RBB Bancorp Reports Second Quarter Earnings for 2020

RBB Bancorp and its subsidiaries, Royal Business Bank (“the Bank”) and RBB Asset Management Company (“RAM”), collectively referred to herein as “the Company,” announced financial results for the quarter ended June 30, 2020.

The Company reported net income of $6.5 million, or $0.33 diluted earnings per share, for the three months ended June 30, 2020, compared to net income of $6.7 million, or $0.33 diluted earnings per share, and $10.1 million, or $0.50 diluted earnings per share, for the three months ended March 31, 2020 and June 30, 2019, respectively.

“While the COVID-19 pandemic had an impact on our operating performance for the second quarter, we were able to make progress towards returning to future earnings growth,” said Mr. Alan Thian, Chairman, President and CEO of RBB Bancorp.  “We grew our core loans by over 18% on an annualized basis and our loan pipeline remains strong.  We continued to drive down our deposit costs while increasing our core noninterest-bearing deposits during the quarter.  Our average loan yields also declined, but at a slower pace than the decrease in our funding costs, enabling us to expand our net interest margin.  While our results were impacted by lower loan sales and an increased provision for loan losses, our credit quality improved, and our operating expenses were in line with our expectations.

“We are encouraged that 85% of our clients that received loan payment deferrals in April resumed making payments in July,” added Mr. Thian.  “It is difficult to predict the ultimate impact that this pandemic will have on our clients, given economic uncertainty, the original government stimulus package ending soon, and the number of new COVID-19 cases continuing to increase across some of our primary markets.  However, we are well-capitalized and well-positioned to manage through this public health crisis and we continue to evaluate opportunities to expand our franchise beyond our existing markets.

“Our board of directors  approved a quarterly dividend of $0.06 per share, consistent with the second quarter, and we anticipate being able to restore the dividend to a higher level once we obtain more clarity on future business conditions and the earnings potential of the company,” Mr. Thian concluded.

Key Performance Ratios

Net income of $6.5 million for the second quarter of 2020 produced an annualized return on average assets of 0.83%, an annualized return on average tangible common equity of 7.77%, and an annualized return on average equity of 6.34%.  This compares to an annualized return on average assets of 0.90%, an annualized return on average tangible common equity of 8.13%, and an annualized return on average equity of 6.60% for the first quarter of 2020.  The efficiency ratio for the second quarter of 2020 was 54.40%, compared to 57.70% for the prior quarter.

Net Interest Income and Net Interest Margin

Net interest income, before provision for loan losses, was $25.0 million for the second quarter of 2020, compared to $23.6 million for the first quarter of 2020.  The $1.4 million increase was primarily attributable to a $128.8 million increase in average earning assets and a $72.3 million increase in average noninterest-bearing deposits, partially offset by a $48.6 million increase in average interest-bearing liabilities.  Net interest income was also favorably impacted by a 5 basis point increase in the net interest margin.  Accretion of purchase discounts from prior acquisitions contributed $818,000 to net interest income in the second quarter of 2020, compared to $685,000 in the first quarter of 2020.

Compared to the second quarter of 2019, net interest income, before provision for loan losses, increased $717,000 from $24.3 million. The increase was primarily attributable to a $264.4 million increase in average earning assets and a $149.7 million increase in average noninterest-bearing deposits, partially offset by a 22 basis point decrease in the net interest margin, and a $136.2 million increase in average interest-bearing liabilities.  The increases in average earning assets and total deposits were primarily due to the Pacific Global Bank (“PGB”) acquisition.  

Net interest margin was 3.42% for the second quarter of 2020, an increase from 3.37% in the first quarter of 2020. The increase was primarily attributable to a 30 basis point decrease in the cost of total deposits and a 106 basis point decrease in the cost of subordinated debentures, partially offset by a 21 basis point decrease in the yield on average earning assets.  Loan discount accretion contributed 14 basis points to the net interest margin in the second quarter of 2020, compared to 10 basis points in the first quarter of 2020.

Noninterest Income

Noninterest income was $2.2 million for the second quarter of 2020, a decrease of $2.4 million from $4.6 million in the first quarter of 2020.  The decrease was driven by a decrease in gain on loan sales of $2.6 million as the Company sold fewer loans in the second quarter than in the prior quarter generally due to subdued market activity as a result of the COVID-19 pandemic. The Company expects gain on sale of loan income to return to prior levels in the fourth quarter.   

The Company sold $5.2 million in FNMA direct mortgage loans for a net gain of $105,000 during the second quarter of 2020, compared to $31.5 million in FNMA direct and indirect mortgage loans, and $69.2 million in mortgage loans to private investors for a net gain of $1.4 million and $1.2 million, respectively during the first quarter of 2020.    

The Company sold $1.4 million in SBA loans for a net gain of $70,000 during the second quarter of 2020, compared to $1.2 million in SBA loans sold for a net gain of $89,000 during the first quarter of 2020. 

Compared to the second quarter of 2019, noninterest income decreased by $3.3 million from $5.5 million. The decrease was primarily attributable to a decrease of $3.0 million in gains on loan sales.

Noninterest Expense

Noninterest expense for the second quarter of 2020 was $14.8 million, compared to $16.3 million for the first quarter of 2020.  The $1.4 million decrease was primarily attributable to a $1.4 million decrease in salaries and employee benefits expenses, $127,000 decrease in merger expenses, $260,000 decrease in data processing expense, $103,000 decrease in marketing and business promotion expenses, partially offset by a $123,000 increase in occupancy and equipment expenses, a $66,000 increase in legal and professional fees and $189,000 increase in other expenses including a $366,000 write-down of mortgage servicing rights.  

RBB incurred $276,000 in merger and conversion expenses in the second quarter of 2020, of which $77,000 related to the First American International Corp. acquisition and $199,000 to the PGB acquisition, a decrease of $127,000 from the prior quarter.

Noninterest expense decreased from $14.9 million in the second quarter of 2019.  The $80,000 decrease was primarily due to a $147,000 decrease in occupancy and equipment expenses, a $205,000 decrease in marketing and business promotion expenses and $51,000 decrease in insurance and regulatory expenses.  These were partially offset by a $261,000 increase in merger expenses.  The increases in merger expenses was due to the acquisition of PGB.

Income Taxes

The effective tax rate was 30.8% for the second quarter of 2020, 32.5% for the first quarter of 2020, and 30.3% for the second quarter of 2019.  The lower effective tax rate in the second quarter of 2020 was a result of affordable housing tax credits. 

Loan Portfolio

Loans held for investment, net of deferred fees and discounts, totaled $2.6 billion as of June 30, 2020, an increase of $108.7 million from March 31, 2020, and an increase of $449.1 million from June 30, 2019 excluding loans transferred from held-for-sale to held-for-investment of $53.1 million and PPP loans of $32.8 million. The increase from the prior quarter was primarily due to organic loan growth.  Single-family residential mortgages increased by $51.2 million, net of payoffs, paydowns and loan sales, excluding the net transfer of loans from the available for sale category, and was driven by new production.  Commercial real estate loans increased by $45.7 million, construction and land development loans increased by $25.6 million, SBA loans increased by $26.5 million, and commercial and industrial loans decreased by $8.1 million. 

During the second quarter of 2020, single-family residential mortgage production was $117.6 million (mortgage loans held for investment and held for sale), payoffs and paydowns were $36.0 million, and single-family residential mortgage loan sales were $5.2 million.  During the first quarter of 2020, single-family residential mortgage production was $106.6 million, payoffs and paydowns were $39.3 million, and loan sales were $100.5 million.

Mortgage loans held for sale were $15.5 million as of June 30, 2020, a decrease of $36.6 million from $52.1 million at March 31, 2020 and a decrease of $234.1 million from $249.6 million as of June 30, 2019.  The Company originated approximately $19.0 million in mortgage loans for sale for the second quarter of 2020, compared with $32.4 million during the prior quarter.  In the second quarter, SBA loan production was $33.1 million, which consisted exclusively of PPP loans, and total loan sales were $1.4 million.  In the prior quarter, SBA loan production was $6.2 million and total loan sales were $1.2 million.

Deposits

Deposits were $2.4 billion at June 30, 2020, an increase of $31.3 million from March 31, 2020, and an increase of $317.2 million from June 30, 2019, excluding brokered deposits. The increase in total deposits from the prior quarter was primarily attributable to organic deposit growth.  Noninterest-bearing deposits increased by $70.2 million and interest-bearing non-maturity deposits increased by $30.1 million.  Time deposits decreased by $99.8 million, including a $30.7 million decrease in brokered CDs.  As of June 30, 2020, time deposits included $2.4 million in brokered CDs, as compared to $33.1 million as of March 31, 2020 and $135.0 million as of June 30, 2019.

Asset Quality

Nonperforming assets totaled $17.5 million, or 0.56% of total assets at June 30, 2020, compared to $20.8 million, or 0.66%, of total assets at March 31, 2020.  The decrease in nonperforming assets was primarily due to the sale of two hotel franchise loans and one loan returning to accrual status, for a combined total of $3.0 million.  Nonperforming assets consist of OREO, loans modified under troubled debt restructurings (“TDR”), non-accrual loans, and loans past due 90 days or more and still accruing interest. 

Loans held-for-investment 30 to 89 days past due increased to $23.9 million at June 30, 2020, up from $22.5 million at March 31, 2020. 

In the second quarter of 2020, there were $319,000 in net charge-offs, due to the sale of the two hotel franchise loans, down from $631,000 in the prior quarter.

The Company recorded a provision for credit losses of $3.0 million for the second quarter of 2020, an increase from $1.9 million in the prior quarter, primarily attributable to the higher loan balances and the impact of the COVID-19 pandemic. 

The allowance for loan losses totaled $22.8 million, or 0.88% of loans held for investment at June 30, 2020, compared with $20.1 million, or 0.84%, of total loans at March 31, 2020.

The following table, as of June 30, 2020, is intended to summarize the Company’s overall loan exposure to major industries that are considered “at-risk” for business interruption due to the COVID-19 pandemic:

In the above table, the general retail exposure now includes warehouse loans and the mixed use commercial exposure now includes residential mixed use loans.

As of June 30, 2020, borrowers representing 258 loans totaling $32.8 million, or 1.3% of the Company’s total loan portfolio, have funded under the SBA’s Paycheck Protection Program due to the COVID-19 pandemic. As of July 20, 2020 85.2% of our borrowers that received loan payment deferrals in April, representing $184.6 million in loan balances, have resumed making payments.  The following table provides details regarding the Company’s COVID-19 loan deferral activity through July 20, 2020.

The Company does not have any shared national credits or loans backed by service stations, airlines or cruise lines on deferral as of July 20, 2020. 

Properties

On March 31, 2020, we closed the Grand Street branch in New York City as the lease for this branch expired in April 2020.  Branch operations and staff were transferred to the Bowery branch.

The Bank plans to open a new full service banking branch in Edison, New Jersey in the second half of 2020. The branch will be located at 561 US-1, in the Wicks Shopping Plaza in Edison.  The Bank entered into an agreement to purchase a property located at 2057 86^th Street, Brooklyn, New York, in the Bensonhurst neighborhood, to house a full-service branch.  We expect this branch to open in 2021. 

Corporate Overview

RBB Bancorp is a community-based financial holding company headquartered in Los Angeles, California.  The Company has total assets of $3.1 billion. Its wholly-owned subsidiary, Royal Business Bank is a full service commercial bank, which provides business banking services to the Chinese-American communities in Los Angeles County, Orange County and Ventura County in California, in Las Vegas, Nevada, in Brooklyn, Queens, and Manhattan in New York, and three branches in the Chicago neighborhoods of Chinatown and Bridgeport.  Bank services include remote deposit, E-banking, mobile banking, commercial and investor real estate loans, business loans and lines of credit, commercial and industrial loans, SBA 7A and 504 loans, 1-4 single family residential loans, automobile lending, trade finance, a full range of depository account products and wealth management services.  The Bank has ten branches in Los Angeles County, two branches in Ventura County, one branch in Irvine, California, one branch in Las Vegas, Nevada, six branches and one loan operation center in Brooklyn, Queens and Manhattan in New York, and three branches in Chicago, Illinois. The Company’s administrative and lending center is located at 1055 Wilshire Blvd., Los Angeles, California 90017, and its finance and operations center is located at 7025 Orangethorpe Avenue, Buena Park, California 90621. The Company’s website address is www.royalbusinessbankusa.com.

Conference Call

Management will hold a conference call at 11:00 a.m. Pacific time/2:00 p.m. Eastern time tomorrow, July 28, 2020, to discuss the Company’s second quarter 2020 financial results.

To listen to the conference call, please dial 1-833-519-1355 or 1-918-922-6505, passcode 6968497. A replay of the call will be made available at 1-800-585-8367 or 1-404-537-3406, passcode 6968497, approximately one hour after the conclusion of the call and will remain available through August 4, 2020.

The conference call will also be simultaneously webcast over the Internet; please visit our Royal Business Bank website at www.royalbusinessbankusa.com and click on the “Investors” tab to access the call from the site. This webcast will be recorded and available for replay on our website approximately two hours after the conclusion of the conference call.

Disclosure

This press release contains certain non-GAAP financial disclosures for tangible common equity and tangible assets and adjusted earnings. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Please refer to the tables at the end of this release for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measures to the GAAP financial measures.

Safe Harbor

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to, local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities; our ability to attract deposits and other sources of funding or liquidity; supply and demand for real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend, including both residential and commercial real estate; a prolonged slowdown or decline in real estate construction, sales or leasing activities; changes in the financial performance and/or condition of our borrowers, depositors or key vendors or counterparties; changes in our levels of delinquent loans, nonperforming assets, allowance for loan losses and charge-offs; expectations regarding the impact of the COVID-19 pandemic;  the costs or effects of acquisitions or dispositions we may make, including our recent acquisition of PGB Holdings, Inc. and its wholly-owned subsidiary, Pacific Global Bank, and our recently completed acquisition of First American International Corp., whether we are able to obtain any required governmental or shareholder approvals in connection with any such acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits associated with any such acquisitions or dispositions; the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, banking capital levels, consumer, commercial or secured lending, securities and securities trading and hedging, compliance, employment, executive compensation, insurance, vendor management and information security) with which we and our subsidiaries must comply or believe we should comply; changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting requirements, including changes in the Basel Committee framework establishing capital standards for credit, operations and market risk; inflation, interest rate, securities market and monetary fluctuations; changes in government interest rates or monetary policies; changes in the amount and availability of deposit insurance; cyber-security threats, including loss of system functionality or theft or loss of Company or customer data or money; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, drought, or the effects of pandemic diseases; the timely development and acceptance of new banking products and services and the perceived overall value of these products and services by our customers and potential customers; the Company’s relationships with and reliance upon vendors with respect to the operation of certain of the Company’s key internal and external systems and applications; changes in commercial or consumer spending, borrowing and savings preferences or behaviors; technological changes and the expanding use of technology in banking (including the adoption of mobile banking and funds transfer applications); the ability to retain and increase market share, retain and grow customers and control expenses; changes in the competitive and regulatory environment among financial and bank holding companies, banks and other financial service providers; volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions; fluctuations in the price of the Company’s common stock or other securities; and the resulting impact on the Company’s ability to raise capital or make acquisitions, the effect of changes in accounting policies and practices, as may be adopted from time-to-time by our regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard-setters, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”, commonly referenced as the Current Expected Credit Loss (“CECL”) model, which will change how we estimate credit losses and may increase the required level of our allowance for credit losses after adoption; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our workforce, management team and/or our board of directors; the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (such as securities, consumer or employee class action litigation), regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews; our ongoing relations with our various federal and state regulators, including the SEC, FDIC, FRB and California DBO; our success at managing the risks involved in the foregoing items and all other factors set forth in the Company’s public reports, including its Annual Report as filed under Form 10-K for the year ended December 31, 2019, and particularly the discussion of risk factors within that document. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.

Tangible Book Value Reconciliations (non-GAAP)

The tangible book value per share is a non-GAAP disclosure. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of tangible book value to the Company shareholders’ equity computed in accordance with GAAP, as well as a calculation of tangible book value per share as of June 30, 2020 and 2019.

Earnings Per Share Excluding Merger and Conversion Expense (non-GAAP)

Earnings per share excluding merger and conversion expense is a non-GAAP disclosure.  The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance. The following is a calculation of earnings per share with after-tax net income excluding tax-affected merger and conversion expense.  This EPS calculation is presented for the quarters ended June 30, 2020, March 31, 2020 and June 30, 2019, plus for the six-month periods ending June 30, 2020 and 2019.

Efficiency Ratio (non-GAAP)

The efficiency ratio is a non-GAAP disclosure.  The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance.  The efficiency ratio is non-interest expense divided by net interest income plus non-interest income.  The efficiency ratio is presented for the quarters ended June 30, 2020, March 31, 2020 and June 30, 2019, plus the six-month periods ending June 30, 2020 and 2019.