RBB Bancorp — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Although the request identifies 2019 Q4, this is an annual 10-K; it also includes unaudited quarterly results. Amounts below are U.S. dollars.
Business context
RBB Bancorp is the holding company for Royal Business Bank, a community and commercial bank focused on Asian-American communities and small and midsize businesses. Its lending includes commercial real estate, commercial and industrial, SBA, and single-family residential mortgages. The 2019 comparison reflects the full-year contribution of First American International Corp. (FAIC), acquired in October 2018.
Key financial results and position
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Revenue (interest income plus noninterest income) | $160.0 million | $115.0 million | Up 39.2% |
| Net interest income | $96.9 million | $78.5 million | Up 23.4% |
| Net interest margin | 3.63% | 4.12% | Down 49 basis points |
| Net income | $39.2 million | $36.1 million | Up 8.6% |
| Diluted EPS | $1.92 | $2.01 | Down $0.09 |
| Return on average assets / equity | 1.38% / 9.95% | 1.78% / 12.16% | Both declined |
| Efficiency ratio | 49.9% | 44.5% | Higher ratio indicates increased expense relative to revenue |
| Total assets | $2.789 billion | $2.974 billion | Down 6.2%, mainly as mortgage loans held for sale declined |
| Held-for-investment loans, net | $2.178 billion | $2.124 billion | Up about 2.5% |
| Deposits | $2.249 billion | $2.144 billion | Up 4.9% |
| Shareholders’ equity | $407.7 million | $374.6 million | Up 8.8% |
Interest expense rose 89.7% to $44.9 million, reflecting higher deposit balances and rates; the average cost of interest-bearing liabilities increased to 2.24% from 1.69%. Provision for loan losses was $2.4 million, down from $4.5 million. Noninterest income increased 42.7% to $18.3 million, while noninterest expense rose 41.4% to $57.5 million, including higher staffing, occupancy, data-processing and intangible-amortization costs.
Cash flow: Operating activities provided $476.5 million, versus $84.6 million used in 2018; investing activities used $219.4 million and financing activities used $223.0 million. Cash and cash equivalents increased $34.1 million to $181.8 million. Operating cash flow was significantly affected by mortgage loan originations and sales and should not be read as recurring earnings-based cash generation.
Debt and liquidity: Borrowings and debt totaled approximately $113.7 million at year-end, versus $432.7 million a year earlier, after repayment of $319.5 million of FHLB advances. The reported loan-to-deposit ratio was 97.69%. The Bank had no FHLB advances outstanding and reported $636.5 million of additional FHLB borrowing capacity, subject to collateral and terms. Bank regulatory capital ratios remained well above “well-capitalized” thresholds; its total risk-based capital ratio was 21.86%.
Material changes and credit quality
- Loans held for investment grew modestly; SFR mortgages increased $76.0 million and CRE loans increased $34.5 million, partly offset by decreases in C&I, construction and SBA loans.
- Mortgage loans held for sale fell $326.3 million to $108.2 million. The company sold $472.5 million of SFR mortgages during 2019 and recognized $8.2 million of related gains.
- Nonperforming loans increased to $13.2 million, or 0.60% of held-for-investment loans, from $3.3 million, or 0.15%. The increase was principally attributable to nonperforming SBA loans, including $9.4 million reported in that category. Nonperforming assets were $13.5 million, or 0.48% of assets.
- The allowance for loan losses was $18.8 million, or 0.86% of loans, compared with $17.6 million, or 0.82%, in 2018. Net charge-offs were 0.05% of average loans.
- Deposits increased, but the average total deposit cost rose to 1.56% from 1.11%. The company reported that 86.5% of deposits qualified as core under its adjusted relationship-based measure; its top ten depositor relationships represented about 14.4% of deposits.
- RBB repurchased 169,785 shares for approximately $3.2 million under a 1.0 million-share authorization. Dividends declared were $0.40 per share, versus $0.35 in 2018.
Outlook, risks and unusual items
- Management estimated a 2020 effective tax rate of 30%–32% and planned to maintain mortgage loans held for sale in a range of $120–$150 million. No explicit earnings or revenue guidance was provided.
- On January 10, 2020, RBB acquired Pacific Global Bank for $32.9 million in cash. At acquisition it had approximately $217.6 million of assets, $192.3 million of deposits and three Chicago branches; purchase accounting was not complete when the filing was issued.
- Management planned a new Edison, New Jersey branch in mid-2020 and stated that it would continue to pursue organic growth and acquisitions.
- Key risks include the concentration of real-estate-secured lending (about 83% of the loan portfolio), non-qualified SFR mortgage exposure and reliance on a limited group of loan purchasers, large depositor concentration, credit deterioration, interest-rate and liquidity risk, acquisition integration, and LIBOR transition. The filing states that approximately 25% of gross loans referenced LIBOR.
- The filing flagged the emerging COVID-19 outbreak as a possible risk to customers, operations and local economies; the financial impact was not quantifiable at the time. CECL adoption was anticipated for January 1, 2023, with potential effects on credit-loss reserves still under evaluation.
- Management reported no litigation reserves at year-end and did not expect pending matters to have a material adverse effect, while noting that litigation outcomes are uncertain. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether the sharp rise in nonperforming loans—especially SBA credits—leads to further charge-offs, provisions or reserve needs.
- Whether margin pressure continues as deposit costs rise and acquired-loan discount accretion runs off.
- How sustainable mortgage and SBA loan-sale volumes, premiums and buyer access are, given their contribution to noninterest income.
- Whether deposit concentrations and core-funding measures remain stable, and how the bank funds future growth after repaying FHLB advances.
- The final cost, integration results and contribution of the January 2020 Pacific Global Bank acquisition, alongside branch expansion plans.
- How COVID-19, real estate conditions and the LIBOR transition affect borrowers, loan performance, earnings and capital.