RBB Bancorp — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; financial statements are unaudited. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context and reporting period
RBB Bancorp is the holding company for Royal Business Bank and serves business and consumer customers across Southern California, Nevada, New York, New Jersey, Chicago and Hawaii. The bank’s lending is concentrated in real estate and related businesses. It acquired a Honolulu branch in January 2022 and opened a Brooklyn branch in May.
Financial performance and condition
- Q2 earnings: Net income was $15.5 million, up 15.7% from $13.4 million a year earlier. Diluted EPS was $0.80 versus $0.67.
- First-half earnings: Net income was $30.1 million, up 16.5% from $25.8 million; diluted EPS was $1.54 versus $1.30.
- Interest income and margins: Q2 net interest income was $37.1 million, up 23.4%; tax-equivalent net interest margin was 4.08%, versus 3.33%. First-half net interest income was $71.6 million, up 20.2%, and margin was 3.77%, versus 3.52%. Higher asset yields and loan growth supported the improvement.
- Other income and expenses: Q2 noninterest income declined 18.0% to $3.4 million, primarily as loan-sale gains fell; noninterest expense rose 20.0% to $17.6 million. Legal and professional expense increased $1.7 million, largely related to a previously disclosed board special investigation.
- Assets and lending: Total assets were $4.0 billion, down 6.1% from year-end 2021. Loans held for investment, net of fees and discounts, increased 3.9% to $3.05 billion. Single-family residential loans rose $201.2 million and construction/land-development loans rose $53.6 million; commercial real estate loans declined $87.6 million.
- Credit quality: The allowance for loan losses was $34.2 million, or 1.12% of loans, versus $32.9 million and 1.12% at year-end. Nonperforming loans declined to $13.9 million (0.46% of loans) from $20.7 million (0.71%). There were no loans 90 days or more past due and still accruing, and management reported no COVID-related payment deferrals at quarter-end.
- Deposits and liquidity: Deposits fell $358.0 million to $3.03 billion, mainly from managing large depositor concentrations and customers placing funds elsewhere. Cash and cash equivalents declined $369.6 million to $324.7 million. The company had $250 million of FHLB advances, including $100 million short-term, and reported $913.5 million of FHLB borrowing capacity. Estimated uninsured deposits were $1.46 billion.
- Debt and capital: Borrowings comprising FHLB advances, long-term debt and subordinated debt totaled about $437.9 million, up $100.4 million from year-end. Shareholders’ equity was $463.7 million, down 0.6%; accumulated other comprehensive loss widened to $15.7 million, primarily from unrealized losses on available-for-sale securities as rates rose. The bank remained above regulatory well-capitalized thresholds; its June 30 total risk-based capital ratio was 20.76%.
- Cash flow and shareholder returns: First-half operating cash flow was $45.5 million; investing cash flow was negative $56.2 million and financing cash flow was negative $358.9 million. Cash declined $369.6 million. The company repurchased $16.8 million of common stock in the first half and declared a $0.14-per-share quarterly dividend.
Material changes versus the prior comparable period
- Q2 net interest income and net income increased, supported by higher loan yields, larger average loan balances and lower deposit interest expense.
- Loan-sale gains fell to $0.3 million in Q2 from $2.6 million; loan sales were $13.7 million versus $78.2 million. First-half loan-sale gains declined to $1.5 million from $6.4 million.
- Q2 noninterest expense increased, particularly legal/professional costs, salaries and marketing. The company attributed the legal-cost increase to the board special investigation.
- AFS securities had a $22.7 million pretax net unrealized loss at June 30, compared with a $2.4 million net unrealized loss at December 31, 2021.
Outlook, risks and unusual items
- No quantified earnings or financial guidance is provided. Management said acquired-loan discount accretion income is expected to decline through the remainder of 2022.
- Management expected the proposed Gateway Bank acquisition, valued at approximately $22.9 million in cash, to close in Q4 2022, subject to regulatory approvals and other conditions.
- The company planned to adopt CECL on December 31, 2022. Based on its preliminary model, management expected a one-time allowance adjustment through retained earnings, but the filing does not provide a clear amount. RBB did not expect to phase in CECL’s regulatory-capital effects.
- Interest-rate, inflation, economic, deposit-concentration, real-estate-credit, geopolitical and COVID-related risks were highlighted. About 6.2% of gross loans referenced LIBOR; the company was developing SOFR-based loan products and had adopted SOFR for specified debt instruments.
- Control weakness: Management concluded disclosure controls were ineffective at June 30 because of a material weakness in controls over identifying right-of-use assets when leases are renewed. A New York branch lease extension resulted in an additional $4.8 million asset and liability. A balance-sheet misstatement in the July 25 earnings release was corrected in the 10-Q. New controls were implemented but had not operated long enough to establish remediation.
- Rate sensitivity: The company estimated that an immediate 100-basis-point rate increase would raise one-year net interest income by 7.20%; an immediate 200-basis-point increase would raise it by 14.38%. Management reported one EVE scenario, a 100-basis-point decline, slightly outside policy limits and considered it remote.
Important facts for investors to verify
- Progress and effectiveness of remediation for the lease-accounting control material weakness.
- Deposit trends, depositor concentration, uninsured balances and reliance on FHLB or other wholesale funding.
- Credit performance and concentration in residential, commercial real estate and construction lending, including changes in delinquencies and nonperforming loans.
- Impact of higher interest rates on net interest margin, funding costs, securities values and the company’s rate-sensitivity assumptions.
- CECL adoption impact, Gateway acquisition timing and terms, and the durability of earnings as loan-sale gains and acquired-loan accretion change.
- Costs and findings associated with the board special investigation, and capital and share-count effects of repurchases and dividends.