RBB Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. Unaudited. RBB Bancorp is a bank holding company whose Royal Business Bank serves business and individual customers across several U.S. markets. Amounts below are in U.S. dollars.
Financial performance
- Earnings: Net income was $14.6 million, up 17.3% from $12.5 million in Q1 2021. Diluted EPS rose to $0.74 from $0.63.
- Interest income and margin: Interest income increased 11.3% to $39.6 million. Net interest income rose 17.0% to $34.5 million, helped by loan growth and lower funding costs. Net interest margin compressed to 3.49% from 3.73%; tax-equivalent net interest margin was also 3.49% versus 3.73%.
- Credit provision: Provision for loan losses fell to $0.4 million from $1.5 million, reflecting a lower COVID-related reserve, partly offset by loan growth. The allowance was $33.3 million, or 1.11% of held-for-investment loans, versus $32.9 million, or 1.12%, at year-end.
- Noninterest items and efficiency: Noninterest income fell 50.1% to $2.9 million, principally because loan-sale gains declined to $1.2 million from $3.8 million as residential mortgage loan sales decreased. Noninterest expense increased 1.7% to $16.1 million. The efficiency ratio improved to 42.90% from 44.64%.
- Returns: Annualized return on average assets was 1.39% versus 1.47%; return on average equity was 12.59% versus 11.64%. Return on average tangible common equity was 14.91% versus 14.05%.
Financial position, liquidity and capital
- Assets and loans: Total assets were $4.01 billion, down 5.1% from year-end. Net loans were $2.97 billion, up $74.8 million; gross held-for-investment loans, net of fees and discounts, grew 2.6% to $3.01 billion. Growth in residential mortgages, construction and land development, and commercial and industrial loans was partly offset by lower CRE and SBA balances.
- Deposits and liquidity: Deposits declined $217.3 million to $3.17 billion, including a $131.8 million decline in noninterest-bearing demand deposits. Cash and cash equivalents fell $344.6 million to $349.8 million. Cash flow was $33.2 million from operations, negative $70.8 million from investing, and negative $307.0 million from financing. Management attributed deposit declines mainly to normal fluctuations and customers moving funds to other investments. The company reported $563.8 million in adjusted short-term assets and $893.4 million of FHLB borrowing capacity; no short-term FHLB advances were outstanding.
- Deposit concentration: Estimated uninsured deposits were $1.58 billion. The ten largest deposit relationships totaled $730 million. Management classified 82.5% of deposits as core under its relationship-based definition.
- Debt: Borrowings were approximately $337.7 million: $150 million of FHLB advances at a 1.18% fixed rate, $173.2 million of long-term debt, and $14.6 million of subordinated debentures. The FHLB advances mature by March 2025; long-term debt and subordinated instruments have longer maturities.
- Capital: Shareholders’ equity was $464.8 million, down 0.4%. Regulatory capital ratios remained above applicable minimums: consolidated Tier 1 leverage 9.90%, CET1 14.12%, Tier 1 risk-based 14.63%, and total risk-based 21.96%. The Bank’s total risk-based ratio was 19.37% and it remained well-capitalized.
- Investment marks: Available-for-sale securities had a $14.9 million pretax net unrealized loss at quarter-end, versus $2.4 million at year-end. Q1 other comprehensive loss was $8.7 million after tax, largely from securities valuation changes.
Material changes and notable events
- RBB completed its Honolulu branch acquisition on January 14, 2022, assuming $81.7 million of deposits and acquiring approximately $7.4 million of selected loans; it recorded $2.3 million of goodwill and $0.7 million of core deposit intangible. The branch contributed $96,000 of revenue and an $87,000 net loss in Q1.
- RBB repurchased 233,337 shares for $5.7 million during the quarter. Shareholders’ equity also reflected $2.7 million of dividends and the securities-related decline in accumulated other comprehensive income.
- On April 11, 2022, CEO Alan Thian resigned after an independent investigation identified policy and procedure violations, including in personnel decisions, and adverse effects on employee morale. The board and management said the violations had no overall adverse financial impact. David Morris signed the filing as interim CEO and CFO.
- RBB opened a Brooklyn branch on May 2, 2022, and announced an agreement to acquire Gateway Bank F.S.B.; management expected that transaction to close in Q4 2022.
Outlook, risks and contingencies
- The filing provides no formal earnings or full-year financial guidance. Management expected acquired-loan discount accretion to decline during the remainder of 2022 as acquired loans pay off, and anticipated a neutral financial impact from its LIBOR-to-SOFR transition.
- Management described Q1 loan growth as primarily organic. The company planned to adopt CECL on December 31, 2022, and said adoption would likely affect required credit-loss reserves; it did not expect to take the optional regulatory-capital phase-in.
- Interest-rate modeling indicated an asset-sensitive position: an immediate +100 basis-point move was projected to increase one-year net interest income by 8.71%, while a -100 basis-point move was projected to reduce it by 2.65%. The -100 basis-point economic-value-of-equity scenario was slightly outside policy limits; management considered further rate declines or negative rates remote.
- Key risks include interest-rate and market changes, inflation and economic disruption, credit deterioration, real-estate and geographic concentration, deposit outflows and uninsured deposits, acquisition integration, LIBOR transition, cybersecurity and operational interruptions, and the effects of COVID-19 or geopolitical events. Real estate represented a substantial majority of the loan portfolio. No loans were deferred due to COVID-19 at March 31, 2022.
- Off-balance-sheet commitments totaled $470.1 million, including $202.5 million of commitments to make loans and $260.3 million of unused lines of credit; many may expire undrawn. Management said ordinary-course litigation was not expected to have a material financial effect. No material change to previously disclosed risk factors was reported.
- Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting. A $0.14-per-share dividend was announced on April 20, payable May 6, 2022.
Important facts for investors to verify
- Whether deposit outflows persist, particularly among large or uninsured relationships, and how RBB maintains liquidity.
- Whether higher rates improve net interest income as modeled, while monitoring margin compression, deposit pricing, and securities valuation losses.
- Loan quality and reserve adequacy as the portfolio grows, especially in CRE, residential mortgages, and construction lending; also track CECL adoption and nonperforming loans.
- Execution and integration of the Honolulu branch and proposed Gateway Bank acquisition, including timing, costs, and expected benefits.
- Leadership and governance developments following the CEO resignation and internal investigation.
- The reported values and assumptions behind the $14.9 million pretax unrealized AFS loss and the interest-rate sensitivity analyses.