RBB Bancorp — Q3 2021 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. RBB Bancorp is a bank holding company whose Royal Business Bank serves business and consumer customers across California, Nevada, New York, New Jersey and Illinois, with a significant real-estate lending focus. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $37.1 | $35.1 | $108.6 | $103.3 |
| Net interest income | $31.6 | $27.3 | $91.1 | $75.9 |
| Provision for loan losses | $1.2 | $3.9 | $3.3 | $8.8 |
| Noninterest income | $5.5 | $2.7 | $15.6 | $9.6 |
| Noninterest expense | $14.4 | $14.0 | $44.9 | $45.1 |
| Net income | $15.4 | $8.5 | $41.2 | $21.8 |
| Diluted EPS | $0.77 | $0.43 | $2.07 | $1.09 |
- Margins and returns: Tax-equivalent net interest margin was 3.38% in Q3 versus 3.59% a year earlier; for the nine months it was 3.47% versus 3.46%. Q3 return on average assets was 1.54% and return on average equity was 13.52%; the efficiency ratio was 38.87%.
- Balance sheet at September 30: Total assets were $3.80 billion, up 13.5% from year-end 2020. Loans held for investment, net of deferred fees and discounts, were $2.84 billion, up 4.9%; deposits were $2.97 billion, up $332.7 million. Shareholders’ equity was $456.0 million.
- Funding and liquidity: Cash and cash equivalents were $376.9 million, versus $194.7 million at year-end. Nine-month operating cash flow was $169.8 million, investing cash flow was negative $375.6 million, and financing cash flow was positive $388.1 million. Noninterest-bearing deposits represented 27.8% of period-end deposits. The company reported $914 million of FHLB borrowing capacity, secured by pledged loans, and $26.4 million of Federal Reserve borrowing capacity; neither facility had amounts outstanding at period-end.
- Credit and capital: The allowance for loan losses was $32.2 million, or 1.13% of HFI loans, compared with $29.3 million and 1.08% at year-end. Nonperforming loans were $14.2 million, or 0.50% of loans, down from $19.6 million and 0.72%. The Bank remained well capitalized: CET1 was 18.64%, Tier 1 risk-based capital 18.64%, and total risk-based capital 19.89%.
- Debt: Period-end FHLB advances were $150 million. Long-term debt, net of issuance costs, was $172.9 million; subordinated debentures were $14.4 million. In March 2021 RBB issued $120 million of 4.00% fixed-to-floating subordinated debt due 2031 and redeemed $50 million of older subordinated debt.
Material changes versus comparable periods
- Q3 net income rose 80.3% year over year, and nine-month net income rose 89.2%. Higher net interest income, lower loan-loss provisions and increased noninterest income were the principal reported contributors.
- Lower deposit rates reduced interest expense: Q3 average cost of total deposits was 0.35%, versus 0.87% a year earlier. Average earning assets grew, but Q3 net interest margin contracted as asset yields fell.
- Q3 noninterest income included a $1.8 million U.S. Treasury CDFI Rapid Response Program grant. Loan-sale gains also increased; nine-month loan sales were $254.4 million versus $140.3 million in 2020. Servicing income fell as mortgage and SBA servicing portfolios declined amid payoffs and refinancing.
- HFI loan growth was concentrated in commercial real estate and construction and land development; single-family residential mortgages declined with accelerated prepayments. CRE was 42.4% and SFR mortgages 34.3% of HFI loans at quarter-end.
- AFS securities increased to $345.0 million from $210.9 million at year-end; their net unrealized position moved from a $1.6 million gain to a $765,000 pretax loss, principally attributed by management to interest-rate movements.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or margin guidance. It expected lower single-family loan growth and loan-sale volume, continued SFR prepayments, higher SBA payoffs, and stable CRE originations. It also expected temporary excess liquidity to decline over the following 12 months.
- Management said the economic recovery remained uncertain, citing COVID-19 resurgence, labor-market tightness, supply-chain disruption, inflation and financial-market volatility. Other key exposures include geographic and real-estate concentration, credit quality, interest-rate sensitivity, competition, cybersecurity, regulatory change, and acquisition and integration risks.
- Q3 provision expense declined partly because the company reduced its COVID-19 reserve by 50%. Net charge-offs were $317,000 in Q3 versus $47,000 a year earlier. At September 30, three borrowers with three loans totaling $399,000 were on three-month payment deferrals; RBB reported 167 PPP loans totaling approximately $23 million.
- RBB said it was slightly asset sensitive: a modeled immediate 100-basis-point rate increase projected a 7.68% increase in one-year net interest income. The -100-basis-point economic-value-of-equity scenario was slightly outside board policy limits; management considered further rate declines unlikely.
- RBB planned to adopt CECL on December 31, 2022 and said implementation would likely affect required credit-loss reserves. Approximately 9.4% of gross loans referenced LIBOR; management anticipated a neutral financial impact from transition to SOFR.
- A Honolulu branch purchase from Bank of the Orient, subject to regulatory approval and then expected to close in mid-January 2022, was announced. The filing gives conflicting deposit figures for the branch: approximately $81.5 million in Note 23 and $38.5 million in MD&A; selected performing loans were approximately $9.9 million and stated consideration was $2.8 million.
- Other notable items: RBB declared a $0.13-per-share Q3 dividend payable November 12, 2021; repurchased 44,888 shares during Q3. Management reported no material pending litigation, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Resolve the Honolulu branch deposit discrepancy ($81.5 million versus $38.5 million) and confirm final transaction terms, regulatory approval and closing status.
- Assess whether earnings growth is repeatable after accounting for the $1.8 million grant, higher loan-sale gains and reduced credit provisioning; monitor the effects of acquired-loan discount accretion, which management expected to decline.
- Review CRE and construction growth, real-estate concentration, criticized/classified loans, delinquencies, charge-offs and the adequacy of the allowance as economic conditions evolve.
- Track deposit mix and concentration, excess liquidity, pledged collateral and refinancing/maturity exposure across FHLB advances and debt.
- Evaluate sensitivity to rate changes and the assumptions behind the interest-rate models, including deposit behavior and mortgage prepayments; monitor LIBOR transition and CECL implementation.