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0001499422 RBB Bancorp false --12-31 Q2 2021 7,042 7,603 100,000,000 100,000,000 0 0 0 0 100,000,000 100,000,000 0 0 19,349,802 19,349,802 19,565,921 19,565,921 26.8 3 0.33 0 7.9 158,000 0 0 0 0 0 0 0 0 0 7 6 0 0 0 0 2 2 1 2 1.3 0 0 366,000 5 30 5 5 5 0 0 0 6.0 6.0 6.0 3.98 2.60 0 0 0 0 293,000 2029 August 13, 2021 August 2, 2021 Included in total loans. The amounts primarily represent revenue from contracts with customers that are out of scope of ASC 606: Net loan servicing income, letter of credit commissions, import/export commissions, recoveries on purchased loans, BOLI income, and gains (losses) on sales of mortgage loans, loans and investment securities. Other income consists of safe deposit box rental income, wire transfer fees, security brokerage fees, annuity sales, insurance activity and OREO income. Other fees consists of wealth management fees, miscellaneous loan fees and postage/courier fees. 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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021 or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission File Number: 001-38149

 

RBB BANCORP

(Exact name of registrant as specified in its charter)

 

California

27-2776416

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1055 Wilshire Blvd., Suite 1200,

 

Los Angeles, California

90017

(Address of principal executive offices)

(Zip Code)

 

(213) 627-9888

(Registrants telephone number, including area code)

 

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of exchange on which registered

Common Stock, No Par Value

 

RBB

 

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

 

Number of shares of common stock of the registrant:  19,353,637 outstanding as of August 3, 2021.

 



 

 

    

 

TABLE OF CONTENTS

 

PART I  FINANCIAL INFORMATION (UNAUDITED)

3

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9

ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

36

 

CRITICAL ACCOUNTING POLICIES

38

 

OVERVIEW

40

 

ANALYSIS OF THE RESULTS OF OPERATIONS

41

 

ANALYSIS OF FINANCIAL CONDITION

50

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

67

ITEM 4.

CONTROLS AND PROCEDURES

68

PART II - OTHER INFORMATION

69

ITEM 1.

LEGAL PROCEEDINGS

69

ITEM 1A.

RISK FACTORS

69

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

69

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

69

ITEM 4.

MINE SAFETY DISCLOSURES

69

ITEM 5.

OTHER INFORMATION

69

ITEM 6.

EXHIBITS

70

SIGNATURES

 

71

 

 

 

PART I - FINANCIAL INFORMATION (UNAUDITED)

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020 (AUDITED)

(In thousands, except share amounts)

 

  June 30,  December 31, 
  

2021

  

2020

 

Assets

        

Cash and due from banks

 $493,653  $137,654 

Federal funds sold and other cash equivalents

  110,000   57,000 

Cash and cash equivalents

  603,653   194,654 

Interest-earning deposits in other financial institutions

  600   600 

Securities:

        

Available for sale

  339,568   210,867 

Held to maturity (fair value of $7,042 and $7,603 at June 30, 2021 and December 31, 2020, respectively)

  6,664   7,174 

Mortgage loans held for sale

  9,246   49,963 

Loans held for investment:

        

Real estate

  2,328,735   2,320,216 

Commercial and other

  385,838   392,066 

Total loans

  2,714,573   2,712,282 

Unaccreted discount on acquired loans

  (2,209)  (2,872)

Deferred loan fees, net

  (3,158)  (2,644)

Total loans, net of deferred loan fees

  2,709,206   2,706,766 

Allowance for loan losses

  (31,352)  (29,337)

Net loans

  2,677,854   2,677,429 
         

Premises and equipment

  27,039   27,103 

Federal Home Loan Bank (FHLB) stock

  15,000   15,641 

Other real estate owned (OREO)

  293   293 

Cash surrender value of life insurance (BOLI)

  55,325   35,121 

Goodwill

  69,243   69,243 

Servicing assets

  12,558   13,965 

Core deposit intangibles

  4,608   5,196 

Right-of-use assets- operating leases

  25,050    

Accrued interest and other assets

  43,937   42,823 

Total assets

 $3,890,638  $3,350,072 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020 (AUDITED) (CONTINUED)

(In thousands, except share amounts)

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 

Liabilities and Shareholders’ Equity

        

Deposits:

        

Noninterest-bearing demand

 $940,041  $617,206 

Savings, NOW and money market accounts

  858,597   731,084 

Time deposits $250,000 and under

  658,393   688,875 

Time deposits over $250,000

  612,894   597,963 

Total deposits

  3,069,925   2,635,128 
         

Reserve for unfunded commitments

  1,216   1,383 

FHLB advances

  150,000   150,000 

Long-term debt, net of debt issuance costs

  172,718   104,391 

Subordinated debentures

  14,393   14,283 

Lease liabilities - operating leases

  25,798    

Accrued interest and other liabilities

  14,263   16,399 

Total liabilities

  3,448,313   2,921,584 
         

Commitments and contingencies - Note 13

      
         

Shareholders' equity:

        

Preferred Stock - 100,000,000 shares authorized, no par value; none outstanding

      

Common Stock - 100,000,000 shares authorized, no par value; 19,349,802 shares issued and outstanding at June 30, 2021 and 19,565,921 shares issues and outstanding at December 31, 2020

  280,253   284,261 

Additional paid-in capital

  5,275   4,932 

Retained earnings

  156,558   138,094 

Non-controlling interest

  72   72 

Accumulated other comprehensive income, net

  167   1,129 

Total shareholders’ equity

  442,325   428,488 

Total liabilities and shareholders’ equity

 $3,890,638  $3,350,072 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(In thousands, except per share amounts)

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Interest and dividend income:

                

Interest and fees on loans

 $34,669  $32,633  $69,185  $64,909 

Interest on interest-earning deposits

  125   74   173   525 

Interest on investment securities

  794   887   1,421   1,708 

Dividend income on FHLB stock

  225   187   417   189 

Interest on federal funds sold and other

  158   322   315   800 

Total interest income

  35,971   34,103   71,511   68,131 

Interest expense:

                

Interest on savings deposits, now and money market accounts

  708   782   1,406   2,025 

Interest on time deposits

  2,410   5,933   5,374   13,019 

Interest on subordinated debentures and long-term debt

  2,356   1,915   4,314   3,871 

Interest on other borrowed funds

  440   439   875   589 

Total interest expense

  5,914   9,069   11,969   19,504 

Net interest income

  30,057   25,034   59,542   48,627 

Provision for loan losses

  628   3,009   2,128   4,954 

Net interest income after provision for loan losses

  29,429   22,025   57,414   43,673 

Noninterest income:

                

Service charges, fees and other

  1,374   1,065   2,784   2,144 

Gain on sale of loans

  2,572   81   6,413   2,792 

Loan servicing fees, net of amortization

  118   708   364   1,300 

Recoveries on loans acquired in business combinations

  5   5   10   47 

Unrealized loss on equity investments

  (35)     (55)   

(Loss)/Gain on derivatives

  (80)     145    

Increase in cash surrender value of life insurance

  217   191   404   382 

Gain on sale of securities

     158      158 
   4,171   2,208   10,065   6,823 

Noninterest expense:

                

Salaries and employee benefits

  8,742   8,103   17,984   17,608 

Occupancy and equipment expenses

  2,135   2,527   4,377   4,931 

Data processing

  1,231   882   2,671   2,024 

Legal and professional

  536   670   1,341   1,274 

Office expenses

  272   337   527   660 

Marketing and business promotion

  231   111   415   325 

Insurance and regulatory assessments

  354   234   702   411 

Core deposit premium

  287   357   588   714 

OREO expenses

  4   14   9   28 

Merger expenses

  17   276   59   679 

Other expenses

  871   1,308   1,799   2,428 
   14,680   14,819   30,472   31,082 

Income before income taxes

  18,920   9,414   37,007   19,414 

Income tax expense

  5,540   2,901   11,171   6,153 

Net income

 $13,380  $6,513  $25,836  $13,261 
                 

Net income per share

                

Basic

 $0.69  $0.33  $1.32  $0.67 

Diluted

  0.67   0.33   1.30   0.66 

Cash dividends declared per common share

  0.13   0.06   0.25   0.12 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(In thousands)

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net income

 $13,380  $6,513  $25,836  $13,261 
                 

Other comprehensive income (loss):

                

Unrealized (losses) gains on securities available for sale:

                

Change in unrealized (losses) gains

  448   919   (1,368)  1,417 

Reclassification of gains recognized in net income

     (158)     (158)
   448   761   (1,368)  1,259 

Related income tax effect:

                

Change in unrealized (gains) losses

  (131)  (271)  406   (419)

Reclassification of gains recognized in net income

     47      47 
   (131)  (224)  406   (372)
                 

Total other comprehensive income (loss)

  317   537   (962)  887 
                 

Total comprehensive income

 $13,697  $7,050  $24,874  $14,148 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(In thousands, except share amounts)

 

  

Common Stock

              

Accumulated

     
  

Shares

  

Amount

  

Additional Paid-in Capital

  

Retained Earnings

  

Non- Controlling Interest

  

Other Comprehensive Income (Loss)

  

Total

 

Balance at March 31, 2021

  19,528,249  $282,845  $5,095  $147,806  $72  $(150) $435,668 

Net income

           13,380         13,380 

Stock-based compensation

        315            315 

Cash dividend

           (2,540)        (2,540)

Stock options exercised, net of expense recognized

  43,976   466               466 

Repurchase of common stock

  (222,423)  (3,058)  (135)  (2,088)        (5,281)

Other comprehensive income, net of taxes

                 317   317 

Balance at June 30, 2021

  19,349,802  $280,253  $5,275  $156,558  $72  $167  $442,325 
                             

Balance at March 31, 2020

  19,739,280  $286,350  $4,833  $116,149  $72  $589  $407,993 

Net income

           6,513         6,513 

Stock-based compensation

        166            166 

Cash dividend

           (1,184)        (1,184)

Other comprehensive income, net of taxes

                 537   537 

Balance at June 30, 2020

  19,739,280  $286,350  $4,999  $121,478  $72  $1,126  $414,025 

 

 

  

Common Stock

              

Accumulated

     
  

Shares

  

Amount

  

Additional Paid-in Capital

  

Retained Earnings

  

Non- Controlling Interest

  

Other Comprehensive Income (Loss)

  

Total

 

Balance at December 31, 2020

  19,565,921  $284,261  $4,932  $138,094  $72  $1,129  $428,488 

Net income

           25,836         25,836 

Stock-based compensation

        602            602 

Restricted stock granted

  60,000                   

Cash dividend

           (4,887)        (4,887)

Stock options exercised, net of expense recognized

  76,265   930   (124)           806 

Repurchase of common stock

  (352,384)  (4,938)  (135)  (2,486)        (7,559)

Other comprehensive loss, net of taxes

                 (962)  (962)

Balance at June 30, 2021

  19,349,802  $280,253  $5,275  $156,558  $72  $167  $442,325 
                             

Balance at December 31, 2019

  20,030,866  $290,395  $4,938  $112,046  $72  $239  $407,690 

Net income

           13,261         13,261 

Stock-based compensation

        327            327 

Cash dividend

           (3,598)        (3,598)

Stock options exercised, net of expense recognized

  56,498   978   (266)           712 

Repurchase of common stock

  (348,084)  (5,023)     (231)        (5,254)

Other comprehensive income, net of taxes

                 887   887 

Balance at June 30, 2020

  19,739,280  $286,350  $4,999  $121,478  $72  $1,126  $414,025 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(In thousands)

 

  

Six Months Ended

 
  

June 30,

 
  

2021

  

2020

 

Operating activities

        

Net income

 $25,836  $13,261 

Adjustments to reconcile net income to net cash from Operating activities:

        

Depreciation and amortization of premises and equipment

  980   1,032 

Net accretion of securities, loans, deposits, and other

  (369)  (2,121)

Unrealized loss on equity securities

  55    

Amortization of investment in affordable housing tax credits

  519   494 

Amortization of intangible assets

  3,411   2,734 

Amortization of right-of-use asset

  2,618    

Change in operating lease liabilities

  (2,512)   

Provision for loan losses

  2,128   4,954 

Stock-based compensation

  602   327 

Gain on sale of securities

     (158)

Gain on sale of loans

  (6,413)  (2,792)

Increase in cash surrender value of life insurance

  (404)  (382)

Loans originated and purchased for sale, net

  (108,425)  (51,561)

Proceeds from loans sold

  216,770   111,047 

Other items

  (2,469)  (6,734)

Net cash provided by operating activities

  132,327   70,101 

Investing activities

        

Securities available for sale:

        

Purchases

  (372,303)  (339,790)

Maturities, prepayments and calls

  242,162   274,209 

Sales

     7,911 

Securities held to maturity:

        

Maturities, prepayments and calls

  500   705 

Purchase of other equity securities, net

  (43)   

Redemption of Federal Home Loan Bank stock

  641    

Purchase of Federal Home Loan Bank stock and other equity securities, net

     (26)

Net increase of investment in qualified affordable housing projects

  (453)  (2,036)

Net increase in loans

  (64,521)  (188,693)

Purchase of bank owned life insurance

  (19,800)   

Net cash received in connection with acquisition

     6,634 

Purchases of premises and equipment

  (895)  (121)

Net cash used in investing activities

  (214,712)  (241,207)

Financing activities

        

Net increase (decrease) in demand deposits and savings accounts

  450,349   (8,120)

Net increase (decrease) in time deposits

  (15,436)  7,447 

Advances on long-term FHLB advances

     150,000 

Cash dividends paid

  (4,887)  (3,598)

Redemption of subordinated debentures

  (50,000)   

Issuance of subordinated debentures, net of issuance costs

  118,111    

Common stock repurchased, net of repurchased costs

  (7,559)  (5,254)

Exercise of stock options

  806   712 

Net cash provided by financing activities

  491,384   141,187 

Net increase (decrease) in cash and cash equivalents

  408,999   (29,919)

Cash and cash equivalents at beginning of period

  194,654   181,763 

Cash and cash equivalents at end of period

 $603,653  $151,844 

Supplemental disclosure of cash flow information

        

Cash paid during the period:

        

Interest paid

 $11,357  $20,294 

Taxes paid

  15,100    

Non-cash investing and financing activities:

        

Loans transfer to (from) held for sale, net

  61,215   (36,021)

Loan to facilitate OREO

     1,020 

Additions to servicing assets

  1,416   897 

Net change in unrealized holding gain on securities available for sale

  962   887 

Recognition of operating lease right-of-use assets

  (27,668)   

Recognition of operating lease liabilities

  27,668    

Acquisition:

        

Assets acquired, net of cash received

     183,475 

Liabilities assumed

     200,755 

Cash considerations

     32,885 

Goodwill

     10,646 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

RBB BANCORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

NOTE 1 - BUSINESS DESCRIPTION

 

RBB Bancorp (“RBB”) is a financial holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s principal business is to serve as the holding company for its wholly-owned banking subsidiaries, Royal Business Bank ("Bank") and RBB Asset Management Company ("RAM"), collectively referred to herein as "the Company". RAM was formed to hold and manage problem assets acquired in business combinations.

 

At June 30, 2021, the Company had total consolidated assets of $3.9 billion, gross consolidated loans (held for investment and held for sale) of $2.7 billion, total consolidated deposits of $3.1 billion and total consolidated stockholders' equity of $442.3 million. RBB’s common stock trades on the Nasdaq Global Select Market under the symbol “RBB”.

 

The Bank provides business-banking services to the Chinese-American communities in Los Angeles County, Orange County and Ventura County in California, in Las Vegas, Nevada, the New York City, New York metropolitan area, including Edison, New Jersey, and Chicago, Illinois. Specific services include remote deposit, E-banking, mobile banking, commercial and investor real estate loans, business loans and lines of credit, Small Business Administration (“SBA”) 7A and 504 loans, mortgage loans, trade finance and a full range of depository accounts.

 

The Company operates full-service banking offices in Arcadia, Cerritos, Diamond Bar, Irvine, Los Angeles, Monterey Park, Oxnard, Rowland Heights, San Gabriel, Silver Lake, Torrance, and Westlake Village, California; Las Vegas, Nevada; Manhattan, Brooklyn, Flushing, and Elmhurst, New York; the Chinatown and Bridgeport neighborhoods of Chicago, Illinois; and Edison, New Jersey. The Company’s primary source of revenue is providing loans to customers, who are predominantly small and middle-market businesses and individuals.

 

The Company generates its revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities. The Company also derives income from noninterest sources, such as fees received in connection with various lending and deposit services, loan servicing, gain on sales of loans and wealth management services. The Company’s principle expenses include interest expense on deposits and subordinated debentures, and operating expenses, such as salaries and employee benefits, occupancy and equipment, data processing, and income tax expense.

 

The Company has completed six acquisitions from July 2011 through January 2020, including the acquisition of Pacific Global Bank Holdings, Inc. (“PGBH”) and its wholly-owned subsidiary, Pacific Global Bank (“PGB”), in which the PGBH acquisition closed on January 10, 2020. PGB operated branches in the Chicago neighborhoods of Chinatown and Bridgeport. See Note 3 – Acquisition, for more information about the PGBH acquisition transaction. All of the Company’s acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates.

 

 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2020, included in our Annual Report filed on Form 10-K/A for the fiscal year ended December 31, 2020 (our “2020 Annual Report”).

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. It is reasonably possible our estimate of the allowance for loan losses and the fair value of mortgage servicing rights could change as actual results could differ from those estimates. Actual results could differ from those estimates.

 

9

 

Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements were compiled in accordance with the accounting policies set forth in Note 2 – Basis of Presentation and Summary of Significant Policies in our Consolidated Financial Statements as of and for the year ended December 31, 2020, included in our 2020 Annual Report.  The Financial Accounting Standards Board ("FASB") issues Accounting Standards Updates ("ASU" or “Update”) and Accounting Standards Codifications (“ASC”), which are the primary source of GAAP.

 

Recent Accounting Pronouncements

 

When RBB conducted its initial public offering (“IPO”) in 2017, we qualified as an emerging growth company (“EGC”). We will remain an EGC until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.0 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our IPO, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We anticipate no longer qualifying as an EGC on December 31, 2022. EGCs are entitled to reduced regulatory and reporting requirements under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act, as compared to public business entities ("PBE").

 

In  February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance. The amendments in this Update are effective for annual periods beginning after  December 15, 2020 and for interim periods beginning after  December 15, 2021, for an EGC as the effective date was deferred by the FASB. The Company has several lease agreements, which are currently considered operating leases and are therefore not included on the Company’s Consolidated Balance Sheets. Under the new guidance, the Company recognized on the Consolidated Balance Sheets right-of-use assets with a corresponding lease liability.  The Company adopted this ASU on January 1, 2021 and recorded the right-of-use asset and lease liability of approximately $26.8 million as of the  January 1, 2021 adoption date.

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instrument (Topic 326), including subsequent amending ASUs. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model. The new model, referred to as the current expected credit loss ("CECL") model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held to maturity securities, loan commitments, and financial guarantees. For available for sale (“AFS”) debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. ASU 2016-13 also expands the disclosure requirements regarding an entity's assumptions, models, and methods for estimating the allowance for loan and lease losses.  In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU 2016-13 was originally proposed to be effective for interim and annual reporting periods for an emerging growth company beginning after December 15, 2020, but was subsequently extended until December 31, 2022. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its evaluation of the impact of the implementation of ASU 2016-13. The implementation of the provisions of ASU 2016-13 will most likely impact the Company’s consolidated financial statements as to the level of reserves that will be required for credit losses. The Company will continue to assess the potential impact that this Update will have on the Company’s consolidated financial statements.  The Company will adopt CECL (ASU 2016-13) on December 31, 2022.

 

10

 

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a three year period the day-one adverse regulatory capital effects of ASU 2016-13. Additionally, in March 2020, the U.S. federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus disease 2019 ("COVID-19") pandemic. As a result, entities will have the option to gradually phase in the full effect of CECL on regulatory capital over a five-year transition period.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). This Update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. As a result, under this Update, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.” For PBE's, ASU 2017-04 is effective for annual and any interim impairment tests performed in periods beginning after December 15, 2019. As an EGC, the Company will adopt this ASU on December 31, 2022. Adoption of ASU 2017-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. For EGCs, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update has the potential to only impact share-based payments to members of the Company’s non-employees. The Company adopted this ASU on January 1, 2020 and this ASU did not have a material impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. These disclosure requirements were removed from the topic: (1) The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels, and (3) the valuation processes for Level 3 fair value measurements. These disclosure requirements were modified: (1) For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly, and (2) the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added: (1) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. In addition, the amendments eliminate “at a minimum” from the phrase “an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements”. The amendments in this Update are effective for EGCs for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. As an EGC, the Company adopted this Update on January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.

 

11

 

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This Update provides additional guidance to ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (CCA), on the accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) apply to entities that are a customer in a hosting arrangement. This Update applies to entities that are a customer in a hosting arrangement that is a service contract. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. This Update also requires the customer to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This Update is effective for an EGC for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, for all entities. The amendments in this Update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update will most likely not have a material impact unless the Company incurs implementation costs for a CCA that is a service contract.

 

In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)”. This ASU is for equity securities accounted for by the equity method. The amendment clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.  The Company has equity securities on our balance sheet but are not material to be considered for the equity method. For an EGC, this ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.  The Company will adopt this ASU on January 1, 2022.

 

In February 2020, the FASB issued ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)”. This is an amendment to add the SEC Staff guidance on CECL) to the FASB codification. It contains guidance on what the SEC would expect the Company to perform and document when measuring and recording its allowance for credit losses for financial assets recorded at amortized cost. As an EGC, the Company will implement CECL on December 31, 2022.

 

In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments”. The ASU clarifies the accounting and disclosure guidance in various codification topics for financial instruments. In particular, the amendments (1) clarify certain disclosure requirements, including fair value option disclosures, (2) add cross-references in U.S. GAAP to clarify certain guidance, (3) make clear the applicability of the portfolio exception in ASC 820, Fair Value Measurement, to nonfinancial items, (4) clarify the determination of the contractual life of a net investment in leases in estimating expected credit losses under ASC 326, Financial Instruments – Credit Losses, and (5) explain the interaction between the guidance in ASC 860-20, Transfers and Servicing: Sales of Financial Assets, and ASC 326. For RBB as an EGC, issues 1, 2, 4 and 5 were adopted  January 1, 2020. The amendment related to Issue 3 is a conforming amendment that affects the guidance in the amendments in ASU 2019-04. We determined the financial impact on the Company’s consolidated financial statements was not material.

 

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). This pronouncement is applicable to all companies with contracts or hedging relationships that reference an interest rate that is expected to be discontinued. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022). For contract modifications, companies can account for the modification as a continuation of the existing contract without additional analysis. For held-to-maturity (“HTM”) debt securities, one-time sale and/or transfer to available-for-sale or trading may be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. Regarding the effective date and transition: (1) companies can apply the ASU as of the beginning of the interim period that includes March 12, 2020 (e.g. January 1, 2020 for calendar year-end companies) or any date thereafter, (2) the ASU applies prospectively to contract modifications and hedging relationships, and (3) the one-time election to sell and/or transfer debt securities classified as HTM may be made at any time after March 12, 2020. The optional relief generally does not apply to contract modifications made, sales and transfers of HTM debt securities, and hedging relationships entered into or evaluated after December 31, 2022. The guidance was effective upon issuance and generally can be applied through December 31, 2022. Of the Company’s $2.7 billion in total gross loans as of June 30, 2021, approximately 11% have a LIBOR based reference rate. The Company has several issuances of LIBOR based long-term debt and subordinated debentures. Refer to Notes 9 and 10 of the Company’s consolidated financial statements included in this Form 10-Q.  The Company is developing new SOFR-based loan products that will be equivalent to prior LIBOR-based loan products.  We anticipate a neutral financial impact.

 

In June 2020, the FASB issued ASU 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities”. This ASU allows for the deferral of the effective dates of ASC 606 and ASC 842 (including amendments issued after the issuance of the original Update) to provide immediate, near-term relief for certain entities for whom these Updates are either currently effective or imminently effective.  The Company has already implemented this ASU for Topic 606 and Topic 842.

 

12

 
 

NOTE 3 ACQUISITION

 

PGB Holdings, Inc. Acquisition:

 

On January 10, 2020, the Company acquired all the assets and assumed all the liabilities of PGBH and its wholly owned bank subsidiary, in exchange for cash of $32.9 million. PGBH operated three branches in the Chicago, Illinois metropolitan area. The Company acquired PGBH to strategically establish a presence in the Chicago area. Goodwill in the amount of $10.7 million was recognized in this acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill is not deductible for income tax purposes.

 

The following table represents the assets acquired and liabilities assumed of PGBH as of January 10, 2020 and the fair value adjustments and amounts recorded by the Company in 2020 under the acquisition method of accounting:

 

  

PGBH

  

Fair Value

  

Fair

 

(dollars in thousands)

 

Book Value

  

Adjustments