RBB Bancorp — Q2 2021 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020. RBB Bancorp is a California-based financial holding company whose Royal Business Bank serves business and individual customers across Southern California, Las Vegas, the New York City area, Chicago and New Jersey. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial and operating highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $30.1 | $25.0 | $59.5 | $48.6 |
| Provision for loan losses | $0.6 | $3.0 | $2.1 | $5.0 |
| Noninterest income | $4.2 | $2.2 | $10.1 | $6.8 |
| Noninterest expense | $14.7 | $14.8 | $30.5 | $31.1 |
| Net income | $13.4 | $6.5 | $25.8 | $13.3 |
| Diluted EPS | $0.67 | $0.33 | $1.30 | $0.66 |
- Q2 net interest margin was 3.33%, down from 3.42% a year earlier; first-half margin was 3.52%, up from 3.39%. The first-half efficiency ratio improved to 43.78% from 56.05%.
- Q2 annualized return on average assets was 1.39% and return on average equity was 12.13%, versus 0.83% and 6.34%, respectively, in Q2 2020.
- Q2 net income rose 105% year over year. Management attributed the improvement primarily to higher net interest income, lower loan-loss provision, higher loan-sale gains and slightly lower operating expense.
- At June 30, assets were $3.89 billion, up 16.1% from year-end. Deposits were $3.07 billion, up $434.8 million; cash and cash equivalents were $603.7 million, up $409.0 million.
- Loans held for investment, net of deferred fees and discounts, were $2.71 billion, essentially flat from year-end. Commercial real estate loans increased $98.8 million and construction and land development loans increased $50.2 million; single-family residential mortgages declined $140.0 million.
- Six-month cash flows: operating activities provided $132.3 million, investing activities used $214.7 million and financing activities provided $491.4 million. Cash and cash equivalents increased $409.0 million to $603.7 million.
- The allowance for loan losses was $31.4 million, or 1.16% of loans, versus $29.3 million, or 1.08%, at year-end. Nonperforming loans were $19.2 million, or 0.71% of loans; there were no loans 90 days or more past due and still accruing.
- Borrowings totaled approximately $337.1 million: $150.0 million in FHLB advances, $172.7 million in long-term debt net of issuance costs and $14.4 million in subordinated debentures. Shareholders’ equity was $442.3 million.
- Regulatory capital ratios at June 30 included a 10.20% consolidated Tier 1 leverage ratio, 14.76% common equity Tier 1 ratio, 15.33% Tier 1 risk-based ratio and 23.48% total risk-based ratio. The Bank remained above “well-capitalized” thresholds.
Material changes versus comparable periods
- Q2 interest expense fell 34.8% year over year, mainly reflecting lower deposit rates; average cost of total deposits declined to 0.41% from 1.10%. The benefit was partly offset by lower yields on earning assets and a modest decline in quarterly net interest margin.
- Q2 loan-sale gains increased to $2.6 million from $81,000, with $78.2 million of SBA and single-family residential loans sold in the quarter. First-half loan-sale gains were $6.4 million versus $2.8 million.
- Servicing income, net of amortization, fell to $118,000 in Q2 from $708,000, as mortgage prepayments reduced serviced balances. Serviced loans totaled $1.58 billion at June 30, down 11.3% from June 2020.
- Q2 provision expense fell to $628,000 from $3.0 million; first-half provision was $2.1 million versus $5.0 million. Management cited fewer past-due and nonperforming loans, while also noting COVID-related qualitative reserve factors.
- Noninterest expense was broadly stable in Q2. Lower occupancy, merger and other expense offset increased salaries and data-processing costs. First-half merger costs declined to $59,000 from $679,000.
- Deposits grew substantially, including noninterest-bearing demand deposits, which were 30.6% of deposits at quarter-end versus 23.4% at year-end. Cash accumulation drove a large increase in liquidity.
Outlook, risks, contingencies and unusual items
- The filing provides no formal earnings or financial guidance. Management expected lower single-family loan growth and nonqualified-mortgage originations amid accelerated refinancing and prepayments; commercial real estate originations were expected to remain stable. It also expected temporary excess liquidity to decline over the next 12 months.
- Management expected acquired-loan discount accretion to decline through the rest of 2021 as acquired loans pay off. The company reported approximately 11% of gross loans with LIBOR-based reference rates and said it was developing SOFR-based products; it anticipated a neutral financial impact from the transition.
- COVID-19 impacts remain uncertain. Risks cited include renewed infections or economic weakness, asset-quality deterioration, loan deferrals, funding availability and potential impairment of goodwill or other intangibles. The loan portfolio is concentrated in real estate and in the company’s regional markets.
- Interest-rate sensitivity modeling showed projected one-year net interest income up 8.84% under an immediate +100-basis-point shock and up 0.38% under -100 basis points. Economic value of equity was modeled down 9.52% under -100 basis points and up 2.91% under +200 basis points. These are model estimates, not forecasts.
- The $120 million 4.00% fixed-to-floating subordinated-debenture issuance in March 2021 was partly used to redeem $50 million of older debentures. The company also maintained $150 million in five-year FHLB advances to support liquidity.
- After quarter-end, RBB announced a $0.13-per-share dividend, payable August 13, 2021, and agreed to acquire a Bank of the Orient Honolulu branch for $2.8 million, including approximately $77.8 million of deposits and $10 million of selected performing loans; the transaction was subject to regulatory approval and expected to close by year-end. The Bank was also awarded a $1.8 million Treasury grant, pending finalization of the grant contract.
- RBB repurchased 222,423 shares during Q2 for approximately $5.3 million; first-half repurchases totaled $7.6 million. Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material pending litigation beyond ordinary-course matters.
Most important facts for investors to verify
- Whether elevated loan-sale gains and the sharply lower provision are sustainable, and how declining acquired-loan accretion and mortgage prepayments affect future earnings and margins.
- Credit quality trends, including nonperforming loans, delinquency levels, COVID-related deferrals and the adequacy of the $31.4 million allowance as the portfolio mix shifts toward commercial real estate and construction lending.
- Deposit stability and concentration: the top ten deposit relationships totaled $545.3 million, and the filing identifies wholesale and large time deposits as funding sources.
- Liquidity and capital effects of the planned Hawaii branch acquisition, the $1.8 million grant and ongoing share repurchases and dividends.
- Interest-rate and LIBOR-to-SOFR transition assumptions, including the sensitivity of earnings and economic value of equity to rate changes.