rbb-10q_20200331.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, 2020 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)

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

 

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  

Number of shares of common stock of the registrant: 19,739,281 outstanding as of May 8, 2020.

 

 


 

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

35

 

 

 

 

CRITICAL ACCOUNTING POLICIES

37

 

 

 

 

OVERVIEW

39

 

 

 

 

ANALYSIS OF THE RESULTS OF OPERATIONS

40

 

 

 

 

ANALYSIS OF FINANCIAL CONDITION

49

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

65

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

66

 

 

PART II - OTHER INFORMATION

67

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

67

 

 

 

ITEM 1A.

RISK FACTORS

67

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

69

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

69

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

69

 

 

 

ITEM 5.

OTHER INFORMATION

69

 

 

 

ITEM 6.

EXHIBITS

70

 

 

 

SIGNATURES

 

71

 

 

 

2


 

PART I - FINANCIAL INFORMATION (UNAUDITED)

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2020 (UNAUDITED) AND DECEMBER 31, 2019 (AUDITED)

(In thousands, except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

285,667

 

 

$

114,763

 

Federal funds sold and other cash equivalents

 

 

75,300

 

 

 

67,000

 

Cash and cash equivalents

 

 

360,967

 

 

 

181,763

 

Interest-earning deposits in other financial institutions

 

 

600

 

 

 

600

 

Securities:

 

 

 

 

 

 

 

 

Available for sale

 

 

126,294

 

 

 

126,069

 

Held to maturity (fair value of $8,154 and $8,632 at March 31, 2020 and

   December 31, 2019, respectively)

 

 

7,825

 

 

 

8,332

 

Mortgage loans held for sale

 

 

52,096

 

 

 

108,194

 

Loans held for investment:

 

 

 

 

 

 

 

 

Real estate

 

 

2,051,767

 

 

 

1,852,206

 

Commercial and other

 

 

353,722

 

 

 

349,391

 

Total loans

 

 

2,405,489

 

 

 

2,201,597

 

Unaccreted discount on acquired loans

 

 

(5,065

)

 

 

(5,067

)

Deferred loan (fees) costs, net

 

 

(442

)

 

 

404

 

Total loans, net of deferred loan fees

 

 

2,399,982

 

 

 

2,196,934

 

Allowance for loan losses

 

 

(20,130

)

 

 

(18,816

)

Net loans

 

 

2,379,852

 

 

 

2,178,118

 

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

24,472

 

 

 

16,813

 

Federal Home Loan Bank (FHLB) stock

 

 

15,630

 

 

 

15,000

 

Net deferred tax assets

 

 

 

 

 

2,326

 

Other real estate owned (OREO)

 

 

293

 

 

 

293

 

Cash surrender value of life insurance (BOLI)

 

 

34,544

 

 

 

34,353

 

Goodwill

 

 

69,790

 

 

 

58,563

 

Servicing assets

 

 

16,826

 

 

 

17,083

 

Core deposit intangibles

 

 

6,234

 

 

 

6,100

 

Accrued interest and other assets

 

 

33,230

 

 

 

34,928

 

Total assets

 

$

3,128,653

 

 

$

2,788,535

 

 

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

3


 

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2020 (UNAUDITED) AND DECEMBER 31, 2019 (AUDITED) (CONTINUED)

(In thousands, except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

504,324

 

 

$

458,763

 

Savings, NOW and money market accounts

 

 

571,870

 

 

 

537,490

 

Time deposits under $100,000

 

 

245,827

 

 

 

257,362

 

Time deposits $100,000 and over

 

 

1,113,960

 

 

 

995,323

 

Total deposits

 

 

2,435,981

 

 

 

2,248,938

 

 

 

 

 

 

 

 

 

 

Reserve for unfunded commitments

 

 

979

 

 

 

826

 

Net deferred tax liabilities

 

 

312

 

 

 

 

FHLB advances

 

 

150,000

 

 

 

 

Long-term debt, net of debt issuance costs

 

 

104,135

 

 

 

104,049

 

Subordinated debentures

 

 

14,120

 

 

 

9,673

 

Accrued interest and other liabilities

 

 

15,133

 

 

 

17,359

 

Total liabilities

 

 

2,720,660

 

 

 

2,380,845

 

 

 

 

 

 

 

 

 

 

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; 19,739,280 shares

   issued and outstanding at March 31, 2020 and 20,030,866 shares at

   December 31, 2019

 

 

286,350

 

 

 

290,395

 

Additional paid-in capital

 

 

4,833

 

 

 

4,938

 

Retained earnings

 

 

116,149

 

 

 

112,046

 

Non-controlling interest

 

 

72

 

 

 

72

 

Accumulated other comprehensive income, net

 

 

589

 

 

 

239

 

Total shareholders’ equity

 

 

407,993

 

 

 

407,690

 

Total liabilities and shareholders’ equity

 

$

3,128,653

 

 

$

2,788,535

 

 

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, 2020 AND 2019

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Interest and dividend income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

32,276

 

 

$

35,839

 

Interest on interest-earning deposits

 

 

451

 

 

 

468

 

Interest on investment securities

 

 

821

 

 

 

588

 

Dividend income on FHLB stock

 

 

2

 

 

 

198

 

Interest on federal funds sold and other

 

 

478

 

 

 

113

 

Total interest income

 

 

34,028

 

 

 

37,206

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on savings deposits, now and money market accounts

 

 

1,243

 

 

 

1,294

 

Interest on time deposits

 

 

7,086

 

 

 

5,953

 

Interest on subordinated debentures and long-term debt

 

 

1,956

 

 

 

1,933

 

Interest on other borrowed funds

 

 

150

 

 

 

2,114

 

Total interest expense

 

 

10,435

 

 

 

11,294

 

Net interest income

 

 

23,593

 

 

 

25,912

 

Provision for loan losses

 

 

1,945

 

 

 

550

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

21,648

 

 

 

25,362

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges, fees and other

 

 

1,079

 

 

 

820

 

Gain on sale of loans

 

 

2,711

 

 

 

2,198

 

Loan servicing fees, net of amortization

 

 

592

 

 

 

840

 

Recoveries on loans acquired in business combinations

 

 

42

 

 

 

6

 

Unrealized gain on equity investments

 

 

 

 

 

147

 

Increase in cash surrender value of life insurance

 

 

191

 

 

 

191

 

 

 

 

4,615

 

 

 

4,202

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,505

 

 

 

9,118

 

Occupancy and equipment expenses

 

 

2,404

 

 

 

2,252

 

Data processing

 

 

1,142

 

 

 

1,009

 

Legal and professional

 

 

604

 

 

 

425

 

Office expenses

 

 

323

 

 

 

336

 

Marketing and business promotion

 

 

214

 

 

 

362

 

Insurance and regulatory assessments

 

 

177

 

 

 

298

 

Core deposit premium

 

 

357

 

 

 

388

 

OREO expenses

 

 

14

 

 

 

81

 

Merger and conversion expenses

 

 

403

 

 

 

71

 

Other expenses

 

 

1,120

 

 

 

985

 

 

 

 

16,263

 

 

 

15,325

 

Income before income taxes

 

 

10,000

 

 

 

14,239

 

Income tax expense

 

 

3,252

 

 

 

3,859

 

Net income

 

$

6,748

 

 

$

10,380

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.52

 

Diluted

 

 

0.33

 

 

 

0.51

 

Cash dividends declared per common share

 

 

0.12

 

 

 

0.10

 

 

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, 2020 AND 2019

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net income

 

$

6,748

 

 

$

10,380

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gains on securities available for sale:

 

 

 

 

 

 

 

 

Change in unrealized gains

 

 

498

 

 

 

958

 

 

 

 

498

 

 

 

958

 

Related income tax effect:

 

 

 

 

 

 

 

 

Change in unrealized gains

 

 

(148

)

 

 

(284

)

 

 

 

(148

)

 

 

(284

)

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

350

 

 

 

674

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

7,098

 

 

$

11,054

 

 

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 THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(In thousands, except share amounts)

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Non-

Controlling

Interest

 

 

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance at January 1, 2020

 

 

20,030,866

 

 

$

290,395

 

 

$

4,938

 

 

$

112,046

 

 

$

72

 

 

$

239

 

 

$

407,690

 

Net income

 

 

 

 

 

 

 

 

 

 

 

6,748

 

 

 

 

 

 

 

 

 

6,748

 

Stock-based compensation

 

 

 

 

 

 

 

 

161

 

 

 

 

 

 

 

 

 

 

 

 

161

 

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

(2,414

)

 

 

 

 

 

 

 

 

(2,414

)

Stock options exercised, net of expense

   recognized

 

 

56,498

 

 

 

978

 

 

 

(266

)

 

 

 

 

 

 

 

 

 

 

 

712

 

Repurchase of common stock

 

 

(348,084

)

 

 

(5,023

)

 

 

 

 

 

(231

)

 

 

 

 

 

 

 

 

(5,254

)

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

350

 

 

 

350

 

Balance at March 31, 2020

 

 

19,739,280

 

 

$

286,350

 

 

$

4,833

 

 

$

116,149

 

 

$

72

 

 

$

589

 

 

$

407,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

1,303

 

 

 

(399

)

 

 

 

 

 

 

 

 

 

 

 

904

 

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

674

 

 

 

674

 

Balance at March 31, 2019

 

 

20,073,991

 

 

$

289,913

 

 

$

5,491

 

 

$

89,991

 

 

$

72

 

 

$

(664

)

 

$

384,803

 

 

 

 

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, 2020 AND 2019

(In thousands)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

6,748

 

 

$

10,380

 

Adjustments to reconcile net income to net cash from

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of premises, and equipment

 

 

522

 

 

 

481

 

Net accretion of securities, loans, deposits, and other

 

 

(873

)

 

 

(964

)

Unrealized gain on equity securities

 

 

 

 

 

(147

)

Amortization of investment in affordable housing tax credits

 

 

247

 

 

 

225

 

Amortization of intangible assets

 

 

1,441

 

 

 

1,187

 

Provision for loan losses

 

 

1,945

 

 

 

550

 

Stock-based compensation

 

 

161

 

 

 

231

 

Deferred tax benefit (expense)

 

 

1,503

 

 

 

(31

)

Gain on sale of loans

 

 

(2,711

)

 

 

(2,198

)

Increase in cash surrender value of life insurance

 

 

(191

)

 

 

(191

)

Loans originated and purchased for sale

 

 

(30,423

)

 

 

(41,348

)

Proceeds from loans sold

 

 

104,273

 

 

 

144,272

 

Other items

 

 

(4,442

)

 

 

(663

)

Net cash provided by operating activities

 

 

78,200

 

 

 

111,784

 

Investing activities

 

 

 

 

 

 

 

 

Increase in interest-earning deposits

 

 

 

 

 

(596

)

Securities available for sale:

 

 

 

 

 

 

 

 

Purchases

 

 

(151,163

)

 

 

 

Maturities, prepayments and calls

 

 

151,707

 

 

 

16,185

 

Securities held to maturity:

 

 

 

 

 

 

 

 

Maturities, prepayments and calls

 

 

500

 

 

 

500

 

Redemption of Federal Home Loan Bank stock

 

 

 

 

 

1,751

 

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

 

 

(621

)

 

 

(1,007

)

Purchase of investment in qualified affordable housing projects

 

 

(2,004

)

 

 

 

Net increase in loans

 

 

(45,668

)

 

 

(20,438

)

Net cash received in connection with acquisition

 

 

6,634

 

 

 

 

Purchases of premises and equipment

 

 

(135

)

 

 

(484

)

Net cash used in investing activities

 

 

(40,750

)

 

 

(4,089

)

Financing activities

 

 

 

 

 

 

 

 

Net decrease in demand deposits and savings accounts

 

 

(108,420

)

 

 

(118,098

)

Net increase in time deposits

 

 

107,130

 

 

 

158,400

 

Net decrease in short-term FHLB advances

 

 

 

 

 

(44,500

)

Net increase in long-term FHLB advances

 

 

150,000

 

 

 

 

Cash dividends paid

 

 

(2,414

)

 

 

(2,007

)

Common stock repurchased, net of repurchased costs

 

 

(5,254

)

 

 

 

Exercise of stock options

 

 

712

 

 

 

904

 

Net cash provided by (used in) financing activities

 

 

141,754

 

 

 

(5,301

)

Net increase in cash and cash equivalents

 

 

179,204

 

 

 

102,394

 

Cash and cash equivalents at beginning of period

 

 

181,763

 

 

 

147,685

 

Cash and cash equivalents at end of period

 

$

360,967

 

 

$

250,079

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Interest paid

 

$

8,643

 

 

$

2,350

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Transfer from loans to other real estate owned

 

 

 

 

 

955

 

Transfer of loans to held for sale, net

 

 

15,041

 

 

 

33,633

 

Loan to facilitate OREO

 

 

1,025

 

 

 

412

 

Net change in unrealized holding gain on securities available for sale

 

 

350

 

 

 

674

 

Additions to servicing assets

 

 

827

 

 

 

 

Acquisition:

 

 

 

 

 

 

 

 

Assets acquired, net of cash received

 

 

183,524

 

 

 

 

Liabilities assumed

 

 

201,385

 

 

 

 

Cash considerations

 

 

32,885

 

 

 

 

Goodwill

 

 

11,227

 

 

 

 

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, 2020, the Company had total consolidated assets of $3.1 billion, gross consolidated loans (held for investment and held for sale) of $2.5 billion, total consolidated deposits of $2.4 billion and total consolidated stockholders' equity of $408.0 million. 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, Las Vegas, the New York City metropolitan area and the Chicago 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, and Westlake Village, California; Las Vegas, Nevada; Manhattan, Brooklyn, Flushing, and Elmhurst, New York; and the Bridgeport and Chinatown areas of Chicago, Illinois. 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 principal 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.

The Company has completed six acquisitions from July 8, 2011 through March 31, 2020, including the acquisition of PGB Holdings Inc. (“PGBH”) and its wholly-owned subsidiary, Pacific Global Bank (“PGB”), which closed on January 10, 2020. PGB operated three branches in Chicago. See Note 3 – Acquisition, for more information about the PGBH acquisition transaction. 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, 2020 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, 2019, included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2019 (our “2019 Annual Report”).

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.  It is reasonably possible our estimate of the allowance for loan losses and the fair value of mortgage servicing rights could change as actual results could differ from those estimates.  Actual results could differ from those estimates.

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Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements were compiled in accordance with the accounting policies set forth in Note 2 – Basis of Presentation and Summary of Significant Policies in our Consolidated Financial Statements as of and for the year ended December 31, 2019, included in our 2019 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, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020. The Financial Accounting Standards Board ("FASB") issues Accounting Standards Updates ("ASU" or “Update”) and Accounting Standards Codifications (“ASC”), which are the primary source of GAAP.

Recent Accounting Pronouncements

When RBB conducted its initial public offering (“IPO”) in 2017, we qualified as an emerging growth company (“EGC”).  We will remain an EGC until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.0 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our IPO, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We anticipate no longer qualifying as an EGC on January 1, 2023.  EGCs are entitled to reduced regulatory and reporting requirements under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act.

In May 2014, the FASB issued 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.  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 EGC, 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), including subsequent amending ASUs.  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. On July 17, 2019, the FASB proposed a one-year deferral of the amendments in this Update to be effective for interim periods beginning after December 15, 2021 and annual periods beginning after December 15, 2020, for an EGC. 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 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. As of this Quarterly Report and the Company’s current leases, we estimate the right-of-use asset and lease liability will be in the range of $25-30 million as of the expected January 1, 2021 adoption date.  The effective date for this ASU is for years beginning after December 15, 2020, and for interim periods beginning after December 15, 2021.  The Company will continue to evaluate how extensive the impact will be under the ASU on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instrument (Topic 326), including subsequent amending ASUs. 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,

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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 was originally proposed to be effective for interim and annual reporting periods for an emerging growth company beginning after December 15, 2020 (however, see below). 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. In October 2019, the FASB announced a delay in the effective date to January 1, 2023 for an EGC. The Company anticipates adopting this ASU 2016-13 on that date.

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a three year period the day-one adverse regulatory capital effects of ASU 2016-13. Additionally, in March 2020, the U.S. federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to  delay the  estimated CECL impact  on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus disease 2019 ("COVID-19") pandemic. As a result, entities will have the option to gradually phase in the full effect of CECL on regulatory capital over a five-year transition period.

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 2017-04 is effective for annual and any interim impairment tests performed in periods beginning after December 15, 2022 for an EGC.  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 amendment does 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 EGC’s for interim periods after December 15, 2020 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 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 EGCs, 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 non-employees. The Company adopted this ASU on January 1, 2020 and this ASU did not have a material impact on the Company’s consolidated financial statements.

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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 EGCs for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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.  As an EGC, RBB adopted this Update on January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.

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 requires 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 EGC 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 will most likely not have a material impact unless RBB incurs implementation costs for a CCA that is a service contract.

In November 2019, the FASB issued ASU 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606), Codification Improvements—Share-Based Consideration Payable to a Customer. This ASU will affect companies that issue share-based payments (e.g., options or warrants) to their customers. In June 2018, the FASB issued ASU 2018-07 that expanded the scope of Topic 718, Compensation—Stock Compensation, to include share-based payments to non-employees in exchange for goods and services. That ASU substantially aligned the accounting for share-based payments to non-employees and employees. However, it required share-based payments to nonemployee customers to be accounted for under Topic 606, Revenue from Contracts with Customers, as a reduction of revenue, similar to other sales incentives (such as coupons and rebates). While that ASU provided guidance on the income statement classification of payments to customers (as a reduction of revenue), that ASU did not specify when to measure such awards or how to classify awards on the balance sheet (for example as a liability or as equity). To address diversity in these areas, the new guidance requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718. As a result, the amount recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment. ASU 2019-08 is effective for entities that have not yet adopted the amendments in ASU 2018-07, the amendments in ASU 2019-08 are effective for an EGC in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. RBB adopted the ASU as of December 31, 2019 and this ASU did not have a material impact on the Company’s financial statements as the Company has not issued share-based payments to non-employees, except for non-employee members of the board of directors.

  

 

 

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). The guidance was effective upon issuance and generally can be applied through December 31, 2022. Of the

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Company’s $2.3 billion in total gross loans as of December 31, 2019, approximately 25% have a LIBOR based reference rate.  The Company has several LIBOR based debt issues, refer to Notes 9 and 10 of the Company’s consolidated financial statements included in this Form 10-Q.  We are currently evaluating this guidance to determine the date of adoption and the impact on the Company.

NOTE 3 – ACQUISITION

PGB Holdings, Inc. Acquisition:

On January 10, 2020, the Company acquired all the assets and assumed all the liabilities of PGB Holdings, Inc. (“PGBH” or “PGB”) in exchange for cash of $32.9 million. PGBH operated three branches in the Chicago, Illinois metropolitan area. The Company acquired PGBH to strategically establish a presence in the Chicago area. Goodwill in the amount of $11.2 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 PGBH as of January 10, 2020 and the fair value adjustments and amounts recorded by the Company in 2020 under the acquisition method of accounting:

 

 

 

PGBH

 

 

Fair Value

 

 

Fair

 

(dollars in thousands)

 

Book Value

 

 

Adjustments

 

 

Value

 

Assets acquired

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,033

 

 

$

 

 

$

17,033

 

Fed funds sold

 

 

8,300

 

 

 

 

 

 

8,300

 

Interest-bearing deposits in other financial Institutions

 

 

14,186

 

 

 

 

 

 

14,186

 

Loans, gross

 

 

172,443

 

 

 

715

 

 

 

173,158

 

Allowance for loan losses

 

 

(2,265

)

 

 

2,265

 

 

 

 

Bank premises and equipment

 

 

6,394

 

 

 

1,639

 

 

 

8,033

 

Core deposit premium

 

 

 

 

 

491

 

 

 

491

 

Investment in trust

 

 

155

 

 

 

 

 

 

155

 

Other assets

 

 

1,687

 

 

 

 

 

 

1,687

 

Total assets acquired

 

$

217,933

 

 

$

5,110

 

 

$

223,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

187,393

 

 

$

969

 

 

$

188,362

 

Escrow Payable

 

 

4,277