RBB Bancorp — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; financial statements are unaudited. RBB Bancorp is a bank holding company serving businesses and individuals in Southern California, Las Vegas, Chicago, and the New York City area. It completed its acquisition of PGB Holdings, Inc. on January 10, 2020, expanding its Chicago presence.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $27.3 million | $23.5 million | $75.9 million | $73.7 million |
| Provision for loan losses | $3.9 million | $0.8 million | $8.8 million | $1.7 million |
| Noninterest income | $2.7 million | $2.8 million | $9.6 million | $12.5 million |
| Noninterest expense | $14.0 million | $13.8 million | $45.1 million | $44.0 million |
| Net income | $8.5 million | $8.0 million | $21.8 million | $28.5 million |
| Diluted EPS | $0.43 | $0.39 | $1.09 | $1.40 |
| Net interest margin | 3.59% | 3.59% | 3.46% | 3.68% |
At September 30, 2020, total assets were $3.36 billion, up 20.5% from year-end 2019; loans held for investment, net of deferred fees and discounts, were $2.76 billion, up 25.4%; deposits were $2.61 billion, up $362.8 million; and shareholders’ equity was $421.4 million. Growth reflected organic activity and the PGB acquisition.
- Credit and asset quality: Allowance for loan losses was $26.6 million, or 0.97% of loans, versus $18.8 million, or 0.86%, at December 31, 2019. Nonperforming loans were $18.0 million (0.65% of loans), compared with $13.2 million (0.60%) at year-end. Loans 30–89 days past due rose to approximately $23.0 million from $5.3 million. Q3 net charge-offs were $47,000.
- Liquidity and funding: Cash and cash equivalents were $178.6 million. RBB had $190 million in FHLB advances ($150 million five-year advances at a 1.18% weighted average rate and $40 million overnight); reported FHLB borrowing capacity was $859.9 million. Management said it had not experienced deposit runoff and described the term borrowing as a liquidity measure amid the pandemic.
- Debt and capital: Long-term debt, net, was $104.3 million and subordinated debentures were $14.2 million. Regulatory capital ratios at September 30 included consolidated CET1 of 14.11%, Tier 1 risk-based capital of 14.69%, total risk-based capital of 20.05%, and leverage of 11.47%; the Bank exceeded “well-capitalized” thresholds. Tangible common equity to tangible assets was 10.55%, down from 12.59% at year-end 2019.
- Cash flows, nine months: Operating activities provided $80.1 million, investing activities used $438.6 million, and financing activities provided $355.3 million. Cash and cash equivalents decreased $3.1 million to $178.6 million.
Material changes versus comparable periods
- Q3 net income rose 6.3% year over year, supported by 15.9% higher net interest income as lower deposit funding costs and larger average earning assets offset lower asset yields. Q3 net interest margin was unchanged year over year.
- Nine-month net income fell 23.7%. The larger credit-loss provision and lower noninterest income—particularly lower loan-sale gains—more than offset higher net interest income and lower interest expense.
- Loan-sale gains fell to $3.6 million from $6.1 million for the first nine months; total loan sales were $140.3 million versus $346.1 million. Management attributed weaker activity to pandemic-related disruption, including reduced non-qualified mortgage originations and a paused mortgage securitization market.
- RBB acquired approximately $173.1 million of PGB loans and assumed $188.4 million of deposits; $10.7 million of goodwill was recognized. Goodwill was $69.2 million at quarter-end, with no impairment reported in the quarter.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided. Management expected broadly similar single-family loan growth, with a shift toward FNMA loans and fewer non-qualified mortgages; lower loan-sale volume and gains; and stable commercial real estate originations. For CRE lending, it described requiring six to twelve months of principal and interest in deposit accounts as additional collateral.
- Management expected higher loan losses in the second and third quarters of 2021 as deferment arrangements expired. It cautioned that the ultimate pandemic effects on borrowers, credit quality, liquidity, earnings, and goodwill were uncertain.
- As of September 30, borrowers had requested payment deferrals on approximately $219.2 million of residential mortgages and $214.7 million of commercial loans. As of October 23, $35.2 million of residential and $70.2 million of commercial loans remained on deferral plans. Qualifying COVID-related modifications were treated under CARES Act and regulatory relief from TDR accounting.
- RBB recorded an $8.8 million year-to-date loan-loss provision and a $416,000 mortgage-servicing-rights impairment related to pandemic impacts. It reported no goodwill impairment through September 30, but warned that deterioration could lead to future impairment.
- Approximately 15% of gross loans had LIBOR-based rates. The filing identifies LIBOR cessation and transition to alternative benchmarks as risks; management was evaluating the related accounting guidance.
- Commitments to extend credit and letters of credit totaled $451.5 million. Management said ordinary-course litigation was not expected to have a material effect. The filing reports effective disclosure controls and no material change in internal controls during the quarter.
- A subsequent event disclosed an October 1 purchase of a Brooklyn property for $3.5 million and a planned branch conversion, subject to the existing tenant’s lease.
Important facts for investors to verify
- Reconcile the dividend disclosures: the income statement lists $0.06 per common share declared for Q3, while a subsequent-event note says an October 23 announcement set a $0.09-per-share dividend for the third quarter.
- Track delinquency, nonaccrual, deferral, TDR, and charge-off trends, and whether losses rise as pandemic-related relief expires.
- Assess the adequacy of the allowance and acquired-loan credit discounts against the expanding loan portfolio and real estate concentration.
- Monitor deposit stability, reliance on wholesale funding and FHLB advances, and the maturity and repricing profile of borrowings and LIBOR-linked instruments.
- Evaluate whether loan growth and the PGB acquisition can sustain earnings as loan-sale income and acquired-loan discount accretion change, and whether goodwill remains recoverable.