RBB Bancorp — Q2 2017 Form 10-Q
Business context and period. RBB Bancorp is the holding company for Royal Business Bank and RBB Asset Management. The bank primarily serves Chinese-American communities in Southern California and Las Vegas, lending to businesses and individuals. This unaudited filing covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2017 | Comparable period / change |
|---|---|---|
| Net income | $8.5 | $5.2 in Q2 2016, up 65.6% |
| Diluted EPS | $0.62 | $0.38 in Q2 2016 |
| Net interest income | $14.0 | $15.5 in Q2 2016, down 9.5% |
| Net interest margin | 4.02% | 4.57% in Q2 2016 |
| Provision for loan losses | $(4.2) recapture | $1.4 provision in Q2 2016 |
| Noninterest income / expense | $3.2 / $7.0 | Income up 35.9%; expense down 9.1% year over year |
| Efficiency ratio | 40.44% | 42.92% in Q2 2016 |
- For the first six months, net income was $14.0 million, up 75.5% from $8.0 million; diluted EPS was $1.02 versus $0.58. Net interest income was essentially unchanged at $27.5 million, while net interest margin declined to 4.04% from 4.36%.
- At June 30, total assets were $1.534 billion, up 9.9% from year-end; loans held for investment were $1.146 billion before allowance, and deposits were $1.278 billion, up $125.7 million. Cash and cash equivalents were $162.9 million.
- Net loans were $1.135 billion; the allowance for loan losses was $10.6 million, or 0.93% of loans, versus $14.2 million, or 1.28%, at year-end. Nonperforming loans were $8.5 million (0.74% of loans), compared with $6.1 million (0.55%) at year-end; nonperforming assets were 0.61% of assets.
- Shareholders’ equity was $192.3 million. Long-term debt was $49.5 million and acquired subordinated debentures were $3.4 million. No short-term borrowings were outstanding at quarter-end. The bank reported capital ratios of 13.32% Tier 1 leverage, 16.58% CET1, 16.58% Tier 1 risk-based and 17.53% total risk-based.
- First-half cash flows were $(10.4) million from operations, $(67.4) million from investing and $121.9 million from financing, producing a $44.2 million increase in cash and cash equivalents.
Material changes and notable items
- Q2 earnings benefited materially from a $4.2 million credit-loss provision recapture. This included a $629,000 SBA-guarantee recovery received in May and a $3.6 million SBA-guarantee payment received in July, after quarter-end, on a loan previously fully reserved.
- Q2 net interest income fell despite higher average earning assets: average loan balances and yields declined, deposit rates rose, and acquired-loan discount accretion fell to $0.9 million from $2.6 million. Management expected acquired-loan accretion to continue declining during 2017.
- First-half noninterest income rose, principally on higher SBA loan-sale gains. The company sold $46.3 million of SBA loans in the half and $37.7 million of mortgage loans in Q2. It planned to sell approximately $22 million of SBA loans and $40 million of single-family mortgage loans per quarter for the remainder of 2017.
- Noninterest expense declined year over year, partly because 2016 included TomatoBank integration and acquisition costs. Salaries and benefits increased 19.3% for the half, reflecting added staff; management also cited the demands of becoming a public company.
- Loans grew $35.6 million from year-end, with single-family residential mortgages up $61.8 million and commercial and industrial loans up $26.1 million. Commercial real estate loans declined $62.6 million, largely from acquired-loan payoffs. Mortgage loans held for sale increased $38.9 million.
- After quarter-end, the company completed its July 31 IPO of 3.75 million shares at $23 per share. RBB sold 2,857,756 shares, raising approximately $61.8 million gross and $60.3 million net; selling shareholders sold the balance. The company intended to contribute $25 million of net proceeds to the bank.
Outlook, risks and contingencies
- The filing provides no formal earnings or growth guidance. Management’s stated loan-sale plans and expected decline in acquired-loan accretion are the principal quantified outlook items.
- Management identified sensitivity to interest rates, credit quality and loan concentrations, competition, deposit funding, regulatory and public-company costs, and its ability to manage growth. The loan portfolio is concentrated in real estate-related lending and geographically in California and the Southwest. Uninsured or large deposit relationships and time-deposit maturities are relevant funding risks.
- At June 30, commitments to extend credit, unused lines and letters of credit totaled $195.5 million; these are contingent exposures and are not necessarily expected cash outflows. Management said pending litigation arose in the ordinary course and did not expect a material effect, but also cautioned that litigation outcomes are uncertain. No litigation reserves were recorded at quarter-end.
- Interest-rate modeling showed estimated one-year net interest income rising 7.84% under an immediate 100-basis-point increase and 16.47% under a 200-basis-point increase; a 100-basis-point decrease was estimated to reduce it 3.44%. These are model estimates, not forecasts.
- The company was evaluating the future CECL credit-loss standard, which management expected could affect required reserves. It also expected lease-accounting changes to place some operating leases on the balance sheet.
Important facts for investors to verify
- How much of reported earnings depends on the unusual $4.2 million provision recapture, and how credit costs and allowance coverage evolve after the SBA guarantee recovery.
- Whether underlying net interest margin and loan yields stabilize as acquired-loan accretion declines and deposit funding costs rise.
- Loan delinquency and nonperforming-asset trends, including the status of the $1.4 million loan still delinquent after quarter-end and the composition of real-estate and SBA exposures.
- Deposit retention, concentration, pricing and maturity trends, alongside the use of IPO proceeds and the effect of the offering on per-share results.
- Execution of planned mortgage and SBA loan sales, related gain income and servicing-asset economics; these activities can make noninterest income variable.