RBB Bancorp — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Amounts are in U.S. dollars. RBB Bancorp is a bank holding company whose principal subsidiary, Royal Business Bank, serves business customers, particularly in Southern California and Las Vegas. Its lending includes commercial real estate, business, SBA and residential mortgage loans.
Key financial results and position
- Profitability: Net income was $8.85 million, up 61.1% from $5.49 million in Q1 2017. Diluted EPS was $0.52 versus $0.40. Return on average assets was 2.15%, compared with 1.55%; return on average equity was 13.27%, compared with 12.13%.
- Net interest: Net interest income rose 21.7% to $16.45 million. Reported net interest margin increased to 4.26% from 4.06%; excluding acquired-loan discount accretion, management reported margins of 4.17% and 3.74%, respectively. Accretion contributed $353,000 versus $1.08 million.
- Revenue and expenses: Interest income was $20.18 million, up 20.4%; interest expense rose 15.0% to $3.73 million. Noninterest income was nearly flat at $2.46 million. Noninterest expense increased 26.0% to $8.29 million, including higher compensation, data-processing costs and legal/professional expense. The prior-year legal/professional figure included $628,000 in reversed accruals.
- Taxes and unusual items: Income tax expense fell to $1.58 million from $3.88 million; the effective tax rate was 15.2% versus 41.4%. Management attributed the lower rate in part to the federal tax-law change and a $1.2 million tax benefit associated with exercised stock options.
- Balance sheet: At March 31, total assets were $1.715 billion, total deposits $1.374 billion, held-for-investment loans $1.262 billion gross ($1.248 billion net), and shareholders’ equity $275.8 million. Versus December 31, 2017, deposits increased $36.2 million and net loans increased $12.7 million. Cash and cash equivalents fell to $78.5 million from $150.0 million.
- Cash flow: Operating cash flow was negative $21.5 million, investing cash flow negative $63.5 million, and financing cash flow positive $13.5 million. Cash and cash equivalents decreased $71.5 million during the quarter.
- Credit quality: The allowance for loan losses was $14.0 million, or 1.11% of loans, versus $13.8 million, or 1.10%, at year-end. There were no net charge-offs. Nonperforming loans were $4.47 million (0.35% of loans), up from $2.58 million (0.21%) at year-end; nonperforming assets were 0.28% of assets. A $1.4 million SBA loan placed on nonaccrual was reported current after quarter-end, with collateral considered sufficient by management.
- Debt, liquidity and capital: The company reported $49.6 million of long-term debt and $3.4 million of subordinated debentures; no FHLB advances were outstanding at quarter-end. It reported unused FHLB borrowing capacity of $342.9 million against pledged loans. The Bank exceeded regulatory “well-capitalized” thresholds; its total risk-based capital ratio was 18.78% and Tier 1 leverage ratio 14.84%.
Material changes, outlook and risks
- Year-over-year earnings benefited principally from higher net interest income, reflecting growth in average earning assets and improved asset yields; higher operating costs partly offset the gains. Loan growth and increased mortgage loans held for sale were accompanied by lower cash balances.
- Management planned further loan sales in 2018: approximately $22 million of SBA loans per quarter and residential mortgage sales of about $65 million in Q2 and $40 million in each of Q3 and Q4. These are stated plans, not earnings guidance.
- After quarter-end, RBB agreed to acquire First American International Corporation (FAIC). The announced consideration is 1.3472 RBB shares plus $15.30 cash per FAIC common share; the deal was expected to close in the second half of 2018, subject to regulatory and shareholder approvals. FAIC was to redeem $17 million of Treasury-held TARP preferred stock, with the Bank committing to lend up to $17 million briefly if needed. The filing also discusses possible integration, execution, credit and dilution risks; approximately 3.0 million RBB shares were expected to be issued.
- Interest-rate modeling showed projected one-year net interest income changes of -1.14% for a 100-basis-point rate decline, +7.65% for a 100-basis-point rise and +15.15% for a 200-basis-point rise. The modeled economic value of equity declined 10.99% in the -100-basis-point scenario. These are model estimates, not forecasts.
- Key exposures include real-estate and geographic loan concentrations, dependence on large business deposit relationships, rising deposit costs, interest-rate and securities-value changes, and acquisition execution. The filing says unrealized securities losses were primarily rate-related and management did not consider them other-than-temporary impairments. Management reported no material pending litigation and effective disclosure controls.
Important facts for investors to verify
- Verify the merger terms, regulatory and shareholder approvals, integration assumptions, financing of the TARP redemption and expected share issuance. The risk-factor text states FAIC had “$873 billion” of assets at December 31, 2017; this figure appears inconsistent with the transaction’s scale and should be checked against the underlying filing or other authoritative disclosure.
- Reconcile dividends: the income statement reports $0.08 per share declared for Q1, while the subsequent-events note says a $0.09-per-share dividend was declared April 18, payable May 15.
- Assess the trend in nonperforming loans and the status of the SBA loan that management said became current after quarter-end; review the adequacy of the allowance and acquired-loan credit discounts.
- Monitor deposit pricing and concentration, near-term maturities of large time deposits, and liquidity as cash declined during the quarter. Also consider that customer credit commitments totaled $229.6 million.
- Confirm the impact of planned loan sales, the unusually negative Q1 net loan-servicing income, and the sustainability of the low effective tax rate and stock-option-related tax benefit.