RBB Bancorp — 2020 Form 10-K Summary
Business and reporting period. RBB Bancorp is a California bank holding company operating Royal Business Bank, a community-focused commercial bank serving businesses and individuals, with an emphasis on Asian-American communities. It provides commercial real estate, commercial and industrial, residential mortgage and SBA lending, plus deposit and banking services. This annual report covers the fiscal year ended December 31, 2020; comparisons are primarily with 2019. RBB acquired Pacific Global Bank Holdings (PGBH) on January 10, 2020, adding three Chicago-area branches.
Financial performance and condition
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total assets, year-end | $3.35 billion | $2.79 billion | Up 20.1%; growth reflected PGBH and organic expansion |
| Revenue (interest income plus noninterest income) | $153.2 million | $160.0 million | Down 4.3% |
| Net interest income | $104.8 million | $96.9 million | Up 8.1% |
| Net interest margin | 3.52% | 3.63% | Down 11 basis points |
| Provision for credit losses | $11.8 million | $2.4 million | Up $9.4 million |
| Net income | $32.9 million | $39.2 million | Down 16.0% |
| Diluted earnings per share | $1.65 | $1.92 | Down $0.27 |
| Return on average assets / equity | 1.03% / 7.88% | 1.38% / 9.95% | Both declined |
| Efficiency ratio | 50.10% | 49.90% | Worsened 0.20 percentage points |
- Income drivers: Interest expense fell $10.5 million as deposit and borrowing costs declined, supporting higher net interest income despite lower interest income and margin. Noninterest income fell $4.3 million, largely as loan-sale gains and servicing income declined. Noninterest expense rose $2.0 million to $59.5 million.
- Loans and credit: Year-end held-for-investment loans were $2.71 billion, up 23.2% from 2019, including $173.1 million acquired with PGBH. The loan portfolio included $1.12 billion of residential mortgages and $1.00 billion of commercial real estate loans. Nonperforming loans rose to $19.6 million, or 0.72% of loans, from $13.2 million, or 0.60%. The allowance for loan losses increased to $29.3 million, or 1.08% of loans, from $18.8 million, or 0.86%.
- Liquidity and funding: Deposits rose 17.2% to $2.64 billion; noninterest-bearing deposits were $617.2 million, or 23.4% of deposits. Average total deposit cost declined to 1.01% from 1.56%. Cash and cash equivalents were $194.7 million and securities totaled $218.0 million at year-end. The loan-to-deposit ratio was 102.72%. RBB had $150 million of five-year FHLB advances and reported $915.2 million of additional FHLB borrowing capacity.
- Debt and capital: Borrowings totaled approximately $268.7 million: $150.0 million of FHLB advances, $104.4 million of subordinated notes and $14.3 million of subordinated debentures. Shareholders’ equity was $428.5 million. The consolidated total risk-based capital ratio was 20.77%; the Bank’s was 20.19%. The Bank remained “well-capitalized” under regulatory standards.
- Cash flows: Operating activities provided $124.5 million, versus $476.5 million in 2019; investing activities used $446.0 million, versus $219.4 million; financing activities provided $334.4 million, versus using $223.0 million. Cash and cash equivalents increased $12.9 million to $194.7 million. The large year-over-year operating cash-flow change reflects, among other items, mortgage loan originations and sales.
Material changes and significant developments
- PGBH contributed about $217.9 million in assets and $188.4 million in deposits at acquisition. RBB paid $32.9 million in cash and recorded $10.7 million of goodwill.
- Loan growth was funded by acquired and organic deposits, as well as a new $150 million five-year FHLB advance obtained in 2020 to provide liquidity amid pandemic uncertainty.
- The allowance rose substantially, with management citing COVID-19-related market effects, loan growth and increases in past-due, substandard and impaired loans. A $2.3 million COVID-related reserve was included.
- Noninterest income declined as mortgage and SBA loan-sale volumes and premiums fell. Management said correspondent demand had shifted from non-qualified mortgages toward standard FNMA products and anticipated lower non-qualified mortgage sales and higher FNMA sales.
- RBB repurchased 521,443 shares during 2020 for approximately $7.9 million. The annual declared dividend was $0.33 per share, down from $0.40 in 2019; a $0.12-per-share fourth-quarter dividend was announced after year-end.
Outlook, commentary and risks
- Outlook: The filing provides no quantitative earnings or revenue guidance. Management’s stated strategy is to pursue organic growth and acquisitions that meet its criteria. It expected COVID-19 uncertainty to continue affecting loan demand and underwriting; loan originations began rebounding in the latter part of 2020.
- COVID-19: Pandemic-related business disruption, borrower stress and uncertainty could increase delinquencies, defaults, losses and pressure on loan collateral and deposits. COVID-19 payment deferrals fell from $433.9 million across 570 loans at June 30, 2020, to $49.8 million across 35 loans at January 15, 2021. The Bank originated $32.9 million in PPP loans; RBB disclosed potential compliance, litigation and SBA-guaranty risks.
- Concentration and credit risks: Approximately 91.2% of loans had real estate as a primary or secondary collateral component. RBB reported CRE loans equal to 229.8% of risk-based capital. Its non-qualified residential mortgage portfolio, SBA exposures (including hotel/motel collateral) and construction lending may be more exposed to adverse economic conditions.
- Funding risks: Deposits are concentrated among larger customers: the ten largest depositor relationships represented 13.9% of deposits, and 131 relationships over $2 million represented approximately 33.5%. Significant withdrawals could raise funding costs or require replacement borrowing.
- Other exposures: RBB cited interest-rate and securities-value risk, the LIBOR transition, acquisition integration and goodwill impairment risk, regulatory and compliance requirements, cybersecurity and third-party vendor risks, and possible legal or environmental liabilities. Approximately 13% of gross loans had LIBOR-based reference rates.
- Unusual items and controls: RBB recorded $417,000 of mortgage servicing-rights impairment in 2020; it reported no goodwill impairment. The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Management excluded the acquired PGBH business—7% of year-end assets, 6% of annual revenue and 5% of annual net income—from its 2020 internal-control assessment while integration continued.
Investor verification priorities
- Reconcile the $11.8 million credit-loss provision, the $2.3 million COVID-related reserve and subsequent loan performance, including the elevated nonperforming and past-due balances.
- Review the portfolio’s real-estate concentration, construction growth, non-qualified mortgage exposure and SBA collateral mix, with attention to hotel/motel borrowers.
- Assess deposit concentration, the 102.72% loan-to-deposit ratio, borrowing capacity and the effect of the new $150 million FHLB advance on funding costs and liquidity.
- Check trends in net interest margin, loan yields, mortgage and SBA sale volumes, servicing income and the planned shift toward FNMA mortgage sales.
- Monitor PGBH integration, acquisition-related expenses and the controls assessment for the acquired business.
- Review progress on LIBOR contract fallback provisions, given LIBOR-linked loans and debt, and confirm the effect of the transition on pricing and interest-rate risk.