rbb-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018 or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 001-38149

RBB BANCORP

(Exact name of registrant as specified in its charter)

 

California

27-2776416

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

660 S. Figueroa Street, Suite 1888

 

Los Angeles, California

90017

(Address of principal executive offices)

(Zip Code)

 

(213) 627-9888

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company. See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

 

 

 

Emerging growth company 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of shares of common stock of the registrant: 16,382,779 outstanding as of May 11, 2018.

 

 

 


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION (UNAUDITED)

3

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

31

 

 

 

 

CRITICAL ACCOUNTING POLICIES

32

 

 

 

 

OVERVIEW

 

 

 

 

 

ANALYSIS OF THE RESULTS OF OPERATIONS

 

 

 

 

 

ANALYSIS OF FINANCIAL CONDITION

42

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

59

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

60

 

 

PART II - OTHER INFORMATION

61

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

61

 

 

 

ITEM 1A.

RISK FACTORS

61

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

62

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

62

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

62

 

 

 

ITEM 5.

OTHER INFORMATION

62

 

 

 

ITEM 6.

EXHIBITS

63

 

 

 

SIGNATURES

 

64

 

 

 

2


 

PART I - FINANCIAL INFORMATION (UNAUDITED)

ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2018 (UNAUDITED) AND DECEMBER 31, 2017 (AUDITED)

(In thousands, except share amounts)

 

 

 

March 31

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

53,535

 

 

$

70,048

 

Federal funds sold and other cash equivalents

 

 

25,000

 

 

 

80,000

 

Cash and cash equivalents

 

 

78,535

 

 

 

150,048

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits in other financial institutions

 

 

600

 

 

 

600

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

Available for sale

 

 

82,848

 

 

 

64,957

 

Held to maturity (fair value of $10,020 and $10,250 at March 31, 2018 and

   December 31, 2017, respectively)

 

 

9,998

 

 

 

10,009

 

Mortgage loans held for sale

 

 

183,391

 

 

 

125,847

 

 

 

 

 

 

 

 

 

 

Loans held for investment:

 

 

 

 

 

 

 

 

Real estate

 

$

871,073

 

 

$

839,230

 

Commercial

 

 

391,614

 

 

 

410,812

 

Total loans

 

 

1,262,687

 

 

 

1,250,042

 

Unaccreted discount on acquired loans

 

 

(2,410

)

 

 

(2,762

)

Deferred loan costs (fees), net

 

 

1,651

 

 

 

1,794

 

 

 

 

1,261,928

 

 

 

1,249,074

 

Allowance for loan losses

 

 

(13,957

)

 

 

(13,773

)

Net loans

 

 

1,247,971

 

 

 

1,235,301

 

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

6,687

 

 

 

6,583

 

Federal Home Loan Bank (FHLB) stock

 

 

6,770

 

 

 

6,770

 

Net deferred tax assets

 

 

6,460

 

 

 

6,086

 

Income tax receivable

 

 

272

 

 

 

272

 

Other real estate owned (OREO)

 

 

293

 

 

 

293

 

Cash surrender value of life insurance

 

 

32,980

 

 

 

32,782

 

Goodwill

 

 

29,940

 

 

 

29,940

 

Servicing assets

 

 

5,979

 

 

 

5,957

 

Core deposit intangibles

 

 

1,357

 

 

 

1,438

 

Accrued interest and other assets

 

 

21,023

 

 

 

14,176

 

Total assets

 

$

1,715,104

 

 

$

1,691,059

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


 

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2018 (UNAUDITED) AND DECEMBER 31, 2017 (AUDITED) (CONTINUED)

(In thousands, except share amounts)

 

 

 

March 31,

 

 

December 31,

 

Liabilities and Shareholders’ Equity

 

2018

 

 

2017

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

316,047

 

 

$

285,690

 

Savings, NOW and money market accounts

 

 

399,892

 

 

 

411,663

 

Time deposits under $250,000

 

 

292,887

 

 

 

293,471

 

Time deposits $250,000 and over

 

 

364,678

 

 

 

346,457

 

Total deposits

 

 

1,373,504

 

 

 

1,337,281

 

 

 

 

 

 

 

 

 

 

Reserve for unfunded commitments

 

 

575

 

 

 

282

 

Income tax payable

 

 

1,563

 

 

 

 

FHLB advances

 

 

 

 

 

25,000

 

Long-term debt

 

 

49,564

 

 

 

49,528

 

Subordinated debentures

 

 

3,447

 

 

 

3,424

 

Accrued interest and other liabilities

 

 

10,629

 

 

 

10,368

 

Total liabilities

 

 

1,439,282

 

 

 

1,425,883

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies - Note 13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred Stock - 100,000,000 shares authorized, no par value; none outstanding

 

 

 

 

 

 

Common Stock - 100,000,000 shares authorized, no par value; 16,288,928 shares

   issued and outstanding at March 31, 2018 and 15,908,893 shares at

   December 31,2017

 

 

210,595

 

 

 

205,927

 

Additional paid-in capital

 

 

7,429

 

 

 

8,426

 

Retained earnings

 

 

58,838

 

 

 

51,266

 

Accumulated other comprehensive income (loss) - net unrealized loss on

   securities available for sale, net of tax of $437 at March 31, 2018 and

   $186 at December 31, 2017

 

 

(1,040

)

 

 

(443

)

Total shareholders’ equity

 

 

275,822

 

 

 

265,176

 

 

 

$

1,715,104

 

 

$

1,691,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4


 

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME – (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Interest and dividend income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

19,074

 

 

$

16,033

 

Interest on interest-earning deposits

 

 

187

 

 

 

151

 

Interest on investment securities

 

 

560

 

 

 

278

 

Dividend income on FHLB stock

 

 

119

 

 

 

153

 

Interest on federal funds sold and other

 

 

237

 

 

 

144

 

Total interest income

 

 

20,177

 

 

 

16,759

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on savings deposits, now and money market accounts

 

 

702

 

 

 

474

 

Interest on time deposits

 

 

2,046

 

 

 

1,849

 

Interest on subordinated debentures and other

 

 

913

 

 

 

905

 

Interest on other borrowed funds

 

 

71

 

 

 

17

 

Total interest expense

 

 

3,732

 

 

 

3,245

 

Net interest income

 

 

16,445

 

 

 

13,514

 

Provision for credit losses

 

 

184

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for credit losses

 

 

16,261

 

 

 

13,514

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges, fees and other

 

 

466

 

 

 

460

 

Gain on sale of loans

 

 

1,815

 

 

 

1,497

 

Loan servicing fees, net of amortization

 

 

(31

)

 

 

262

 

Recoveries on loans acquired in business combinations

 

 

6

 

 

 

28

 

Increase in cash surrender value of life insurance

 

 

199

 

 

 

185

 

 

 

 

2,455

 

 

 

2,432

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,951

 

 

 

4,183

 

Occupancy and equipment expenses

 

 

791

 

 

 

744

 

Data processing

 

 

473

 

 

 

352

 

Legal and professional

 

 

258

 

 

 

(387

)

Office expenses

 

 

171

 

 

 

154

 

Marketing and business promotion

 

 

203

 

 

 

182

 

Insurance and regulatory assessments

 

 

210

 

 

 

205

 

Amortization of intangibles

 

 

81

 

 

 

94

 

OREO expenses

 

 

7

 

 

 

14

 

Other expenses

 

 

1,144

 

 

 

1,037

 

 

 

 

8,289

 

 

 

6,578

 

Income before income taxes

 

 

10,427

 

 

 

9,368

 

Income tax expense

 

 

1,580

 

 

 

3,875

 

Net income

 

$

8,847

 

 

$

5,493

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.55

 

 

$

0.43

 

Diluted

 

$

0.52

 

 

$

0.40

 

Cash dividends declared per common share

 

$

0.08

 

 

$

0.30

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

5


 

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Net income

 

$

8,847

 

 

$

5,493

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

 

Change in unrealized gains (losses)

 

 

(853

)

 

 

115

 

Related income tax effect:

 

 

 

 

 

 

 

 

Change in unrealized gains (losses)

 

 

256

 

 

 

(47

)

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

(597

)

 

 

68

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

8,250

 

 

$

5,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

6


 

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY – (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance at January 1, 2018

 

 

15,908,893

 

 

$

205,927

 

 

$

8,426

 

 

$

51,266

 

 

$

(443

)

 

$

265,176

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,847

 

 

 

 

 

 

 

8,847

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

131

 

 

 

 

 

 

 

 

 

 

 

131

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,275

)

 

 

 

 

 

 

(1,275

)

Stock options exercised

 

 

380,035

 

 

 

4,668

 

 

 

(1,128

)

 

 

 

 

 

 

 

 

 

 

3,540

 

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(597

)

 

 

(597

)

Balance at March 31, 2018

 

 

16,288,928

 

 

$

210,595

 

 

$

7,429

 

 

$

58,838

 

 

$

(1,040

)

 

$

275,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

 

12,827,803

 

 

$

142,651

 

 

$

8,417

 

 

$

30,784

 

 

$

(267

)

 

$

181,585

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,493

 

 

 

 

 

 

 

5,493

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

198

 

 

 

 

 

 

 

 

 

 

 

198

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,848

)

 

 

 

 

 

 

(3,848

)

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68

 

 

 

68

 

Balance at March 31, 2017

 

 

12,827,803

 

 

$

142,651

 

 

$

8,615

 

 

$

32,429

 

 

$

(199

)

 

$

183,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

7


 

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

8,847

 

 

$

5,493

 

Adjustments to reconcile net income to net cash from

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of premises, equipment and intangibles

 

 

295

 

 

 

338

 

Net (accretion) of securities, loans, deposits, and other

 

 

(88

)

 

 

(1,020

)

Provision for loan losses

 

 

184

 

 

 

 

Stock-based compensation

 

 

131

 

 

 

198

 

Gain on sale of loans

 

 

(1,815

)

 

 

(1,497

)

Increase in cash surrender value of life insurance

 

 

(198

)

 

 

(185

)

Loans originated and purchased for sale

 

 

(88,790

)

 

 

(43,500

)

Proceeds from loans sold

 

 

57,453

 

 

 

24,780

 

Other items

 

 

2,478

 

 

 

2,950

 

Net cash used in operating activities

 

 

(21,503

)

 

 

(12,443

)

Investing activities

 

 

 

 

 

 

 

 

Decrease in interest-earning deposits

 

 

 

 

 

245

 

Securities available for sale:

 

 

 

 

 

 

 

 

Purchases

 

 

(24,920

)

 

 

(1,000

)

Maturities, prepayments and calls

 

 

6,126

 

 

 

1,152

 

Purchase of FHLB stock and other equity securities, net

 

 

(4,549

)

 

 

(5

)

Purchase of investment in qualified affordable housing projects

 

 

(2,500

)

 

 

 

Net increase in loans

 

 

(37,377

)

 

 

(30,712

)

Purchase of life insurance

 

 

 

 

 

(10,000

)

Purchases of premises and equipment

 

 

(277

)

 

 

(124

)

Net cash used in investing activities

 

 

(63,497

)

 

 

(40,444

)

Financing activities

 

 

 

 

 

 

 

 

Net increase in demand deposits and savings accounts

 

 

18,586

 

 

 

70,270

 

Net increase in time deposits

 

 

17,636

 

 

 

25,299

 

Net (decrease) increase in FHLB advances

 

 

(25,000

)

 

 

10,000

 

Cash dividends paid

 

 

(1,275

)

 

 

(3,848

)

Exercise of stock options

 

 

3,540

 

 

 

 

Net cash from financing activities

 

 

13,487

 

 

 

101,721

 

Net (decrease) increase in cash and cash equivalents

 

 

(71,513

)

 

 

48,834

 

Cash and cash equivalents at beginning of period

 

 

150,048

 

 

 

118,713

 

Cash and cash equivalents at end of period

 

$

78,535

 

 

$

167,547

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Interest paid

 

$

2,873

 

 

$

2,456

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Transfer of loans to held for sale

 

$

23,989

 

 

$

25,046

 

Net change in unrealized holding gain on securities available for sale

 

$

(853

)

 

$

115

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

8


 

RBB BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

 

NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of RBB Bancorp and its wholly-owned subsidiaries Royal Business Bank (Bank) and RBB Asset Management Company (RAM), collectively referred to herein as "the Company", “we”, “our” or “us”.  All significant intercompany accounts and transactions have been eliminated in consolidation.  RBB Bancorp has no significant business activity other than its investments in Royal Business Bank and RAM.  

The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting.  The accompanying unaudited consolidated financial statements reflect all adjustments consisting only of normal recurring adjustments. That, in the opinion of management, are necessary to reflect a fair presentation of financial results for the interim periods presented. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results for the full year.  These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”).

The Company accounts for its investments in its wholly owned special purpose TFC Statutory Trust under the equity method whereby the subsidiary's net earnings are recognized in the Company's statement of income.

 

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements were compiled in accordance with the accounting policies set forth in Note 2 – Summary of Significant Policies in our consolidated financial statements included in our 2017 Annual Report.  

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606).  This Update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.  The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.  These amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and one year later for nonpublic business entities.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The Company plans to adopt ASU 2014-09 on January 1, 2019 utilizing the modified retrospective approach.  Since the guidance does not apply to revenue associated with financial instruments such as loans and investments, which are accounted for under other provisions of GAAP, we do not expect it to impact interest income, our largest component of income.  The Company will perform an overall assessment of revenue streams potentially affected by the ASU, including certain deposit related fees and interchange fees, to determine the impact this guidance will have on our consolidated financial statements.  

9


RBB BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10).  Changes made to the current measurement model primarily affect the accounting for equity securities and readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income.  The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged.  The Update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes.  This Update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and one year later for nonpublic business entities.  Based upon an evaluation of the guidance in ASU 2016-01 the Company determined the ASU will not have a material impact on the Company’s consolidated financial statements as the accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged.  The Company adopted this ASU as of January 1, 2018 but will continue to monitor any updates to the guidance.  

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months.  This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance.  The amendments in this Update are effective for interim and annual periods beginning after December 15, 2018, for public business entities and one year later for all other entities.  The Company has several lease agreements which are currently considered operating leases and are therefore not included on the Company’s Consolidated Balance Sheets.  Under the new guidance the Company expects that some of the lease agreements will have to be recognized on the Consolidated Balance Sheets as a right-of-use asset with a corresponding lease liability.  Based upon a preliminary evaluation the Company expects that the ASU will have an impact on the Company’s Consolidated Balance Sheets.  The Company will continue to evaluate how extensive the impact will be under the ASU on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718.)  ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  Under ASU 2016-09, excess tax benefits and certain tax deficiencies will no longer be recorded in additional paid-in capital (APIC).  Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated.  In addition, the guidance requires excess tax benefits be presented as an operating activity on the statement of cash flows rather than as a financing activity.  ASU 2016-09 also permits an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards.  Forfeitures can be estimated, as required today, or recognized when they occur.  This guidance is effective for public business entities for interim and annual reporting periods beginning after December 15, 2016, and for nonpublic business entities annual reporting periods beginning after December 15, 2017, and interim periods within the reporting periods beginning after December 15, 2018.  Early adoption is permitted, but all of the guidance must be adopted in the same period.  The Company early adopted the ASU as of January 1, 2017. The Company plans to recognize forfeitures as they occur.  The early adoption of the ASU did not have a material effect on the company’s financial statements or disclosures.  

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instrument (Topic 326).  This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income.  In issuing the standard, the FASB is responding to criticism that today's guidance delays recognition of credit losses.  The standard will replace today's "incurred loss" approach with an "expected loss" model.  The new model, referred to as the current expected credit loss (CECL) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures.  This includes, but is not limited to, loans, leases, held to maturity securities, loan commitments, and financial guarantees.  The CECL model does not apply to available for sale (AFS) debt securities.  For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities.  As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today.  The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans.  ASU 2016-13 also expands the disclosure requirements regarding an entity's assumptions, models, and methods for estimating the allowance for loan and lease losses.  In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.  ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, for SEC filers, one year later for non SEC filing public business entities and annual reporting periods beginning after December 15, 2020, for nonpublic business entities and interim periods within the reporting periods beginning after December 15, 2021.  Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).  The Company has begun its evaluation of the impact of the implementation of ASU 2016-13.   The implementation of the provisions of ASU No. 2016-13 will most likely impact the Company’s Consolidated Financial Statements as to the level of reserves that will be required for credit losses.  The Company will continue to access the potential impact that this ASU will have on the Company’s consolidated financial statements.

10


RBB BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230). The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and will require application using a retrospective transition method. The Company adopted this statement as of January 1, 2018.  The Company believes the requirement to separately identify cash flows and application of the predominance principle is the cash flow item currently applicable to the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805). Currently, the ASU specifies three elements of a business – inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. This led many transactions to be accounted for as business combinations rather than asset purchases under legacy GAAP. The primary goal of ASU 2017-01 is to narrow the definition of a business, and the guidance in this update provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this update should be applied prospectively on or after the effective date. The Company adopted this ASU on January 1, 2018 and will be applied prospectively for any future business combinations.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350).  This ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  The amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill.  As a result, under the ASU, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.”  ASU No. 2017-14 is effective for annual and any interim impairment tests performed in periods beginning after December 15, 2019 for public business entities that are SEC filers, December 15, 2020 for business entities that are not SEC filers, and December 15, 2021 for all other entities.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.   The Company will continue to access the potential impact that this ASU will have on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20), which is intended to enhance “the accounting for the amortization of premiums for purchased callable debt securities.” The ASU shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. Under GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument.  The amendments in this Update affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The ASU’s amendments are effective for public business entities for interim and annual periods beginning after December 15, 2018. For other entities, the amendments are effective for annual periods beginning after December 15, 2019, and interim periods thereafter. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The implementation of the provisions of ASU No. 2017-08 will most likely not have a material impact the Company’s consolidated financial statements. The Company will continue to access the potential impact that this ASU will have on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation: Scope of codification Accounting (Topic 718). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share- entity to apply modification accounting. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair

11


RBB BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

 

value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in ASU No. 2017-09 are effective for annual periods, and interim within those annual reporting periods, beginning after December 15, 2017; early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-13—Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments  (SEC Update).  At the July 20, 2017, EITF meeting, the SEC staff announced that it would not object when certain public business entities (PBEs) elect to use the non-PBE effective dates solely to adopt the FASB’s new standards on revenue (ASC 606) and leases (ASC 842). This ASU reflects comments made by the SEC. The Company will continue to evaluate how extensive the impact will be under the ASU on the Company’s consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02 – Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.  The amendments in this Update also require certain disclosures about stranded tax effects.  The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.  The Company will continue to access the potential impact that this ASU will have on the Company’s consolidated financial statements.

 

 

12


RBB BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

 

NOTE 2 - INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of securities available for sale and held to maturity at March 31, 2018 and December 31, 2017, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

March 31, 2018

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government agency securities

 

$

7,746

 

 

$

 

 

$

(264

)

 

$

7,482

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government sponsored agencies

 

 

38,843

 

 

 

 

 

 

(1,171

)

 

 

37,672

 

Corporate debt securities

 

 

37,736

 

 

 

145

 

 

 

(187

)

 

 

37,694

 

 

 

$

84,325

 

 

$

145

 

 

$

(1,622

)

 

$

82,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal taxable securities

 

$

4,294

 

 

$

165

 

 

$

 

 

$

4,459

 

Municipal securities

 

 

5,704

 

 

 

4

 

 

 

(147

)

 

 

5,561

 

 

 

$

9,998

 

 

$

169

 

 

$

(147

)

 

$

10,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government agency securities

 

$

7,968

 

 

$

 

 

$

(152

)

 

$

7,816

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government sponsored agencies

 

 

39,806

 

 

 

17

 

 

 

(608

)

 

 

39,215

 

Corporate debt securities

 

 

17,813

 

 

 

161

 

 

 

(48

)

 

 

17,926

 

 

 

$

65,587

 

 

$

178

 

 

$

(808

)

 

$

64,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal taxable securities

 

$

4,295

 

 

$

228

 

 

$

 

 

$

4,523

 

Municipal securities

 

 

5,714

 

 

 

32

 

 

 

(19

)

 

 

5,727

 

 

 

$

10,009

 

 

$

260

 

 

$

(19

)

 

$

10,250

 

 

One security with a fair value of $759,000 and $796,000 was pledged to secure a local agency deposit at March 31, 2018 and December 31, 2017, respectively.

The amortized cost and fair value of the investment securities portfolio at March 31, 2018 are shown by expected maturity below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  

 

 

 

Available for Sale

 

 

Held to Maturity

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

(dollars in thousands)

 

Cost