RBB Bancorp — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. RBB is a bank holding company whose Royal Business Bank serves business and individual customers in California, Nevada, and the New York City area. The October 2018 First American International Corp. acquisition expanded its New York presence and materially affects year-over-year comparisons.
Financial results and condition
Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $24.3 | $17.8 | $50.2 | $34.3 |
| Provision for credit losses | $0.4 | $0.7 | $0.9 | $0.9 |
| Noninterest income | $5.5 | $2.8 | $9.7 | $5.2 |
| Noninterest expense | $14.9 | $8.2 | $30.2 | $16.5 |
| Net income | $10.1 | $9.4 | $20.5 | $18.3 |
| Diluted EPS | $0.50 | $0.54 | $1.00 | $1.06 |
- Quarterly net income rose 7.5%, while diluted EPS declined 7.4%; for the first half, net income rose 12.2% while diluted EPS fell 5.7%. The filing attributes much of the higher expense base to the FAIC acquisition and reports a substantially larger weighted-average share count than in 2018.
- Net interest margin was 3.64% for Q2 and 3.73% for the first half, versus 4.37% and 4.33%, respectively, a year earlier. Deposit and other funding costs rose; management also cited a lower margin excluding acquired-loan discount accretion. The efficiency ratio increased to 49.97% for Q2 from 39.72%.
- Noninterest income benefited from loan-sale gains and servicing income. Q2 loan-sale gains were $3.1 million; net loan-servicing income was $0.9 million. These sources, along with acquisition-related fee income, contributed to year-over-year growth.
- June 30 balance sheet: Assets were $2.802 billion, down 5.8% from December 31, 2018; deposits were $2.235 billion, up $91.3 million; shareholders’ equity was $393.8 million, up $19.2 million. Cash and cash equivalents were $205.6 million.
- Loans held for investment, net of deferred fees and discounts, were $2.092 billion, down 2.3% from year-end. Mortgage loans held for sale fell to $249.6 million from $434.5 million, reflecting reduced production and increased loan sales. Commercial real estate and single-family residential loans made up 36.2% and 40.7% of held-for-investment loans, respectively.
- Funding costs increased: average total deposit cost was 1.62% in Q2 versus 1.01% a year earlier. Time deposits represented 59.8% of period-end deposits; brokered deposits were $135.0 million. Management estimated 82.23% of deposits were core under its adjusted definition, down from 91.19% at year-end.
- FHLB advances declined to $40.0 million from $319.5 million at year-end; long-term debt was $103.9 million and subordinated debentures were $9.6 million. Available additional FHLB borrowing capacity was $649.3 million, secured by pledged loans.
- First-half operating cash flow was $255.2 million, versus cash used of $63.5 million in 2018; cash increased $58.0 million, compared with a $77.3 million decrease. Mortgage loan sales and originations materially affected operating cash flow.
- The allowance for loan losses was $18.6 million, or 0.89% of held-for-investment loans, versus $17.6 million, or 0.82%, at year-end. Nonperforming assets rose to $8.4 million from $4.4 million; nonperforming loans were 0.30% of loans, versus 0.15%. The increase principally reflected a newly nonaccrual SBA loan of about $2.9 million. Q2 net charge-offs were $32,000.
- Capital remained above regulatory thresholds: consolidated Tier 1 leverage, CET1, Tier 1 risk-based, and total risk-based ratios were 12.19%, 16.96%, 17.45%, and 23.77%, respectively. The Bank was reported as well-capitalized.
Material changes, outlook, and risks
- The October 2018 FAIC acquisition increased average earning assets and deposits, but also expanded staffing, occupancy, data-processing, and amortization expenses. The company reported 372 full-time equivalent employees at June 30, 2019, versus 242 a year earlier.
- Management expects acquired-loan discount accretion to decline quarterly through the remainder of 2019 as acquired loans pay off. It also said brokered certificates of deposit obtained for liquidity were likely to run off during the rest of 2019. No specific earnings, revenue, or growth guidance was provided.
- Interest-rate sensitivity was material: the company’s one-year net-interest-income model showed an estimated 4.32% increase under a +100 basis-point shock and 8.34% under +200 basis points; a -200 basis-point shock showed a 3.62% increase. These are model estimates, not forecasts. Management described the company as having shifted from slightly asset-sensitive toward neutral.
- Key risks include real-estate and geographic concentration, credit deterioration, funding and deposit-mix costs, integration and expense execution, interest-rate and liquidity exposure, and the planned phaseout of LIBOR after 2021. The company said CECL adoption was expected to affect required credit-loss reserves; its anticipated adoption date was January 1, 2023. It estimated lease right-of-use assets and liabilities of $25–30 million at expected January 2021 adoption of the lease standard.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $248.4 million. Operating lease commitments totaled $29.6 million. Management said pending ordinary-course litigation was not expected to have a material effect; no material change to previously disclosed risk factors was reported.
- The board authorized repurchases of up to 1.0 million shares on June 24, 2019; none had been repurchased through June 30. A $0.10-per-share quarterly dividend was announced after quarter-end, payable August 15, 2019.
- Management reported effective disclosure controls and no material quarter-specific change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher deposit costs and a lower net interest margin continue to pressure earnings, and how much margin depends on acquired-loan accretion.
- The performance, risk grades, collateral, and reserve coverage of the new nonaccrual SBA exposure and the broader increase in nonperforming assets.
- Deposit stability and concentration, including brokered and other wholesale funding, large deposit relationships, and the unusually high near-term time-deposit maturities.
- Whether acquisition-related revenue growth can offset added operating expenses, and whether loan-sale and servicing income are sustainable.
- How the company’s concentrated real-estate lending, LIBOR transition, CECL implementation, and modeled interest-rate exposures affect future credit costs, margins, and capital.
- The timing and use of the authorized share-repurchase capacity, alongside dividend payments and regulatory or debt-covenant constraints.