RBB Bancorp — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results. RBB Bancorp is a bank holding company whose Royal Business Bank serves primarily Chinese-American communities and small and middle-market businesses across California, Nevada, and the New York City area.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $23.5 million | $18.6 million | $73.7 million | $52.9 million |
| Provision for credit losses | $0.8 million | $1.7 million | $1.7 million | $2.6 million |
| Noninterest income | $2.8 million | $2.1 million | $12.5 million | $7.4 million |
| Noninterest expense | $13.8 million | $8.7 million | $44.0 million | $25.1 million |
| Net income | $8.0 million | $8.3 million | $28.5 million | $26.6 million |
| Diluted EPS | $0.39 | $0.48 | $1.40 | $1.54 |
| Net interest margin | 3.59% | 4.11% | 3.68% | 4.25% |
Q3 net income fell 3.8% year over year despite higher net interest income and noninterest income; increased operating expenses and tax expense more than offset those gains. Nine-month net income rose 7.2%. The efficiency ratio increased to 52.40% in Q3 from 41.76%; return on average assets was 1.15% versus 1.73%, and return on average equity was 7.99% versus 11.34%.
Financial position, liquidity, and capital
- At September 30, total assets were $2.82 billion, down 5.2% from December 31, 2018; deposits were $2.25 billion, up $107.9 million. Shareholders’ equity was $398.8 million, up $24.2 million.
- Cash and cash equivalents were $183.1 million, up $35.4 million since year-end. Nine-month operating cash flow was $267.0 million, versus a $144.0 million use in 2018; investing activities used $48.4 million and financing activities used $183.2 million. Operating cash flow included substantial mortgage-loan sale proceeds.
- Loans held for investment, net of deferred fees and acquired-loan discounts, were $2.13 billion, down $15.9 million since year-end. Mortgage loans held for sale fell $175.2 million to $259.3 million, largely reflecting loan sales and reduced production.
- FHLB advances declined to $35.0 million from $319.5 million at year-end as mortgage loans held for sale were sold and related funding repaid. Long-term debt was $104.0 million and subordinated debentures were $9.6 million. The company reported $640.9 million of additional FHLB borrowing capacity based on pledged collateral.
- Regulatory capital remained well above minimums: consolidated Tier 1 leverage 12.74%, CET1 16.95%, Tier 1 risk-based 17.44%, and total risk-based capital 23.71%. Tangible book value per share was $16.67.
Changes, credit quality, and notable items
- The October 2018 First American International Corp. (FAIC) acquisition materially increased the year-over-year average earning-asset, deposit, staffing, and branch bases. Management attributed much of the higher interest income and operating costs to FAIC.
- Deposit interest expense rose sharply: average total deposit cost was 1.63% in Q3 versus 1.17% a year earlier, and average cost of interest-bearing deposits was 2.02% versus 1.46%. Time deposits represented 58.3% of period-end deposits. Management reported that 84.5% of deposits met its adjusted core-deposit definition, down from 91.2% at year-end.
- The allowance for loan losses was $19.4 million, or 0.91% of held-for-investment loans, versus $17.6 million, or 0.82%, at year-end. Nonperforming loans increased to $9.6 million from $3.3 million; nonaccrual loans were $6.8 million. Nonperforming assets were 0.39% of assets, compared with 0.15% at year-end. Management cited several newly nonaccrual loans, including an SBA loan, two residential loans, and a commercial real estate loan.
- Credit concentration remains significant: single-family residential mortgages were 41.8% and commercial real estate loans 37.1% of held-for-investment loans. Management also noted geographic and real-estate-related concentration risks.
- RBB agreed to acquire Pacific Global Bank for $32.5 million in cash. PGB had approximately $224.5 million in assets and three Chicago branches at September 30; the transaction was expected to close in Q1 2020. A $0.10-per-share Q3 dividend was declared, payable November 15, 2019. The company repurchased 169,785 shares during the nine months under a 1.0 million-share authorization.
Outlook, risks, and contingencies
- No formal earnings or financial guidance is provided. Management expected acquired-loan discount accretion to decline through the remainder of 2019 as acquired loans pay off. It said mortgage-loan sales were curtailed in Q3 while the pipeline was replenished.
- Interest-rate sensitivity analysis projected one-year net interest income increases of 5.66% and 6.00% under parallel rate shocks of -100 and +100 basis points, respectively. Economic value of equity was projected to decline 15.41% and 0.48% in those scenarios; management disclosed that EVE sensitivity exceeded board limits in the -100 and -200 basis-point scenarios.
- LIBOR was expected to be phased out after 2021. The filing notes uncertainty about replacement rates and potential effects on LIBOR-linked loans, borrowings, and trust preferred securities. Management also expected CECL adoption in 2023 and said it could affect required credit-loss reserves. It estimated lease right-of-use assets and liabilities of $25–30 million upon expected 2022 adoption of the lease standard.
- Customer commitments to extend credit and letters of credit totaled $247.3 million; many commitments may expire undrawn. Management said ordinary-course litigation was not expected to materially affect the company. Other disclosed risks include economic and interest-rate conditions, credit quality, acquisition integration, deposit competition and funding costs, regulatory requirements, and operational and technology risks.
Important facts for investors to verify
- Whether the rise in nonaccrual and nonperforming loans persists, and whether the allowance and acquired-loan discounts adequately reflect credit risk.
- Deposit composition, renewal pricing, brokered and other noncore funding, and the effect of elevated deposit costs on net interest margin and earnings.
- Progress and final terms of the proposed PGB acquisition, including integration costs and expected benefits.
- Whether expense growth moderates and mortgage sales, servicing income, and acquired-loan accretion develop as management anticipated.
- Interest-rate and LIBOR-transition exposures, CECL implementation effects, and the implications of EVE sensitivity exceeding board limits in falling-rate scenarios.
- The filing’s MD&A financial-performance table reports Q3 2018 basic EPS as $0.51, while the income statement and EPS note report $0.50; investors may wish to confirm the correct comparative figure. The filing reports Q3 2019 basic EPS as $0.40 and diluted EPS as $0.39.