RBB Bancorp — Q2 2018 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. RBB Bancorp is a California bank holding company whose Royal Business Bank serves businesses and communities primarily in Southern California and Las Vegas.
Financial results and condition
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Net interest income | $17.8 million | $34.3 million |
| Net interest margin | 4.37% | 4.33% |
| Provision for credit losses | $0.7 million | $0.9 million |
| Net income | $9.4 million | $18.3 million |
| Diluted earnings per share | $0.54 | $1.06 |
- For Q2, net income rose 10.6% year over year, while diluted EPS declined from $0.62 to $0.54. Pretax income fell 18.8%; the lower tax expense, reflecting tax reform and stock-option tax deductions, more than offset the pretax decline.
- For the first half, net income increased 30.3% year over year. Net interest income increased 24.4%, supported by growth in earning assets and higher yields; the effective tax rate fell to 17.5% from 41.1%.
- Q2 average net interest margin increased to 4.37% from 4.02%. Management said purchased-loan discount accretion contributed to margin; excluding accretion, Q2 margin was 4.15%.
- At June 30, total assets were $1.82 billion, loans held for investment net of allowance were $1.27 billion, mortgage loans held for sale were $281.8 million, deposits were $1.42 billion, and shareholders’ equity was $286.2 million.
- Assets grew 7.4% from year-end 2017. Held-for-investment loans increased $35.0 million, while mortgage loans held for sale increased $155.9 million. Deposits rose $87.1 million and FHLB advances rose $15.0 million to $40.0 million.
- Cash and cash equivalents fell to $72.8 million from $150.0 million at year-end. First-half operating cash flow was negative $63.5 million, investing cash flow negative $119.2 million, and financing cash flow positive $105.5 million. Loan originations for sale and growth in loans contributed to cash usage.
- Book long-term debt was $49.6 million; subordinated debentures were $3.5 million. The $50 million subordinated notes carry a fixed 6.5% rate through March 2021 and then float at three-month LIBOR plus 516 basis points.
- Capital remained well above regulatory thresholds: consolidated Tier 1 leverage was 15.23%, CET1 18.29%, Tier 1 risk-based 18.54%, and total risk-based capital 23.16%. The Bank was reported as well-capitalized.
Changes versus comparable periods
- Q2 interest income grew 27.2% year over year, but interest expense rose 27.8%; noninterest expense increased 17.7% and noninterest income declined 12.0%.
- The Q2 2017 comparison included a $4.2 million provision recapture related to SBA loan-guarantee receipts. Q2 2018 instead recorded a $0.7 million provision, attributed to loan growth. This unusual prior-period benefit materially affects the comparison.
- First-half provision expense was $0.9 million versus a $4.2 million recapture in first-half 2017. First-half noninterest expense rose 21.7%, while noninterest income declined 6.4%.
- Nonperforming loans increased to $6.6 million, or 0.51% of total loans, from $2.6 million, or 0.21%, at year-end. The allowance for loan losses rose to $14.7 million, or 1.14% of loans, from $13.8 million, or 1.10%. The filing reports no net charge-offs in Q2.
Outlook, risks and notable items
- No numerical earnings or revenue guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management expected acquired-loan accretion income to continue declining during 2018 as acquired loans pay off; completion of the proposed FAIC acquisition could add purchased-loan discounts and accretion.
- On April 23, 2018, RBB agreed to acquire First American International Corporation (FAIC). Each FAIC common share is to convert into 1.3472 RBB shares plus $15.30 cash, subject to agreement conditions. FAIC is to redeem $17 million of Treasury-held preferred stock before closing. The filing expected closing in early Q4 2018; completion remained conditional.
- Interest-rate modeling indicated estimated next-year net interest income would change by positive 5.85% under an immediate +100-basis-point shock and negative 2.60% under a −200-basis-point shock. Management also noted modeled economic value of equity declines under falling-rate scenarios.
- Credit and funding risks include geographic and real-estate concentration, a relatively young loan portfolio, large deposit relationships and rising deposit costs. The top ten deposit relationships totaled $362.0 million; management classified 82.4% of deposits as core under its adjusted definition.
- Undrawn credit and other financial commitments totaled $193.3 million. The company also had $8.1 million of unfunded affordable-housing investment commitments. Management said ordinary-course litigation was not expected to have a material financial effect.
- A $0.09-per-share Q2 dividend was declared July 18, payable August 15, 2018. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the FAIC transaction closed as expected, and its final financing, integration costs, capital impact and expected synergies.
- Whether loan quality trends continue: nonperforming loans rose, including SBA nonaccruals, while the allowance increased; assess subsequent delinquencies, charge-offs and reserve adequacy.
- Whether loan growth, mortgage-loan sales and purchased-loan accretion are sustainable, particularly as management anticipated lower accretion from existing acquired loans.
- Deposit pricing and concentration, funding mix, and liquidity after the decline in cash and increase in FHLB advances.
- Exposure to rising rates and securities valuation: available-for-sale securities had a $1.9 million pretax unrealized loss at June 30, versus $0.8 million at year-end.
- Reconcile reported earnings and EPS trends with the prior-period $4.2 million provision recapture, lower 2018 tax rate, and increased share count.