RBB Bancorp — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparative figures are for FY 2016 unless noted. This filing reports annual results, not a standalone fourth-quarter income statement. RBB Bancorp is the holding company for Royal Business Bank, a California-chartered community bank focused on commercial banking, with 13 branches in Southern California and Las Vegas and lending to small and midsize businesses and individuals, including Asian-American communities.
Financial performance and position
| Metric | FY 2017 / Dec. 31, 2017 | Prior comparable |
|---|---|---|
| Revenue (net interest income plus noninterest income) | $73.4 million | $65.4 million |
| Net interest income | $60.2 million, up 6.5% | $56.5 million |
| Net income / diluted EPS | $25.5 million / $1.68 | $19.1 million / $1.39 |
| Net interest margin | 4.16% | 4.43% (MD&A also cites 4.44%) |
| Noninterest income | $13.2 million, up 47.2% | $9.0 million |
| Noninterest expense / efficiency ratio | $27.6 million / 37.65% | $27.9 million / 42.64% |
| Operating cash flow | $28.8 million | $56.2 million |
| Total assets / loans held for investment | $1.69 billion / $1.25 billion | $1.40 billion / $1.11 billion |
| Deposits / shareholders’ equity | $1.34 billion / $265.2 million | $1.15 billion / $181.6 million |
Net income rose 33.8%. Growth in net interest income and loan-sale gains, alongside a $1.1 million provision recapture rather than the prior-year $5.0 million provision, supported earnings. Loan-sale gains were $9.3 million, including $5.6 million from SBA loan sales and $3.7 million from mortgage sales. Average earning assets grew, but net interest margin narrowed as asset yields and purchase-accounting accretion declined while funding costs rose. Purchase-accounting accretion contributed 0.37 percentage points to 2017 NIM, down from 0.59 points in 2016.
The provision recapture included $3.6 million received under an SBA guarantee for a previously fully reserved loan and a $629,000 SBA recovery. The 2017 effective tax rate was 45.4%, including a $2.6 million deferred-tax-asset remeasurement charge following enactment of the 21% federal corporate tax rate. The filing estimates a 2018 effective tax rate of 28%–31%.
Cash and cash equivalents were $150.0 million. Investing cash flow was negative $264.4 million, mainly reflecting loan growth, securities purchases, BOLI and affordable-housing investments; financing cash flow was positive $267.0 million, including deposit growth, $60.2 million of net IPO proceeds and $25.0 million of FHLB advances. The $50.0 million subordinated notes had a $49.5 million carrying value; subordinated debentures were $3.4 million. FHLB advances outstanding were $25.0 million at year-end and were repaid January 2, 2018. Available FHLB borrowing capacity was reported at $323.3 million.
Regulatory capital remained well above stated fully phased-in minimums: consolidated CET1 17.54%, Tier 1 risk-based 17.80%, total risk-based 22.55% and leverage 14.35%. The Bank was categorized as well-capitalized. The allowance for loan losses was $13.8 million, or 1.10% of loans; nonperforming loans were $2.6 million (0.21% of loans) and nonperforming assets were $2.9 million (0.17% of assets). The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Material changes versus FY 2016
- Noninterest-bearing deposits increased 63.9% to $285.7 million, and total deposits grew 16.0%. Management’s adjusted core-deposit measure was 75.16% of deposits, using its relationship-based definition.
- Loans held for investment rose 12.5%: SFR mortgages increased $92.5 million and C&I loans $76.9 million; SBA balances fell $27.5 million, partly as the bank increased loan sales. Mortgage loans held for sale increased $81.5 million to $125.8 million.
- Nonperforming assets declined from $7.0 million to $2.9 million, principally after SBA guarantee collections and loan payoffs. The allowance-to-loan ratio decreased from 1.28% to 1.10%.
- Equity rose $83.6 million, largely due to the IPO, which generated $60.2 million net proceeds for the Company. The offering also increased share count and diluted per-share earnings.
- Net interest margin declined, while the efficiency ratio improved. Noninterest expense was nearly flat overall, with higher salaries partly offset by lower legal, professional and other expenses.
Outlook, commentary and risks
- Management described the balance sheet as asset-sensitive: a modeled immediate +100-basis-point rate shock increased projected one-year net interest income by 7.52%; a +200-basis-point shock increased it by 15.11%. These are model estimates, not earnings guidance.
- Management planned to keep mortgage loans held for sale in a range of $100–$120 million and expected an Irvine branch to open in the second quarter of 2018. It identified acquisition-led expansion, including potential San Francisco, New York and Houston markets, as a strategic aim; no specific earnings or growth guidance was provided.
- Key exposures include real-estate collateral and commercial lending, construction-loan execution, interest-rate and funding sensitivity, and sizable depositor relationships: the ten largest represented approximately 24.5% of deposits, and the largest about 8.3%. The non-qualified SFR loan sales channel was concentrated, with substantial sales historically to one bank.
- Other risks include reliance on SBA programs and loan-sale markets, acquired-loan discount run-off, possible deposit withdrawals, acquisition integration, regulatory and compliance costs, cybersecurity and third-party service providers. The company noted that LIBOR was expected to be phased out by the end of 2021 and said debt documents provide for a replacement benchmark.
- A former TFC shareholder lawsuit was described as immaterial, with management disputing the claims; the Company reported no litigation reserves at year-end. The filing also cites the Tax Act’s uncertain effects on customers and the economy.
Important facts for investors to verify
- Reconcile the reported NIM figures: the selected-data table and MD&A give 4.16% versus 4.43% or 4.44% for 2016.
- Track deposit concentration, deposit pricing and the sustainability of management’s relationship-based core-deposit measure, particularly as large balances mature or move.
- Assess whether loan growth and SFR/SBA loan-sale gains can offset lower purchase-accounting accretion and support margins without weakening credit quality.
- Monitor non-qualified mortgage buyer concentration, mortgage production and held-for-sale balances, as well as SBA guarantee collections, sales and program changes.
- Evaluate the effect of the $2.6 million tax remeasurement charge and whether the stated 2018 effective tax-rate range is achieved.
- Review the full audited statements and notes for liquidity, commitments, debt terms, credit concentrations and the distinction between reported and adjusted metrics; cash-flow levels were affected by mortgage-loan origination and sale activity.