RBB Bancorp — Q2 2020 Form 10-Q
Business context and reporting period. RBB Bancorp is a bank holding company serving businesses and individuals in Southern California, Las Vegas, Chicago and the New York City area. This unaudited filing covers the quarter and six months ended June 30, 2020. The January 10 acquisition of PGB Holdings added three Chicago branches and is included in results from that date. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and condition
- Q2 earnings: Net income was $6.5 million, down 35.8% from $10.1 million in Q2 2019. Diluted EPS was $0.33, versus $0.50. For the first half, net income was $13.3 million, down 35.4% from $20.5 million; diluted EPS was $0.66 versus $1.00.
- Net interest income and margin: Q2 net interest income was $25.0 million, up 3.0% year over year; first-half net interest income was $48.6 million, down 3.2%. Net interest margin was 3.42% in Q2 versus 3.64%, and 3.39% for the first half versus 3.73%. Lower funding costs helped, while yields on earning assets fell.
- Credit costs and asset quality: Provision for loan losses was $3.0 million in Q2 versus $0.4 million, and $5.0 million for the first half versus $0.9 million. The allowance was $22.8 million, or 0.88% of loans, compared with $18.8 million, or 0.86%, at year-end. Nonperforming loans rose to $17.2 million from $13.2 million; loans 30–89 days past due increased to $23.9 million from $5.3 million. Q2 net charge-offs were $0.3 million.
- Other income and expenses: Q2 noninterest income fell 59.8% to $2.2 million, mainly because gain on loan sales declined to $0.1 million from $3.1 million. First-half noninterest income fell 29.7% to $6.8 million. Q2 noninterest expense was $14.8 million, approximately flat year over year; first-half expense increased 2.8% to $31.1 million. Q2 pretax income was $9.4 million versus $14.6 million; effective tax rate was 30.8% versus 30.3%.
- Balance sheet and funding: Total assets were $3.14 billion, up 12.5% from December 31, 2019. Loans held for investment, net of deferred fees and discounts but before the allowance, were $2.595 billion versus $2.197 billion. Deposits were $2.437 billion versus $2.249 billion; noninterest-bearing deposits were $574.6 million, or 23.6% of deposits. Cash and cash equivalents were $151.8 million, down from $181.8 million.
- Debt, liquidity and capital: RBB had $150 million of five-year FHLB advances at a weighted-average fixed rate of 1.18%, obtained to enhance pandemic liquidity; total borrowings were $268.4 million. It reported $1.1 billion of additional FHLB borrowing capacity, with no outstanding short-term FHLB advances. The consolidated Tier 1 leverage, CET1, Tier 1 risk-based and total risk-based capital ratios were 11.48%, 14.87%, 15.49% and 21.10%, respectively; the Bank exceeded well-capitalized standards.
- Cash flows, first half: Operating activities provided $70.1 million, investing activities used $241.2 million and financing activities provided $141.2 million. Cash and cash equivalents decreased $29.9 million to $151.8 million.
- Shareholders: Equity was $414.0 million versus $407.7 million at year-end. RBB repurchased approximately 348,000 shares for $5.3 million during the first half and declared $0.12 per share in dividends. The company announced a $0.06-per-share Q2 dividend payable August 17, 2020.
Material changes versus comparable periods
- Profitability weakened year over year, despite Q2 net interest income growth, as credit-loss provision rose and noninterest income fell sharply. Lower interest expense partly offset declining asset yields.
- Loan growth reflected organic activity, the PGB acquisition, and $53.1 million of mortgage loans transferred from held for sale to held for investment. The acquisition contributed $173.1 million of loans and $188.4 million of deposits at fair value.
- Mortgage loans held for sale fell to $15.5 million from $108.2 million at year-end as COVID-related disruption curtailed the nonqualified mortgage secondary market. First-half loan sales were $108.3 million versus $370.6 million.
- Deposits increased by $187.6 million and borrowings rose by $154.7 million, including the new FHLB advances. The filing says no deposit runoff had been experienced as of its reporting.
Outlook, risks and unusual items
- Management said the full COVID-19 impact remained uncertain. It expected a shift toward more FNMA-qualified and fewer nonqualified single-family mortgage originations, lower loan-sale volume and gains, and stable commercial real estate originations under tighter underwriting standards.
- Management expected higher loan losses in Q4 2020 and Q1 2021 as loan deferral agreements expired. As of June 30, borrowers had requested deferrals on 470 single-family mortgages totaling $219.2 million and 94 commercial loans totaling $191.7 million. RBB had processed about 258 PPP loans totaling $32.8 million.
- RBB applied CARES Act and regulatory relief for qualifying COVID-related modifications that otherwise could be treated as troubled debt restructurings. Six TDRs totaling $3.1 million were reported at June 30; $0.9 million were nonaccrual. The filing cautions that deferred or modified loans may still result in future credit losses.
- Unusual or notable items included $0.7 million of first-half merger and conversion expense related to PGB, a $0.4 million mortgage servicing rights impairment attributed to COVID-19, and $0.5 million of Q2 severance expense. Goodwill impairment tests at March 31 and June 30 found no impairment; management warned a deeper or prolonged downturn could cause future impairment.
- Additional risks include real estate and geographic concentration, higher delinquencies and collateral deterioration, PPP compliance or litigation exposure, interest-rate and LIBOR transition risk, acquisition integration, and potential goodwill or servicing asset impairment. About 17% of gross loans referenced LIBOR. No formal earnings guidance was provided.
- After quarter-end, RBB announced plans to purchase a Brooklyn building for a new branch and lease Manhattan premises for a branch relocation. Management reported effective disclosure controls and no material pending litigation beyond ordinary-course matters.
Important facts for investors to verify
- Subsequent delinquency, nonaccrual, charge-off and allowance trends, particularly in commercial real estate, SBA and pandemic-affected borrower segments.
- Performance and repayment status of deferred loans and PPP loans, including any SBA guarantee or servicing issues.
- Deposit stability, concentration among large relationships, and the cost and availability of funding as time deposits mature.
- Whether lower mortgage sales, reduced purchase-loan discount accretion and weaker fee income continue to pressure net interest margin and earnings.
- Integration costs and realized benefits from the PGB acquisition, plus the execution and funding of planned branch changes.
- Future fair-value assessments for goodwill and mortgage servicing rights, and the eventual effects of CECL adoption and LIBOR replacement.