RBB Bancorp — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. RBB Bancorp is a bank holding company whose principal subsidiary, Royal Business Bank, serves businesses and individuals, with a focus on Asian-American communities. On October 15, 2018, RBB acquired First American International Corp. (FAIC), expanding into the New York metropolitan area.
Financial results and position
| Metric | FY 2018 / Dec. 31, 2018 | Prior comparable period |
|---|---|---|
| Revenue (interest income plus noninterest income) | $114.96 million | $87.31 million in 2017 |
| Net interest income | $78.47 million | $60.17 million in 2017 |
| Net income / diluted EPS | $36.11 million / $2.01 | $25.53 million / $1.68 in 2017 |
| Total assets | $2.97 billion | $1.69 billion |
| Loans held for investment, net | $2.12 billion | $1.24 billion |
| Deposits | $2.14 billion | $1.34 billion |
| Shareholders’ equity | $374.62 million | $265.18 million |
| Net interest margin / efficiency ratio | 4.12% / 44.50% | 4.16% / 37.65% in 2017 |
- Net income rose 41.4%; basic EPS was $2.11. Return on average assets was 1.78% and return on average equity was 12.16%.
- Provision for credit losses was $4.47 million, versus a $1.05 million provision recapture in 2017. Noninterest expense rose 47.1% to $40.64 million, including $1.66 million in merger costs. The 2017 tax expense included a $2.6 million charge to revalue deferred tax assets following federal tax reform; the 2018 effective tax rate was 21.9%.
- Cash and cash equivalents were $147.69 million. FY operating cash flow was negative $84.65 million, investing cash flow negative $322.39 million, and financing cash flow positive $404.68 million. Mortgage-loan originations held for sale contributed to the operating cash outflow.
- Year-end borrowings included $319.5 million of FHLB advances, $103.7 million of subordinated notes and $9.5 million of subordinated debentures. The Bank had $119.9 million of additional FHLB borrowing capacity and $49 million of unsecured federal-funds lines, unused at year-end.
- Consolidated capital ratios remained above regulatory “well-capitalized” thresholds: Tier 1 leverage 11.80%, CET1 15.28%, Tier 1 risk-based 15.74%, and total risk-based 21.71%.
Material changes and operating developments
- FAIC added approximately $850 million of assets, $715.6 million of loans, $629.7 million of deposits and nine New York-area branches. Consideration was $34.8 million cash and 3,011,762 RBB shares valued at $69.6 million; RBB recorded $28.4 million of goodwill. FAIC’s results were included from the acquisition date.
- Year-end assets increased 76.0%, loans held for investment increased 71.5%, and deposits increased 60.3%, reflecting the acquisition and organic growth. SFR loans grew substantially and represented about 41% of the loan portfolio; CRE represented 35.4%.
- Net interest income increased 30.4%, chiefly from higher average earning assets and acquisition-related growth. However, funding costs rose: average total deposit cost increased to 1.11% from 0.82%, while reported net interest margin declined four basis points. The efficiency ratio worsened, reflecting higher staffing, occupancy, technology, professional and acquisition expenses.
- Noninterest income edged down 2.7% to $12.84 million as gains on loan sales declined, partly offset by higher service charges and a $1.39 million recovery on an acquired loan.
- Quarterly net income was $9.49 million in Q4 2018, compared with $4.89 million in Q4 2017; diluted EPS was $0.47 versus $0.24.
Outlook, risks and contingencies
- Management intends to pursue organic growth and acquisitions it considers strategically suitable and immediately accretive. It planned to maintain mortgage loans held for sale in a range of $150–$200 million. Management estimated a 2019 effective tax rate of 28%–31%; this is an estimate, not earnings guidance.
- Credit quality metrics remained low but increased in dollar terms: nonperforming loans were $3.28 million, or 0.15% of loans, and nonperforming assets were $4.38 million, or 0.15% of assets. The allowance for loan losses was $17.58 million, or 0.82% of loans. The filing attributes the increase in nonperforming loans partly to FAIC.
- Key exposures include real estate concentration (about 81.8% of loans had real estate as primary or secondary collateral), non-qualified SFR mortgage lending and reliance on a limited group of purchasers for some loans. Large depositor relationships are also a funding concentration: the ten largest represented about 16.8% of deposits, and the largest about 4.3%.
- Management reported that modeled one-year net interest income was approximately neutral to rate shocks, but economic value of equity was outside board limits in the -100 and -200 basis-point scenarios; management said it had a plan to address this within 12 months. Interest-rate, liquidity, acquisition-integration, credit, regulatory, cybersecurity and economic risks are discussed.
- A lawsuit related to a former TFC shareholder was described as immaterial by management; the company had no litigation reserves at year-end. The auditor issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded FAIC’s internal controls from the 2018 assessment; FAIC represented 27% of year-end assets.
Most important facts for investors to verify
- How much of reported growth and earnings came from FAIC versus recurring organic growth, and whether integration costs or expected synergies change.
- Whether the sharp increase in SFR lending, real-estate exposure and purchased-loan balances affects future credit losses, margins or loan-sale capacity.
- Deposit stability and funding costs, particularly large relationships, brokered or internet deposits, and the $319.5 million of year-end FHLB advances.
- Whether the 2019 mortgage-held-for-sale target and estimated tax rate are achieved, and how loan-sale gains, acquired-loan discount accretion and rising deposit costs evolve.
- Reconcile company-defined “core deposits” (91.2% under its adjusted relationship criteria) with the more traditional core-deposit measure (77.9%); also review the full cash-flow statement and regulatory liquidity disclosures.