RBB Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. Comparisons of operating results are to Q1 2020; balance-sheet comparisons are to December 31, 2020. RBB Bancorp is a bank holding company whose Royal Business Bank serves business and individual customers in California, Nevada, the New York City area, Chicago and New Jersey.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $35.5 million | $34.0 million in Q1 2020 |
| Net interest income | $29.5 million | $23.6 million in Q1 2020 |
| Net interest margin | 3.73% tax-equivalent | 3.37% in Q1 2020 |
| Provision for credit losses | $1.5 million | $1.9 million in Q1 2020 |
| Noninterest income / expense | $5.9 million / $15.8 million | $4.6 million / $16.3 million in Q1 2020 |
| Net income; diluted EPS | $12.5 million; $0.63 | $6.7 million; $0.33 in Q1 2020 |
| Return on average assets / equity | 1.47% / 11.64% | 0.90% / 6.60% in Q1 2020 |
| Total assets | $3.664 billion | $3.350 billion at December 31, 2020 |
| Cash and cash equivalents | $419.9 million | $194.7 million at December 31, 2020 |
| Loans held for investment, net of deferred fees | $2.715 billion | $2.707 billion at December 31, 2020 |
| Total deposits | $2.821 billion | $2.635 billion at December 31, 2020 |
| Shareholders’ equity | $435.7 million | $428.5 million at December 31, 2020 |
Cash flow: Operating activities provided $109.2 million; investing activities used $134.0 million; financing activities provided $250.1 million. Cash increased $225.3 million during the quarter. Financing included deposit growth and new subordinated debt, partly offset by redemption of existing debt and dividends.
Margins and efficiency: The efficiency ratio improved to 44.64% from 57.65% in Q1 2020. The average cost of total deposits declined to 0.55% from 1.38%; the average yield on earning assets declined to 4.49% from 4.86%, on a tax-equivalent basis. Management attributed higher net interest income primarily to growth in average earning assets and lower funding costs.
Material changes versus comparable periods
- Net income rose 84.6% year over year. Net interest income increased 25.0%, reflecting lower interest expense and higher average earning assets; noninterest income increased 27.7%, while noninterest expense declined 2.9%.
- Loan-sale gains increased to $3.8 million from $2.7 million, with loan sales of $133.6 million versus $101.7 million. Loan servicing income, net of amortization, fell to $246,000 from $592,000.
- Compared with year-end 2020, deposits increased $186.2 million, including a $170.2 million increase in noninterest-bearing demand deposits. Cash grew $225.3 million; available-for-sale securities increased to $281.6 million from $210.9 million.
- Loans held for investment grew modestly overall, with commercial real estate up $59.5 million and construction and land-development loans up $23.0 million, partly offset by an $83.1 million decline in single-family residential loans.
- Accumulated other comprehensive income declined by $1.3 million, primarily due to lower unrealized gains on available-for-sale securities. The portfolio moved from a $1.6 million pretax unrealized gain at year-end to a $212,000 pretax unrealized loss at March 31.
Credit, debt, liquidity and capital
- The allowance for loan losses was $30.8 million, or 1.13% of held-for-investment loans, versus $29.3 million, or 1.08%, at year-end. Q1 provision was $1.5 million; net charge-offs were $42,000.
- Nonperforming loans were $19.9 million, or 0.73% of total loans, compared with $19.6 million, or 0.72%, at year-end. Loans 30–89 days past due, excluding nonaccrual loans, increased to $10.7 million from $8.9 million. The filing reports no loans 90 days or more past due and still accruing.
- Real estate-related lending is a significant concentration: commercial real estate represented 39.2% and single-family residential mortgages 38.3% of held-for-investment loans. Management also notes geographic concentration in its operating markets.
- Borrowings totaled approximately $336.9 million, including $150.0 million of FHLB advances. In March, RBB issued $120 million of 4.00% fixed-to-floating subordinated notes due 2031 and redeemed $50 million of notes issued in 2016. The new issue is fixed through 2026 and then floats at three-month SOFR plus 329 basis points.
- Reported regulatory capital ratios remained above stated minimums. At March 31, consolidated Tier 1 leverage, common equity Tier 1, Tier 1 risk-based and total risk-based ratios were 11.30%, 14.53%, 15.11% and 23.27%, respectively. The Bank remained classified as well-capitalized.
- Management reported $957.7 million of FHLB borrowing capacity and $36.1 million of Federal Reserve secured borrowing capacity, with no amounts outstanding under those facilities at quarter-end. Adjusted core deposits were 83.04% of deposits; the top ten deposit relationships totaled $480.4 million.
Outlook, risks and unusual items
- No specific full-year earnings or financial guidance is provided. Management said it expected single-family loan growth to be similar, with a shift toward more FNMA and fewer non-qualified mortgage originations; commercial real estate originations were expected to remain stable.
- Management expected lower loan-sale volume and gains from reduced non-qualified mortgage originations, and anticipated higher loan losses in Q3 and Q4 2021 as loan deferment arrangements expire. These are forward-looking expectations, not reported results.
- COVID-19 remains a key uncertainty. The filing cites potential effects on borrowers, loan demand, collateral values, delinquencies, defaults, deposits and regional economic conditions. At March 31, borrowers had requested deferrals on 14 single-family mortgage loans totaling $7.6 million and seven commercial loans totaling $10.1 million. The Company reported approximately 285 PPP loans totaling $42.9 million.
- RBB adopted lease accounting guidance on January 1, 2021, recognizing right-of-use assets and lease liabilities of approximately $26.8 million at adoption. At quarter-end, these were $25.5 million and $26.2 million, respectively.
- Approximately 12% of gross loans had LIBOR-based reference rates. Certain existing debt and subordinated instruments also reference LIBOR; management was evaluating the transition to alternative benchmarks.
- Other stated risks include credit and interest-rate risk, real-estate and geographic concentrations, competition, regulatory and capital requirements, cybersecurity and technology disruption, acquisition integration, and possible goodwill impairment. The filing reports no material change to previously disclosed risk factors, no material pending litigation, and effective disclosure controls.
- Q1 common dividends were reported at $0.12 per share; after quarter-end, the Company announced a $0.13-per-share cash dividend payable May 14, 2021.
Most important facts for investors to verify
- Whether delinquency, nonaccrual and COVID-related deferral trends translate into higher charge-offs or additional allowance needs, particularly as deferrals expire.
- Whether deposit growth and funding costs are sustainable, including the concentration of large deposit relationships and time-deposit maturities.
- How loan mix, mortgage originations and loan-sale gains develop relative to management’s outlook, and whether the decline in purchased-loan accretion affects future net interest income.
- The sensitivity of earnings and economic value to interest-rate changes, and the completion and financial effects of LIBOR benchmark transitions.
- The terms, capital treatment and future cost of the $120 million subordinated debt issuance, alongside the Company’s capital ratios and dividend plans.