RBB Bancorp — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; financial statements are unaudited. Comparisons are principally with Q3 and the first nine months of 2017, or with December 31, 2017 for balance-sheet measures. RBB is a community-focused commercial bank holding company serving markets in California and Nevada.
Financial performance and condition
| Metric | Q3 2018 / September 30, 2018 | Comparison |
|---|---|---|
| Total assets | $2.137 billion | Up 26.4% from December 31, 2017 |
| Loans held for investment, net of fees and discounts | $1.381 billion gross; $1.365 billion net of allowance | Gross balance up 10.6% from year-end |
| Mortgage loans held for sale | $378.9 million | Up $253.1 million from year-end |
| Total deposits | $1.565 billion | Up $227.7 million from year-end |
| FHLB advances | $210.0 million | Compared with $25.0 million at year-end; 2.33% period-end rate |
| Net income | $8.3 million for Q3; $26.6 million for nine months | Q3 up 26.0%; nine-month income up 29.0% |
| Diluted EPS | $0.48 for Q3; $1.54 for nine months | Compared with $0.42 and $1.42, respectively |
| Net interest income / margin | $18.6 million / 4.11% for Q3; $52.9 million / 4.25% for nine months | Margins were 3.91% and 4.00% in comparable 2017 periods |
| Allowance for loan losses | $16.2 million; 1.17% of loans | $13.8 million; 1.10% at year-end |
| Shareholders’ equity | $295.0 million | Up $29.8 million from year-end |
For the first nine months, operating cash flow was negative $144.0 million, investing cash flow negative $251.0 million, and financing cash flow positive $416.5 million. Cash and cash equivalents ended at $171.6 million. The operating outflow principally reflects mortgage loans originated or purchased for sale; financing inflows included deposit growth and increased FHLB advances.
Q3 return on average assets was 1.73% and return on average equity 11.34%; the efficiency ratio was 41.76%. For the first nine months, those measures were 2.01%, 12.65%, and 41.72%, respectively. The filing reports a 19.7% Q3 effective tax rate and 18.2% for the nine months.
Material changes and drivers
- Q3 net interest income rose 26.4%, supported by growth in average earning assets and higher asset yields. Net interest margin expanded, while higher deposit rates and borrowing costs increased interest expense.
- Pre-tax income declined 2.4% in Q3 and 5.5% for the first nine months, despite higher net income. Lower tax expense—attributed primarily to the reduced federal corporate tax rate and stock-option tax deductions—more than offset the pre-tax decline.
- Q3 noninterest income fell 44.6% to $2.1 million, mainly because gains on loan sales were lower; nine-month noninterest income declined 21.8%. Q3 noninterest expense increased 20.2% to $8.7 million, with higher staffing, occupancy, and merger-related costs. The efficiency ratio also worsened year over year.
- Loan growth was led by single-family residential mortgages, commercial real estate, construction, and commercial and industrial lending. SBA balances fell as sales exceeded originations. Mortgage loans held for sale rose sharply as production increased and fewer loans were sold in Q3.
- Credit indicators weakened from year-end: nonperforming loans were $6.6 million, or 0.48% of loans, versus $2.6 million and 0.21%. The allowance increased following loan growth and a $174,000 SBA charge-off. Thirty-to-89-day delinquencies declined to $1.4 million from $3.6 million.
- Available-for-sale securities had $2.2 million of pre-tax unrealized losses at quarter-end, compared with $0.6 million at year-end. Management attributed losses primarily to interest-rate movements and said it did not intend, and was not likely required, to sell before recovery.
Outlook, risks, contingencies, and unusual items
- RBB completed its acquisition of First American International Corp. (FAIC) on October 15, after quarter-end. FAIC reported $844.1 million of assets, $716.1 million of gross loans, and $625.8 million of deposits at September 30. Consideration was approximately $104.5 million, including cash and about 3.016 million RBB shares; RBB also funded repayment of approximately $7 million of FAIC TARP trust preferred securities. RBB recorded approximately $30.5 million of acquisition goodwill. These results are not included in the September 30 balance sheet.
- Management expected mortgage loan sales to return to normal quarterly volume in Q4, and said purchased-loan discount accretion would likely continue declining during 2018 as acquired loans paid off; the FAIC acquisition was expected to add purchased-loan discounts. These are management expectations, not formal earnings guidance.
- Management anticipated short-term data-processing conversion expense while integrating FAIC and higher marketing costs as it expanded in New York and Irvine. The bank opened an Irvine branch in October and signed a lease for a Flushing, New York branch.
- RBB’s and the Bank’s September 30 capital ratios exceeded regulatory minimums; the Bank was reported well-capitalized. The Bank’s CET1 ratio was 17.40%, Tier 1 risk-based ratio 17.40%, total risk-based ratio 18.51%, and leverage ratio 13.94%.
- Liquidity funding included $107.9 million of brokered certificates of deposit booked late in Q3 and increased FHLB borrowing. Management reported $482.9 million of additional FHLB borrowing capacity, subject to eligible collateral. Adjusted net non-core funding dependency rose to 17.84% from 12.25% at year-end.
- Interest-rate modeling showed projected one-year net interest income increases of 4.8% and 8.9% under immediate +100 and +200 basis-point scenarios, respectively. Economic value of equity sensitivity was mixed: +0.90% at +100 basis points and -0.07% at +200; results depend on modeling assumptions.
- Commitments to extend credit and letters of credit totaled $219.8 million. Management stated pending ordinary-course litigation was not expected to have a material effect. The filing identifies risks including real-estate concentration, credit quality, deposit competition and costs, interest-rate exposure, liquidity, and acquisition integration.
- RBB declared a Q3 cash dividend of $0.09 per share. After quarter-end, the Bank paid a $25 million dividend to RBB.
Most important facts for investors to verify
- Whether FAIC integration, acquisition costs, realized synergies, and the resulting dilution and goodwill meet management’s expectations.
- Whether deposit costs, brokered funding, and FHLB advances remain elevated, and how they affect net interest margin and liquidity.
- Whether the rise in nonperforming loans and the allowance adequately reflects credit risk, particularly in real-estate-related lending and SBA exposures.
- Whether mortgage production converts to loan sales as expected and whether lower loan-sale gains and servicing-asset write-downs persist.
- How actual performance compares with the filing’s interest-rate sensitivity estimates, including the effects of deposit repricing and mortgage prepayments.