RBB Bancorp — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; financial statements are unaudited. RBB Bancorp is a California bank holding company operating Royal Business Bank, focused on business banking and lending in Southern California and Las Vegas. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial results and condition
- Third-quarter earnings: Net income was $6.61 million, up 16.0% from $5.70 million a year earlier. Diluted EPS was $0.42 in both periods; the company attributed the lack of per-share growth partly to shares issued in its public offering. Compared with Q2 2017, net income fell from $8.5 million and diluted EPS from $0.62, primarily because Q2 included a $4.2 million loan-loss provision recapture.
- Nine-month earnings: Net income was $20.64 million versus $13.69 million, up 50.7%; diluted EPS was $1.42 versus $1.00. The increase reflected loan-loss recapture, higher loan-sale gains and lower acquisition-related and other expenses, partly offset by higher staffing costs.
- Revenue, costs and margins: Q3 net interest income declined 4.7% to $14.73 million; nine-month net interest income declined 1.7% to $42.28 million. Tax-equivalent net interest margin was 3.91% for Q3 and 4.00% for nine months, compared with 4.48% and 4.40%, respectively, in 2016. Management cited lower yields and reduced accretion from acquired-loan discounts, alongside higher deposit costs. Noninterest income rose 46.2% in Q3 to $3.80 million and 49.7% for nine months to $9.40 million, mainly from gains on loan sales and servicing fees. Noninterest expense was $7.20 million in Q3, up 2.3%; for nine months it fell 7.3% to $20.74 million, helped by nonrecurring 2016 acquisition costs not repeating. Q3 efficiency ratio was 38.87%; nine-month ratio was 40.13%.
- Balance-sheet growth: Total assets reached $1.64 billion, up 17.7% from December 31, 2016. Net loans were $1.19 billion, up $88.8 million (8.1%); growth in single-family residential and commercial and industrial loans was partly offset by declines in commercial real estate and SBA loans. Mortgage loans held for sale rose to $125.7 million from $44.3 million. Deposits increased $165.5 million to $1.32 billion, including noninterest-bearing deposits of $287.6 million, up 65.0%; these represented 21.8% of deposits.
- Credit quality: The allowance for loan losses was $11.42 million, or 0.95% of loans, versus $14.16 million, or 1.19%, at year-end 2016. The nine-month provision was a $3.49 million recapture, compared with $3.60 million of provision expense in 2016. Management attributed the recapture largely to $629,000 and $3.6 million of SBA-guarantee receipts on previously charged-off or reserved loans. Nonperforming loans were $3.95 million (0.33% of loans), down from $6.13 million (0.55%); nonperforming assets were $4.24 million (0.26% of assets). Real estate lending is a significant portfolio concentration.
- Cash flow and liquidity: For the first nine months, operating cash flow was negative $19.13 million, investing cash flow negative $156.53 million and financing cash flow positive $223.00 million; cash and cash equivalents increased $47.34 million to $166.05 million. Financing included $60.22 million of net IPO proceeds and deposit growth; investing included loan growth and a $10 million life-insurance purchase. No short-term borrowings were outstanding at quarter-end. Available secured FHLB borrowing capacity was $326.9 million; FRB capacity was $15.2 million.
- Debt and capital: Long-term debt was $49.49 million, primarily $50 million of subordinated notes issued in 2016, with a 6.5% fixed rate through 2021 and a floating rate thereafter. Subordinated debentures were $3.40 million. Shareholders’ equity was $260.33 million, up 43.4%, including $60.22 million of net IPO proceeds. At September 30, the Bank’s Tier 1 leverage, CET1, Tier 1 risk-based and total risk-based capital ratios were 14.57%, 18.13%, 18.13% and 19.08%, respectively; the company reported that the Bank met regulatory capital requirements.
Material changes and notable items
- RBB completed a public offering in July 2017 at $23 per share. The company issued 2,857,756 shares and received approximately $60.2 million net of expenses; selling shareholders also sold shares. The company contributed $25 million of offering proceeds to the Bank.
- Loan-sale gains for the first nine months rose to $6.37 million from $4.14 million. SBA loan sales increased to $68.9 million from $27.6 million, while mortgage loan sales declined to $81.1 million from $139.8 million.
- Management said acquired-loan discount accretion is expected to continue declining during 2017. Accretion was $2.58 million for the first nine months, versus $6.21 million in the comparable period.
- On October 19, 2017, after quarter-end, the company declared a $0.08-per-share dividend, payable November 30 to shareholders of record October 31. No dividend was declared for Q3 in the income statement period.
Outlook, risks and contingencies
- The filing gives no formal full-year earnings or revenue guidance. Management described plans to sell SBA loans quarterly, including approximately $16 million in the remaining quarter of 2017. Its stated Q4 mortgage-sale plans conflict: one passage says approximately $90 million, another approximately $40 million. The filing does not clarify the discrepancy.
- Management identified risks including economic and credit conditions, loan-portfolio seasoning and concentrations, interest-rate and liquidity exposure, competition, deposit and loan growth, regulatory requirements, technology or third-party service disruptions, and the ability to retain key personnel. It also noted geographic concentration in California and the Southwest.
- Interest-rate sensitivity modeling projected that a parallel +100-basis-point move would increase modeled one-year net interest income by 7.84%; a -100-basis-point move would reduce it by 3.44%. The modeled economic value of equity would decrease 12.78% under -100 basis points and increase 4.40% under +100 basis points. Management said results were within board limits; actual outcomes depend on assumptions and rate movements.
- Off-balance-sheet credit commitments totaled $200.5 million, including $97.1 million of loan commitments and $97.7 million of unused credit lines; amounts drawn may differ. The company disclosed ordinary-course litigation: management stated in the financial-statement note that disposition was not expected to have a material effect, while Part II cautioned that pending or threatened matters could potentially have a material adverse effect. Part II reported no litigation reserves as of June 30, 2017.
- Adoption of the expected-credit-loss standard (CECL) is expected to affect required credit-loss reserves; the company was evaluating the impact. The company also expected the new lease standard to add right-of-use assets and lease liabilities to its balance sheet.
Key facts for investors to verify
- Resolve the conflicting Q4 2017 mortgage-loan sale estimates of approximately $90 million and $40 million, and confirm subsequent sale volumes and gains.
- Assess whether earnings growth is sustainable after the sizable SBA guarantee recoveries and as acquired-loan accretion declines.
- Track loan growth and mix, real-estate concentration, allowance coverage, delinquencies, nonperforming assets and SBA guarantee recoveries.
- Monitor net interest margin and deposit pricing, particularly given rising deposit costs and the modeled sensitivity to interest-rate changes.
- Evaluate deposit concentration and stability: the top ten relationships totaled $319.5 million, including $104.2 million associated with directors and shareholders.
- Review the outcome of disclosed litigation, future CECL reserve effects, and post-IPO dilution and capital deployment.