RBB Bancorp — Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2023; unaudited results. RBB Bancorp is a bank holding company serving businesses and individuals across California, Nevada, New York, New Jersey, Illinois, and Hawaii. Its principal banking subsidiary focuses on commercial and real estate lending. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Earnings: Net income was $11.0 million, down 25.0% from $14.6 million a year earlier. Diluted EPS was $0.58 versus $0.74. Return on average assets was 1.12% (1.39%); return on average equity was 9.04% (12.59%).
- Interest income and margins: Interest income rose 35.9% to $53.8 million, but interest expense increased to $19.7 million from $5.1 million. Net interest income declined 1.1% to $34.1 million. Net interest margin improved to 3.70% from 3.49%, while the reported net interest spread narrowed to 2.93% from 3.16%.
- Credit costs: Provision for credit losses was $2.0 million versus $0.4 million. Allowance for credit losses was $43.1 million, or 1.29% of loans, compared with $41.1 million, or 1.23%, at year-end. Net charge-offs were $157,000. Nonperforming loans increased to $26.4 million from $23.5 million; special-mention loans rose to $89.0 million and substandard loans to $77.7 million. No loans 90 days past due were still accruing.
- Operating costs and other income: Noninterest expense rose 17.7% to $18.9 million, including legal and professional expenses of $3.0 million, up $2.0 million. Noninterest income fell 19.8% to $2.4 million, principally because gains on loan sales declined to $29,000 from $1.2 million.
- Loans and assets: Total assets were $4.11 billion, up 4.9% from December 31, 2022. Loans held for investment were $3.34 billion, nearly flat quarter over quarter. Single-family residential loans increased $75.9 million; commercial and industrial loans declined $45.2 million and commercial real estate loans declined $23.9 million.
- Deposits and liquidity: Deposits totaled $3.15 billion, up $173.4 million. Noninterest-bearing deposits fell $126.6 million to $672.2 million and were 21.3% of deposits, versus 26.8% at year-end; customers shifted funds toward interest-bearing accounts and time deposits. Estimated uninsured deposits were $1.09 billion. Brokered time deposits increased to $369.9 million from $255.0 million. Cash and cash equivalents rose to $230.7 million from $83.5 million. Management reported $1.0 billion of additional FHLB borrowing capacity, $92.0 million of unsecured federal funds lines, and $11.8 million of Federal Reserve discount-window capacity; no borrowings were outstanding on the latter two facilities.
- Cash flow: Operating activities provided $16.8 million, versus $33.2 million in Q1 2022. Investing activities used $40.1 million, and financing activities provided $170.5 million, mainly reflecting increased time deposits. Cash increased $147.2 million during the quarter.
- Debt and capital: FHLB advances were $220.0 million; long-term debt was $173.7 million and subordinated debentures were $14.8 million. Total shareholders’ equity was $494.8 million. RBB reported a 11.61% consolidated Tier 1 leverage ratio, 16.33% CET1 ratio, and 24.58% total risk-based capital ratio; the Bank exceeded well-capitalized thresholds.
- Securities: Available-for-sale securities were $293.4 million, with $28.7 million of pretax unrealized losses, down from $31.3 million at year-end. Management attributed losses mainly to interest rates and spreads, and stated it did not intend or expect to be required to sell before recovery.
Material changes, outlook, risks, and unusual items
- Profitability weakened year over year as sharply higher deposit and borrowing costs, higher credit provision, lower loan-sale gains, and increased expenses outweighed higher loan yields and interest income. Management attributed $2.0 million of the increase in legal and professional expenses to an internal investigation and higher external auditor fees, which it expected to decrease in subsequent quarters.
- Following banking-sector turmoil and bank failures, management said it expects to slow loan originations and reduce the loan portfolio over the next few quarters, focusing on core relationships. It is offering ICS and CDARS deposit products to customers with balances above $250,000 to reduce uninsured deposits. Management said the continuing effect of banking-sector disruption on 2023 results is uncertain; no quantified earnings or balance-sheet guidance was provided.
- Management identified increased classified loans as a reason for higher credit reserves. One large construction loan drove the increase in special-mention loans; management said it was current and expected to be refinanced. The filing also cites real estate concentration and interest-rate sensitivity as risks.
- Gateway Bank acquisition agreement, valued at approximately $22.9 million, was extended to September 30, 2023 and remained subject to regulatory approvals and other conditions.
- RBB’s disclosure controls and internal control over financial reporting were deemed ineffective at March 31, 2023 due to four material weaknesses: related-party transaction controls; segregation of duties and IT access controls; CECL model review and IT access controls; and staffing/competence in financial reporting controls. Management reported remediation efforts but said the controls had not operated long enough to conclude the weaknesses were remediated. It stated the weaknesses did not cause a material misstatement in the reported financial statements.
- Approximately 4.8% of gross loans referenced LIBOR. RBB planned to transition affected loans and certain debt instruments to SOFR by the stated transition dates. The filing lists liquidity, deposit outflows, credit quality, interest rates, regulation, cybersecurity, and economic conditions among risks.
- The company declared a $0.16-per-share first-quarter dividend after quarter-end, payable May 12, 2023. It made no share repurchases during the quarter.
Most important facts for investors to verify
- Whether deposit balances, uninsured deposits, brokered funding, and liquidity capacity remain stable, and how the cost of deposits affects net interest income and margin.
- Whether classified, delinquent, and nonperforming loans continue to rise, particularly in real estate and construction, and whether the allowance remains adequate.
- Whether the internal investigation, elevated professional fees, and disclosed material weaknesses lead to further costs, adjustments, or delayed remediation.
- How the announced loan-growth slowdown and deposit-retention efforts affect future earnings, funding needs, and asset mix.
- Whether the Gateway transaction receives regulatory approval and closes, and whether the LIBOR-to-SOFR transitions proceed as planned.