RBB Bancorp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are with Q1 2018 for income and cash flow, and December 31, 2018 for balance-sheet amounts. Amounts below are in U.S. dollars.
Business context
RBB Bancorp is a bank holding company whose Royal Business Bank serves businesses and individuals, with a focus on Chinese-American communities in California, Nevada, and the New York metropolitan area. Revenue is primarily generated by lending and deposit services. The October 2018 FAIC acquisition materially expanded the company and affects year-over-year comparisons.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / date |
|---|---|---|
| Interest income | $37.2 million | $20.2 million in Q1 2018 |
| Net interest income | $25.9 million | $16.4 million in Q1 2018 |
| Net interest margin | 3.84% | 4.26% in Q1 2018 |
| Net income | $10.4 million | $8.8 million in Q1 2018 |
| Diluted EPS | $0.51 | $0.52 in Q1 2018 |
| Return on average assets | 1.44% | 2.15% in Q1 2018 |
| Efficiency ratio | 50.89% | 43.86% in Q1 2018 |
| Total assets | $2.98 billion | $2.97 billion at December 31, 2018 |
| Loans held for investment, net of fees and discounts | $2.12 billion | $2.14 billion at December 31, 2018 |
| Total deposits | $2.18 billion | $2.14 billion at December 31, 2018 |
| Shareholders’ equity | $384.8 million | $374.6 million at December 31, 2018 |
| Cash and cash equivalents | $250.1 million | $147.7 million at December 31, 2018 |
- Provision for credit losses was $550,000, versus $184,000 in Q1 2018. The allowance for loan losses was $18.2 million, or 0.86% of loans, versus $17.6 million, or 0.82%, at year-end.
- Net cash provided by operating activities was $111.8 million, compared with $21.5 million used in Q1 2018. Investing activities used $4.1 million and financing activities used $5.3 million. Cash flow included substantial mortgage loan sales and originations; operating cash flow should not be read as recurring earnings.
- Funding included $275.0 million of FHLB advances, down from $319.5 million at year-end. Long-term debt was $103.8 million net of issuance costs; subordinated debentures were $9.5 million.
- Reported bank capital ratios remained above regulatory minimums: CET1 19.39%, Tier 1 risk-based 19.39%, total risk-based 20.35%, and Tier 1 leverage 13.43%. The consolidated total risk-based ratio was 22.98%.
Material changes and drivers
- Net income rose 17.3% year over year, while diluted EPS declined from $0.52 to $0.51. The filing attributes higher earnings mainly to the larger earning-asset base following FAIC and higher noninterest income; the share count also increased materially.
- Net interest income rose 57.6%, supported by acquisition-related balance growth and higher asset yields. Net interest margin nevertheless fell to 3.84% from 4.26%, as deposit and borrowing costs rose; average cost of total deposits increased to 1.43% from 0.85%.
- Noninterest income increased to $4.2 million from $2.5 million, including $2.2 million in loan-sale gains and $840,000 in net servicing fees. Noninterest expense rose 84.9% to $15.3 million, primarily reflecting FAIC-related staffing and occupancy, integration and processing costs, and higher intangible amortization.
- Loans held for investment declined $21.6 million from year-end, mainly from lower commercial and industrial, SBA, and commercial real estate balances, partly offset by growth in construction and residential mortgages. Mortgage loans held for sale fell $59.1 million to $375.4 million.
- Deposits increased $40.3 million, but funding mix shifted: noninterest-bearing deposits fell $19.8 million from year-end, and time deposits rose. Brokered deposits were $182.8 million, up from $113.8 million; adjusted core deposits were 81.7% of total deposits, down from 91.2% under the company’s definition.
- Nonperforming loans were $2.6 million, or 0.12% of loans, compared with $3.3 million, or 0.15%, at year-end. Nonperforming assets were $4.6 million. Substandard loans increased to $31.6 million from $14.2 million at year-end; 30–89 day past-due loans were $5.2 million, compared with $4.1 million.
Outlook, risks, and unusual items
- No formal earnings or growth guidance is provided. Management expects accretion income from acquired loans to decline quarterly during 2019 as acquired loans pay off.
- Credit exposure is concentrated in real estate and real-estate-related businesses; single-family residential loans were 41.8% of held-for-investment loans. Management also identifies geographic concentration, loan seasoning and asset quality as risks.
- Interest-rate risk is significant. The company’s one-year net-interest-income sensitivity analysis estimated increases of 2.54% and 4.76% under immediate +100 and +200 basis-point shocks, respectively. The filing also notes sensitivity to deposit pricing, borrower prepayments, and funding costs.
- Liquidity considerations include reliance on large customer relationships, time deposits, brokered funding, and FHLB advances. The company reported $548.4 million of additional FHLB borrowing capacity based on pledged collateral.
- Other identified risks include FAIC integration and realizing expected benefits, competition, regulatory and capital requirements, systems and operational risks, and the planned transition from LIBOR. Management reported no material pending litigation and no material change in previously disclosed risk factors.
- RBB adopted the revenue-recognition standard on January 1, 2019 with no material financial-statement impact. Management expects the future lease standard to add right-of-use assets and lease liabilities; CECL adoption was anticipated for January 1, 2021 and could affect credit-loss reserves.
- Q1 effective tax rate was 27.1%, versus 15.2% in Q1 2018, when stock-option exercises produced a substantially larger tax benefit. A $0.10-per-share second-quarter dividend was declared after quarter-end.
Important facts for investors to verify
- Whether deposit and borrowing costs continue to compress net interest margin, and how much of earnings growth is attributable to FAIC versus organic performance.
- Whether deposit mix, brokered funding, and large depositor concentration remain manageable as the company funds its lending and liquidity needs.
- Whether the increase in substandard loans and past-due balances develops into higher nonperforming assets, charge-offs, or allowance needs.
- How quickly acquired-loan accretion declines and whether expense growth and integration costs moderate.
- The reported capital conservation buffer wording in the filing is unclear or appears inconsistent; verify the applicable regulatory buffer and capital-distribution constraints in the company’s regulatory disclosures.