a payback period of about 1.8 years.
- The Bank of the Orient Honolulu branch purchase closed January 14, 2022. The filing describes approximately $81.7 million of deposits, $7.4 million of performing loans, and a $71 million transaction payment, including an estimated $3 million premium.
- On February 22, 2022, CEO and President Alan Thian took a leave of absence pending an internal investigation by a board special committee. CFO David Morris was appointed interim CEO while continuing as CFO. The filing does not provide findings or an expected resolution date.
- Interest-rate modeling projected a 10.44% increase in one-year net interest income under an immediate 100-basis-point rate increase. However, the company reported that its economic-value-of-equity model was outside board policy limits in the positive 100- and 200-basis-point scenarios and said it had a plan to return to compliance within 12 months.
- Key risks include concentrated and potentially volatile large depositor relationships: the ten largest relationships represented 26.1% of deposits, and one relationship represented 14.7%. Estimated uninsured deposits were $1.82 billion. Other material exposures include real-estate lending concentration, nonqualified residential mortgages and reliance on loan-sale counterparties, interest-rate and securities valuation changes, COVID-19 and economic conditions, and the LIBOR transition. Approximately 8% of gross loans referenced LIBOR; the company planned to transition affected contracts to SOFR by June 30, 2023.
- CECL was scheduled for adoption on December 31, 2022. Management said preliminary modeling did not indicate a significant allowance impact, but acknowledged that actual adoption could require higher reserves. Legal proceedings were described as arising in the ordinary course; the company reported no litigation reserves at year-end, while noting that outcomes are uncertain.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The company also reported effective disclosure controls.
Important facts for investors to verify
- Review subsequent disclosures on the internal investigation and CEO transition, including any findings, governance changes, or financial effects.
- Track deposit concentration, uninsured balances, deposit retention and funding costs, particularly given the largest depositor relationship’s size.
- Monitor past-due and nonperforming loans, CRE and construction growth, hotel-related SBA exposures, and whether the allowance remains adequate as CECL is adopted.
- Assess the company’s actual results against the Gateway acquisition’s cost-savings and EPS-accretion assumptions, and confirm integration costs and closing details.
- Check how rising rates affect net interest margin, securities’ unrealized losses, economic-value-of-equity policy compliance and liquidity.
- Reconcile reported liquidity and capital measures with subsequent balance-sheet developments, including share repurchases, dividends and debt service.