RBB Bancorp quarterly report, Q3 FY2022

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RBB Bancorp — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2022; unaudited consolidated financial statements. RBB Bancorp is a bank holding company whose principal subsidiary, Royal Business Bank, provides business and consumer banking, with a substantial real estate lending portfolio and operations across California, Nevada, New York, New Jersey, Illinois, and Hawaii. Amounts below are in millions unless otherwise noted.

Financial performance and condition

  • Third-quarter earnings: Net income was $16.7 million, up 8.4% from $15.4 million a year earlier. Diluted EPS was $0.87 versus $0.77. For the first nine months, net income was $46.7 million, up 13.5%, and diluted EPS was $2.41 versus $2.07.
  • Interest income and margins: Q3 net interest income was $39.0 million, up 23.4%; tax-equivalent net interest margin was 4.31%, compared with 3.38%. Nine-month net interest income was $110.6 million, up 21.3%, and tax-equivalent margin was 3.95%, compared with 3.47%. Higher market rates, loan growth, and loan prepayment penalties contributed to the margin improvement.
  • Other income and expenses: Q3 noninterest income fell 54.1% to $2.5 million, mainly because of the prior-year $1.8 million CDFI award and lower loan-sale gains. Noninterest expense rose 15.8% to $16.7 million, including higher compensation and costs associated with a Board special investigation. The efficiency ratio was 40.22% versus 38.87%. Nine-month noninterest income declined 42.9% to $8.9 million, while noninterest expense rose 12.2% to $50.4 million.
  • Loans and credit: Gross loans held for investment, net of deferred fees and discounts, rose 9.9% from year-end 2021 to $3.22 billion. Single-family residential loans increased $351.8 million; construction and land development loans rose $50.3 million. The allowance for loan losses was $36.0 million, or 1.12% of HFI loans, versus $32.9 million and 1.12% at year-end. Nine-month provision expense was $3.0 million; net recoveries were $87,000.
  • Asset quality: Nonperforming loans were $11.5 million, or 0.36% of loans, versus $20.7 million, or 0.71%, at December 31, 2021. However, loans 30–89 days past due, excluding nonaccrual loans, increased to $39.9 million from $17.6 million. There were no loans 90 days past due and still accruing.
  • Deposits, liquidity, and debt: Deposits declined $425.9 million to $2.96 billion, primarily reflecting management’s reduction of large-customer concentrations and customers seeking higher yields. Noninterest-bearing deposits were 31.0% of deposits, down from 38.1% at year-end. Cash and equivalents fell $520.2 million to $174.2 million. FHLB advances were $240.0 million, long-term debt $173.4 million, and subordinated debentures $14.7 million; total borrowings were approximately $428.1 million. The Bank reported $972.3 million of FHLB borrowing capacity, subject to collateral availability.
  • Cash flow: For the nine months, operating activities provided $71.3 million; investing activities used $152.6 million; and financing activities used $438.8 million. Cash and equivalents decreased $520.2 million to $174.2 million.
  • Capital and equity: Shareholders’ equity was $471.8 million, up 1.1% from year-end, while accumulated other comprehensive loss widened to $22.5 million from $1.7 million, largely due to interest-rate-related unrealized losses on available-for-sale securities. Those securities had a $32.5 million pretax unrealized loss. At September 30, consolidated Tier 1 leverage, CET1, Tier 1 risk-based, and total risk-based capital ratios were 11.47%, 15.52%, 16.06%, and 23.72%, respectively; the Bank exceeded “well-capitalized” thresholds.

Material changes and notable items

  • Compared with December 31, 2021, total assets decreased 7.6% to $3.91 billion, principally because of lower cash balances; loan growth partly offset the decline.
  • Higher interest rates increased yields and net interest margin but also reduced mortgage originations and loan sales: Q3 loan-sale gains fell to $265,000 from $1.8 million. The portfolio of AFS securities also recorded substantially larger unrealized losses.
  • RBB completed its Honolulu branch acquisition in January 2022, assuming $81.7 million of deposits and recognizing $2.3 million of goodwill. It opened a Brooklyn branch in May.
  • The company repurchased $18.8 million of stock during the first nine months and paid $8.1 million in dividends. A $0.14-per-share Q3 dividend was announced, payable November 11, 2022.

Outlook, risks, and contingencies

  • No specific earnings or financial guidance is provided. Management said purchased-loan discount accretion was expected to decline through the remainder of 2022 as acquired loans pay off.
  • Management expected the proposed cash acquisition of Gateway Bank, valued at approximately $22.9 million, to close in Q2 2023, subject to regulatory approvals and other conditions. The agreement expiration was extended to September 30, 2023.
  • Management described the company as slightly asset-sensitive: its model estimated a 5.36% increase in one-year net interest income under an immediate 100-basis-point rate increase. Economic value of equity modeling showed declines in the modeled rate shocks; the -100-basis-point scenario was slightly outside policy limits, which management considered remote.
  • Key stated risks include deposit outflows and funding costs, interest-rate and market-value changes, real estate lending concentrations, credit deterioration, inflation and economic conditions, acquisition execution, cybersecurity, and the LIBOR-to-SOFR transition. Approximately 5.5% of gross loans referenced LIBOR; RBB said it had adopted SOFR for debt and was developing SOFR-based loan products.
  • Controls: Management concluded disclosure controls were not effective at September 30, 2022 because of material weaknesses involving lease renewal accounting, related-party transaction review and disclosure, and segregation of duties and IT access controls for journal entries and accounts payable. Management reported remediation steps but said the enhanced controls had not operated long enough to establish remediation.
  • Other items: Legal proceedings were described as ordinary-course matters not expected to have a material effect. The filing identifies CECL adoption as a potential source of higher credit-loss allowances; its discussion refers to adoption on December 31, 2022, while also describing a cumulative adjustment as of January 1, 2022, so the precise timing should be checked against subsequent filings.

Important facts for investors to verify

  • Whether deposit outflows and reduced noninterest-bearing balances continue, and how the resulting funding mix affects deposit costs and liquidity.
  • Trends in past-due loans, credit grades, nonperforming assets, and the allowance—particularly given the rise in 30–89-day delinquencies and real estate concentration.
  • Progress in remediating the disclosed material weaknesses and whether subsequent reporting confirms effective controls.
  • Actual CECL adoption timing and the day-one allowance and regulatory-capital impacts.
  • Gateway acquisition approvals and closing status, and the extent to which rate changes affect loan growth, securities values, and net interest income.