rbb-10q_20190331.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, 2019 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.)

 

 

1055 Wilshire Blvd., Suite 1200,

 

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, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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  

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of exchange on which registered

Common Stock, No Par Value

 

RBB

 

NASDAQ Global Select Market

Number of shares of common stock of the registrant: 20,073,991 outstanding as of May 8, 2019.

 

 

 


 

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

32

 

 

 

 

CRITICAL ACCOUNTING POLICIES

34

 

 

 

 

OVERVIEW

35

 

 

 

 

ANALYSIS OF THE RESULTS OF OPERATIONS

36

 

 

 

 

ANALYSIS OF FINANCIAL CONDITION

43

 

 

 

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

61

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

61

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

61

 

 

 

ITEM 5.

OTHER INFORMATION

61

 

 

 

ITEM 6.

EXHIBITS

62

 

 

 

SIGNATURES

 

63

 

 

 

 

2


 

PART I - FINANCIAL INFORMATION (UNAUDITED)

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH, 2019 (UNAUDITED) AND DECEMBER 31, 2018 (AUDITED)

(In thousands, except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

250,079

 

 

$

147,685

 

Cash and cash equivalents

 

 

250,079

 

 

 

147,685

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits in other financial institutions

 

 

1,196

 

 

 

600

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

Available for sale

 

 

58,537

 

 

 

73,762

 

Held to maturity (fair value of $9,599 and $9,940 at March 31, 2019 and

   December 31, 2018, respectively)

 

 

9,449

 

 

 

9,961

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

 

375,430

 

 

 

434,522

 

 

 

 

 

 

 

 

 

 

Loans held for investment:

 

 

 

 

 

 

 

 

Real estate

 

 

1,776,711

 

 

 

1,762,864

 

Commercial

 

 

351,359

 

 

 

387,474

 

Total loans

 

 

2,128,070

 

 

 

2,150,338

 

Unaccreted discount on acquired loans

 

 

(7,809

)

 

 

(9,229

)

Deferred loan costs (fees), net

 

 

152

 

 

 

906

 

Total loans, net of deferred loan fees

 

 

2,120,413

 

 

 

2,142,015

 

Allowance for loan losses

 

 

(18,236

)

 

 

(17,577

)

Net loans

 

 

2,102,177

 

 

 

2,124,438

 

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

17,342

 

 

 

17,307

 

Federal Home Loan Bank (FHLB) stock

 

 

8,899

 

 

 

9,707

 

Net deferred tax assets

 

 

4,389

 

 

 

4,642

 

Income tax receivable

 

 

 

 

 

656

 

Other real estate owned (OREO)

 

 

2,056

 

 

 

1,101

 

Cash surrender value of life insurance (BOLI)

 

 

33,769

 

 

 

33,578

 

Goodwill

 

 

58,383

 

 

 

58,383

 

Servicing assets

 

 

17,288

 

 

 

17,370

 

Core deposit intangibles

 

 

7,212

 

 

 

7,601

 

Accrued interest and other assets

 

 

31,912

 

 

 

32,689

 

Total assets

 

$

2,978,118

 

 

$

2,974,002

 

 

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

 

3


 

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2019 (UNAUDITED) AND DECEMBER 31, 2018 (AUDITED) (CONTINUED)

(In thousands, except share amounts)

 

 

 

March 31,

 

 

December 31,

 

Liabilities and Shareholders’ Equity

 

2019

 

 

2018

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

418,953

 

 

$

438,764

 

Savings, NOW and money market accounts

 

 

480,959

 

 

 

579,247

 

Time deposits under $250,000

 

 

549,287

 

 

 

532,395

 

Time deposits $250,000 and over

 

 

735,141

 

 

 

593,635

 

Total deposits

 

 

2,184,340

 

 

 

2,144,041

 

 

 

 

 

 

 

 

 

 

Reserve for unfunded commitments

 

 

639

 

 

 

688

 

Income tax payable

 

 

3,009

 

 

 

 

FHLB advances

 

 

275,000

 

 

 

319,500

 

Long-term debt, net of debt issuance costs

 

 

103,793

 

 

 

103,708

 

Subordinated debentures

 

 

9,548

 

 

 

9,506

 

Accrued interest and other liabilities

 

 

16,986

 

 

 

21,938

 

Total liabilities

 

 

2,593,315

 

 

 

2,599,381

 

 

 

 

 

 

 

 

 

 

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; 20,073,991 shares

   issued and outstanding at March 31, 2019 and 20,000,022 shares at

   December 31, 2018

 

 

289,514

 

 

 

288,610

 

Additional paid-in capital

 

 

5,890

 

 

 

5,659

 

Retained earnings

 

 

89,991

 

 

 

81,618

 

Non-controlling interest

 

 

72

 

 

 

72

 

Accumulated other comprehensive loss, net

 

 

(664

)

 

 

(1,338

)

Total shareholders’ equity

 

 

384,803

 

 

 

374,621

 

Total liabilities and shareholders’ equity

 

$

2,978,118

 

 

$

2,974,002

 

 

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, 2019 AND 2018

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Interest and dividend income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

35,839

 

 

$

19,074

 

Interest on interest-earning deposits

 

 

468

 

 

 

187

 

Interest on investment securities

 

 

588

 

 

 

560

 

Dividend income on FHLB stock

 

 

198

 

 

 

119

 

Interest on federal funds sold and other

 

 

113

 

 

 

237

 

Total interest income

 

 

37,206

 

 

 

20,177

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on savings deposits, now and money market accounts

 

 

1,294

 

 

 

702

 

Interest on time deposits

 

 

5,953

 

 

 

2,046

 

Interest on subordinated debentures and other

 

 

1,747

 

 

 

913

 

Interest on other borrowed funds

 

 

2,300

 

 

 

71

 

Total interest expense

 

 

11,294

 

 

 

3,732

 

Net interest income

 

 

25,912

 

 

 

16,445

 

Provision for credit losses

 

 

550

 

 

 

184

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for credit losses

 

 

25,362

 

 

 

16,261

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges, fees and other

 

 

820

 

 

 

466

 

Gain on sale of loans

 

 

2,198

 

 

 

1,815

 

Loan servicing fees, net of amortization

 

 

840

 

 

 

(31

)

Recoveries on loans acquired in business combinations

 

 

6

 

 

 

6

 

Unrealized gain on equity investments

 

 

147

 

 

 

 

Increase in cash surrender value of life insurance

 

 

191

 

 

 

199

 

 

 

 

4,202

 

 

 

2,455

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,118

 

 

 

4,951

 

Occupancy and equipment expenses

 

 

2,252

 

 

 

791

 

Data processing

 

 

1,009

 

 

 

473

 

Legal and professional

 

 

425

 

 

 

258

 

Office expenses

 

 

336

 

 

 

171

 

Marketing and business promotion

 

 

362

 

 

 

203

 

Insurance and regulatory assessments

 

 

298

 

 

 

210

 

Amortization of intangibles

 

 

388

 

 

 

81

 

OREO expenses

 

 

81

 

 

 

7

 

Merger expenses

 

 

71

 

 

 

40

 

Other expenses

 

 

985

 

 

 

1,104

 

 

 

 

15,325

 

 

 

8,289

 

Income before income taxes

 

 

14,239

 

 

 

10,427

 

Income tax expense

 

 

3,859

 

 

 

1,580

 

Net income

 

$

10,380

 

 

$

8,847

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.52

 

 

$

0.55

 

Diluted

 

 

0.51

 

 

 

0.52

 

Cash dividends declared per common share

 

 

0.10

 

 

 

0.08

 

 

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, 2019 AND 2018

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net income

 

$

10,380

 

 

$

8,847

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

 

Change in unrealized gains (losses)

 

 

958

 

 

 

(853

)

Related income tax effect:

 

 

 

 

 

 

 

 

Change in unrealized gains (losses)

 

 

(284

)

 

 

256

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

674

 

 

 

(597

)

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

11,054

 

 

$

8,250

 

 

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, 2019 AND 2018

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Retained Earnings

 

 

Non-

Controlling

Interest

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance at January 1, 2019

 

 

20,000,022

 

 

$

288,610

 

 

$

5,659

 

 

$

81,618

 

 

$

72

 

 

$

(1,338

)

 

$

374,621

 

Net income

 

 

 

 

 

 

 

 

 

 

 

10,380

 

 

 

 

 

 

 

 

 

10,380

 

Stock-based compensation

 

 

 

 

 

 

 

 

231

 

 

 

 

 

 

 

 

 

 

 

 

231

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

(2,007

)

 

 

 

 

 

 

 

 

(2,007

)

Stock options exercised

 

 

73,969

 

 

 

904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

904

 

Issuance of common stock for acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

674

 

 

 

674

 

Balance at March 31, 2019

 

 

20,073,991

 

 

$

289,514

 

 

$

5,890

 

 

$

89,991

 

 

$

72

 

 

$

(664

)

 

$

384,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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, 2019 AND 2018

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

10,380

 

 

$

8,847

 

Adjustments to reconcile net income to net cash from

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of premises, equipment and intangibles

 

 

870

 

 

 

295

 

Net accretion of securities, loans, deposits, and other

 

 

(964

)

 

 

(88

)

Unrealized (gain) on equity securities

 

 

(147

)

 

 

 

Amortization of affordable housing tax credits

 

 

225

 

 

 

 

Provision for loan losses

 

 

550

 

 

 

184

 

Stock-based compensation

 

 

231

 

 

 

131

 

Deferred tax benefit

 

 

(31

)

 

 

 

Gain on sale of loans

 

 

(2,198

)

 

 

(1,815

)

Increase in cash surrender value of life insurance

 

 

(191

)

 

 

(198

)

Loans originated and purchased for sale

 

 

(41,348

)

 

 

(88,790

)

Proceeds from loans sold

 

 

144,272

 

 

 

57,453

 

Other items

 

 

135

 

 

 

2,478

 

Net cash provided by (used in) operating activities

 

 

111,784

 

 

 

(21,503

)

Investing activities

 

 

 

 

 

 

 

 

Increase in interest-earning deposits

 

 

(596

)

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

(24,920

)

Maturities, prepayments and calls

 

 

16,185

 

 

 

6,126

 

Securities held to maturity:

 

 

 

 

 

 

 

 

Maturities, prepayments and calls

 

 

500

 

 

 

 

Redemption of Federal Home Loan Bank stock

 

 

1,751

 

 

 

 

Purchase of Federal Home Loan Bank stock and other equity securities, net

 

 

(1,007

)

 

 

(4,549

)

Purchase of investment in qualified affordable housing projects

 

 

 

 

 

(2,500

)

Net increase in loans

 

 

(20,438

)

 

 

(37,377

)

Purchases of premises and equipment

 

 

(484

)

 

 

(277

)

Net cash used in investing activities

 

 

(4,089

)

 

 

(63,497

)

Financing activities

 

 

 

 

 

 

 

 

Net (decrease) increase in demand deposits and savings accounts

 

 

(118,098

)

 

 

18,586

 

Net increase in time deposits

 

 

158,400

 

 

 

17,636

 

Net increase in FHLB advances

 

 

(44,500

)

 

 

(25,000

)

Cash dividends paid

 

 

(2,007

)

 

 

(1,275

)

Exercise of stock options

 

 

904

 

 

 

3,540

 

Net cash (used in) provided by financing activities

 

 

(5,301

)

 

 

13,487

 

Net increase (decrease) in cash and cash equivalents

 

 

102,394

 

 

 

(71,513

)

Cash and cash equivalents at beginning of period

 

 

147,685

 

 

 

150,048

 

Cash and cash equivalents at end of period

 

$

250,079

 

 

$

78,535

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Interest paid

 

$

2,350

 

 

$

2,873

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Transfer from Loans to Other Real Estate Owned

 

$

955

 

 

$

 

Transfer of loans to held for sale

 

$

33,633

 

 

$

23,989

 

Net change in unrealized holding (loss) gain on securities available for sale

 

$

674

 

 

$

(597

)

 

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 - BUSINESS DESCRIPTION

RBB Bancorp (“RBB”) is a financial holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s principal business is to serve as the holding company for its wholly-owned banking subsidiaries, Royal Business Bank ("Bank") and RBB Asset Management Company ("RAM"), collectively referred to herein as "the Company". RAM was formed to hold and manage problem assets acquired in business combinations.

At March 31, 2019, the Company had total assets of $3.0 billion, gross loans, including HFI and HFS loans, of $2.1 billion, total deposits of $2.18 billion and total stockholders' equity of $384.8 million. On July 31, 2017, RBB completed its initial public offering (“IPO”) of 3,750,000 shares of its common stock at a price to the public of $23.00 per share. RBB’s common stock trades on the Nasdaq Global Select Market under the symbol “RBB”.

The Bank provides business banking services to the Chinese-American communities in Los Angeles County, Orange County, Ventura County and in Las Vegas and the New York City metropolitan area, including remote deposit, E-banking, mobile banking, commercial and investor real estate loans, business loans and lines of credit, Small Business Administration (“SBA”) 7A and 504 loans, mortgage loans, trade finance and a full range of depository accounts.

The Company operates full-service banking offices in Arcadia, Cerritos, Diamond Bar, Irvine, Los Angeles, Monterey Park, Oxnard, Rowland Heights, San Gabriel, Silver Lake, Torrance, West Los Angeles, Irvine and Westlake Village, California; Las Vegas, Nevada; and Manhattan, Brooklyn, Flushing, and Elmhurst, New York. The Company’s primary source of revenue is providing loans to customers, who are predominantly small and middle-market businesses and individuals.

The Company generates its revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities.  The Company also derives income from noninterest sources, such as fees received in connection with various lending and deposit services, residential mortgage loan originations, loan servicing, gain on sales of loans and wealth management services.  The Company’s principle expenses include interest expense on deposits and subordinated debentures, and operating expenses, such as salaries and employee benefits, occupancy and equipment, data processing, and income tax expense.

As part of the FAIC acquisition, the Company acquired FAIB Capital Corp. (FAICC) that was formed on January 29, 2014.  FAICC is a real estate investment trust subsidiary of the Bank.

The Company has completed five acquisitions from July 8, 2011 through October 15, 2018, including the acquisition of First American International Corp. (“FAIC”) and its wholly-owned subsidiary, First American International Bank (“FAIB”). On October 15, 2018, FAIB operated three branches in Queens, three in Manhattan, and two in Brooklyn, New York with an operating center and loan production offices in Brooklyn and an administrative center in Manhattan.  See Note 3 – Acquisition, for more information about the FAIC acquisition transactions. All of the Company’s acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates.

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three months ended March 31, 2019 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 as of and for the year ended December 31, 2018, included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2018 (our “2018 Annual Report”).

 

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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 1 – Summary of Significant Policies in our Consolidated Financial Statements as of and for the year ended December 31, 2018, included in our 2018 Annual Report.  The accompanying consolidated unaudited financial statements reflect all adjustments consisting of normal recurring adjustments that, in the opinion of management, are necessary to reflect a fair statement of our consolidated financial condition, results of operations, and cash flows. The results of operations for acquired companies are included from the dates of acquisition.  Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU" or “Update”) 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.  Our revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. Accordingly, the majority of the Company’s revenues will not be affected.  In addition, the standard does not materially impact the timing or measurement of the Company’s revenue recognition as it is consistent with the Company’s existing accounting for contracts within the scope of the standard.  As an emerging growth company, the Company adopted ASU 2014-09 as of January 1, 2019, utilizing the modified prospective approach. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements, as substantially all of the Company’s revenues are excluded from the scope of the new standard. Since there was no net income impact upon adoption of this ASU, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See Note 20 (Revenue from Contracts with Customers) for more information.

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.  Investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock issued to member financial institutions are not subject to this guidance. Instead, FHLB and FRB stock would continue to be accounted for at cost less impairment under ASC 942-325-35-3. The ASU’s impairment guidance on equity investments for which fair value is not readily determinable also does not apply to FHLB or FRB stock. This 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. The Company adopted this ASU as of January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

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, 2019, for an emerging growth company.  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.  The Company anticipates adopting this ASU 2016-02 beginning January 1, 2020.

 

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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.  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.  For available for sale (“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.  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 2016-13 is effective for interim and annual reporting periods for an emerging growth company beginning after December 15, 2020.  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 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 assess the potential impact that this Update will have on the Company’s consolidated financial statements. The Company anticipates adopting this ASU 2016-13 beginning January 1, 2021.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350).  This Update 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 this Update, “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 2017-14 is effective for annual and any interim impairment tests performed in periods beginning after December 15, 2021 for an emerging growth company.  Adoption of ASU 2017-04 is not expected to have a significant impact on the Company’s consolidated financial statements.  

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which is intended to enhance “the accounting for the amortization of premiums for purchased callable debt securities.” This Update 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 current 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 emerging growth companies for interim and annual periods beginning after December 15, 2019. 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 2017-08 will most likely not have a material impact the Company’s consolidated financial statements. The Company will continue to assess 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 (Topic 718): Scope of Modification Accounting. 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 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 2017-09 are effective for annual periods, and interim within those annual reporting periods, for an emerging growth company, beginning after December 15, 2018. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. This ASU did not have a material impact on the Company’s consolidated financial statements.

 

 

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In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718):  Improvements to Nonemployee Share-Based Payment Accounting.  The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.  For emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update has the potential to only impact share-based payments to members of the Company’s board of directors.  The Company will assess the potential impact that this ASU will have on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-09, Codification Improvements, which affects a wide variety of topics, including amendments to subtopics:  220-10, Income Statement—Reporting Comprehensive Income—Overall; 470-50, Debt—Modifications and Extinguishments;  480-10, Distinguishing Liabilities from Equity—Overall; 718-740, Compensation—Stock Compensation—Income Taxes; 805-740, Business Combinations—Income Taxes; and, 820-10, Fair Value Measurement—Overall.  The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and will be effective upon issuance of ASU 2018-09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities and after December 15, 2019 for emerging growth companies.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):  Disclosure Framework – Changes to the Disclosure Requirements for fair Value Measurement.  The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits.  These disclosure requirements were removed from the topic:  (1) The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels, and (3) the valuation processes for Level 3 fair value measurements.  These disclosure requirements were modified:  (1) For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or  announced the timing publicly, and (2) the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.  The following disclosure requirements were added: (1) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.  In addition, the amendments eliminate “at a minimum” from the phrase “an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements”.  The amendments in this Update are effective for emerging growth companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date.  As an emerging growth company, RBB will adopt this Update on January 1, 2021.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  This Update provides additional guidance to ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (CCA), on the accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) apply to entities that are a customer in a hosting arrangement. This Update applies to entities that are a customer in a hosting arrangement that is a service contract.  Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed.  This Update also require the customer to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement.  This Update is effective for an emerging growth company for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, for all entities. The amendments in this Update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  This Update could be material should RBB incur implementation costs for a CCA that is a service contract.

 

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NOTE 3 – ACQUISITION

First American International Corp. Acquisition:

On October 15, 2018, the Company acquired all the assets and assumed all the liabilities of First American International Corp. in exchange for cash of $34.8 million and 3,011,762 shares of RBB common stock, which as valued at $69.6 million in the aggregate on the date of acquisition. FAIC operated nine branches in the New York City metropolitan area. The Company acquired FAIC to strategically establish a presence in the New York area. Goodwill in the amount of $28.4 million was recognized in this acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill is not deductible for income tax purposes.

The following table represents the assets acquired and liabilities assumed of FAIC as of October 15, 2018 and the fair value adjustments and amounts recorded by the Company in 2018 under the acquisition method of accounting:

 

 

 

FAIC

 

 

Fair Value

 

 

Fair

 

(dollars in thousands)

 

Book Value

 

 

Adjustments

 

 

Value

 

Assets acquired

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,891

 

 

$

 

 

$

55,891

 

Fed funds sold

 

 

218

 

 

 

 

 

 

218

 

Interest-bearing deposits in other financial Institutions

 

 

3,801

 

 

 

 

 

 

3,801

 

Investments - held to maturity

 

 

30,814

 

 

 

(611

)

 

 

30,203

 

Investments - available for sale

 

 

14,388

 

 

 

 

 

 

14,388

 

Mortgage loans held for sale

 

 

1,915

 

 

 

 

 

 

1,915

 

Loans, gross

 

 

721,732

 

 

 

(6,161

)

 

 

715,571

 

Allowance for loan losses

 

 

(9,583

)

 

 

9,583

 

 

 

 

Bank premises and equipment

 

 

5,785

 

 

 

3,439

 

 

 

9,224

 

Mortgage servicing rights

 

 

11,274

 

 

 

(660

)

 

 

10,614

 

Core deposit premium

 

 

 

 

 

6,738

 

 

 

6,738

 

Other assets

 

 

3,518

 

 

 

(2,119

)

 

 

1,399

 

Total assets acquired

 

$

839,753

 

 

$

10,209

 

 

$

849,962

 

Liabilities assumed

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

629,609

 

 

$

94

 

 

$

629,703

 

FHLB advances

 

 

124,500

 

 

 

 

 

 

124,500

 

Subordinated debentures

 

 

7,217