rbb-10q_20180630.htm

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

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

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

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

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

Number of shares of common stock of the registrant: 16,544,627 outstanding as of August 8, 2018.

	June 30,			December 31,
	2018			2017
Assets
Cash and due from banks	$	72,788		$	70,048
Federal funds sold and other cash equivalents		—			80,000
Cash and cash equivalents		72,788			150,048

Interest-earning deposits in other financial institutions		600			600

Securities:
Available for sale (amortized cost of $63,157 and $65,587 at June 30, 2018 and December 31, 2017, respectively)		61,299			64,957
Held to maturity (fair value of $9,982 and $10,250 at June 30, 2018 and December 31, 2017, respectively)		9,986			10,009
Mortgage loans held for sale		281,755			125,847

Loans held for investment:
Real estate	$	876,494		$	839,230
Commercial		407,052			410,812
Total loans		1,283,546			1,250,042
Unaccreted discount on acquired loans		(1,488	)		(2,762	)
Deferred loan costs (fees), net		2,024			1,794
Total loans, net of deferred loan fees		1,284,082			1,249,074
Allowance for loan losses		(14,657	)		(13,773	)
Net loans		1,269,425			1,235,301

Premises and equipment		7,502			6,583
Federal Home Loan Bank stock		7,738			6,770
Net deferred tax assets		7,089			6,086
Income tax receivable		2,170			272
Other real estate owned		293			293
Cash surrender value of life insurance		33,180			32,782
Goodwill		29,940			29,940
Servicing assets		6,134			5,957
Core deposit intangibles		1,280			1,438
Accrued interest and other assets		25,693			14,176
Total assets	$	1,816,872		$	1,691,059

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

	June 30,			December 31,
Liabilities and Shareholders’ Equity	2018			2017
Deposits:
Noninterest-bearing demand	$	306,362		$	285,690
Savings, NOW and money market accounts		424,261			411,663
Time deposits under $250,000		268,967			293,471
Time deposits $250,000 and over		424,816			346,457
Total deposits		1,424,406			1,337,281

Reserve for unfunded commitments		483			282
FHLB advances		40,000			25,000
Long-term debt		49,601			49,528
Subordinated debentures		3,470			3,424
Accrued interest and other liabilities		12,710			10,368
Total liabilities		1,530,670			1,425,883

Commitments and contingencies - Note 13		—			—

Shareholders' equity:
Preferred Stock - 100,000,000 shares authorized, no par value; none outstanding		—			—
Common Stock - 100,000,000 shares authorized, no par value; 16,544,627 shares issued and outstanding at June 30, 2018 and 15,908,893 shares at December 31,2017		214,025			205,927
Additional paid-in capital		6,680			8,426
Retained earnings		66,804			51,266
Accumulated other comprehensive income (loss) - net unrealized loss on securities available for sale, net of tax benefit of $551 at June 30, 2018 and $186 at December 31, 2017		(1,307	)		(443	)
Total shareholders’ equity		286,202			265,176
Total liabilities and shareholders’ equity	$	1,816,872		$	1,691,059

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

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2018		2017			2018		2017
Interest and dividend income:
Interest and fees on loans	$	21,132	$	16,759		$	40,206	$	32,792
Interest on interest-earning deposits		209		209			395		360
Interest on investment securities		603		313			1,163		591
Dividend income on FHLB stock		134		82			253		235
Interest on federal funds sold and other		206		158			443		302
Total interest income		22,284		17,521			42,460		34,280
Interest expense:
Interest on savings deposits, now and money market accounts		998		575			1,700		1,049
Interest on time deposits		2,410		1,993			4,456		3,842
Interest on subordinated debentures and other		920		907			1,833		1,812
Interest on other borrowed funds		129		12			200		29
Total interest expense		4,457		3,487			8,189		6,732
Net interest income		17,827		14,034			34,271		27,548
Provision for credit losses		700		(4,188	)		884		(4,188	)

Net interest income after provision for credit losses		17,127		18,222			33,387		31,736
Noninterest income:
Service charges, fees and other		446		646			912		1,106
Gain on sale of loans		2,085		2,289			3,900		3,786
Loan servicing fees, net of amortization		58		(5	)		27		257
Recoveries on loans acquired in business combinations		5		29			11		57
Increase in cash surrender value of life insurance		199		216			398		401
		2,793		3,175			5,248		5,607
Noninterest expense:
Salaries and employee benefits		4,709		4,243			9,660		8,426
Occupancy and equipment expenses		834		727			1,626		1,471
Data processing		487		454			960		806
Legal and professional		423		296			680		(91	)
Office expenses		192		177			363		331
Marketing and business promotion		262		143			465		325
Insurance and regulatory assessments		213		205			422		410
Amortization of intangibles		77		87			158		181
OREO expenses		—		14			7		28
Other expenses		994		614			2,139		1,651
		8,191		6,960			16,480		13,538
Income before income taxes		11,729		14,437			22,155		23,805
Income tax expense		2,292		5,901			3,872		9,776
Net income	$	9,437	$	8,536		$	18,283	$	14,029

Net income per share
Basic	$	0.58	$	0.67		$	1.13	$	1.09
Diluted	$	0.54	$	0.62		$	1.06	$	1.02
Cash dividends declared per common share	$	0.09	$	—		$	0.17	$	0.30

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Net income	$	9,437		$	8,536		$	18,283		$	14,029

Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Change in unrealized gains (losses)		(379	)		185			(1,227	)		300
Reclassification of gains (losses) recognized in net income		—			—			—			—
		(379	)		185			(1,227	)		300
Related income tax effect:
Change in unrealized gains (losses)		112			(76	)		363			(123	)
Reclassification of gains recognized in net income		—			—			—			—
		112			(76	)		363			(123	)

Total other comprehensive income		(267	)		109			(864	)		177

Total comprehensive income	$	9,170		$	8,645		$	17,419		$	14,206

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

											Accumulated
					Additional						Other
	Common Stock				Paid-in			Retained			Comprehensive
	Shares		Amount		Capital			Earnings			Income (Loss)			Total
Balance at January 1, 2018		15,908,893	$	205,927	$	8,426		$	51,266		$	(443	)	$	265,176
Net income									18,283						18,283
Stock-based compensation						262									262
Cash dividend									(2,745	)					(2,745	)
Stock options exercised		635,734		8,098		(2,008	)								6,090
Other comprehensive income, net of taxes												(864	)		(864	)
Balance at June 30, 2018		16,544,627	$	214,025	$	6,680		$	66,804		$	(1,307	)	$	286,202

Balance at January 1, 2017		12,827,803	$	142,651	$	8,417		$	30,784		$	(267	)	$	181,585
Net income									14,029						14,029
Stock-based compensation						395									395
Cash dividend									(3,849	)					(3,849	)
Other comprehensive income, net of taxes												177			177
Balance at June 30, 2017		12,827,803	$	142,651	$	8,812		$	40,964		$	(90	)	$	192,337

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

	Six Months Ended
	June 30,
	2018			2017
Operating activities
Net income	$	18,283		$	14,029
Adjustments to reconcile net income to net cash from
Operating activities:
Depreciation and amortization of premises, equipment and intangibles		417			664
Net accretion of securities, loans, deposits, and other		(742	)		(881	)
Provision for loan losses		884			(4,188	)
Stock-based compensation		262			395
Deferred tax benefit		(1,897	)		—
Gain on sale of loans		(3,900	)		(3,786	)
Increase in cash surrender value of life insurance		(398	)		(401	)
Loans originated and purchased for sale		(208,830	)		(101,210	)
Proceeds from loans sold		130,010			87,387
Other items		2,390			(2,392	)
Net cash used in operating activities		(63,521	)		(10,383	)
Investing activities
Decrease in interest-earning deposits		—			245
Securities available for sale:
Purchases		(31,898	)		(2,000	)
Maturities, prepayments and calls		34,259			2,167
Purchase of FHLB stock and other equity securities, net		(8,010	)		(27	)
Purchase of investment in qualified affordable housing projects		(4,500	)		—
Net increase in loans		(107,957	)		(57,571	)
Purchase of life insurance		—			(10,000	)
Purchases of premises and equipment		(1,103	)		(200	)
Net cash used in investing activities		(119,209	)		(67,386	)
Financing activities
Net increase in demand deposits and savings accounts		33,270			93,373
Net increase in time deposits		53,855			32,398
Net increase in FHLB advances		15,000			—
Cash dividends paid		(2,745	)		(3,849	)
Exercise of stock options		6,090			—
Net cash from financing activities		105,470			121,922
Net (decrease) increase in cash and cash equivalents		(77,260	)		44,153
Cash and cash equivalents at beginning of period		150,048			118,713
Cash and cash equivalents at end of period	$	72,788		$	162,866
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest paid	$	1,107		$	6,793
Taxes paid	$	6,085		$	9,690
Non-cash investing and financing activities:
Transfer of loan to available for sale securities	$	—		$	1,000
Transfer of loans to held for sale	$	72,211		$	67,188
Net change in unrealized holding gain on securities available for sale	$	(1,227	)	$	300

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

RBB Bancorp (“RBB”) is a financial holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our wholly-owned subsidiaries, Royal Business Bank, a California-chartered commercial bank (“Bank”), and RBB Asset Management Company (“RAM”), all collectively referred to herein as “the Company”, “we”, “our” or “us”. All significant intercompany transactions have been eliminated. RBB Bancorp was formed in January 2011 to be the bank holding company of the Bank. RAM was formed in 2012 to hold and manage problem assets acquired in business combinations. RBB Bancorp has no significant business activity other than its investments in the Bank and RAM. In 2016 the Bank became a Community Development Financial Institution and uses any grants we receive to invest back into the low to moderate income areas in the communities we serve.

At June 30, 2018, the Company had total assets of $1.8 billion, gross loans of $1.3 billion, total deposits of $1.4 billion and total stockholders' equity of $286.2 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 and Ventura County in California and in Las Vegas, which is in Clark County, Nevada, 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, Los Angeles, Monterey Park, Oxnard, Rowland Heights, San Gabriel, Silver Lake, Torrance, West LA, and Westlake Village, California and Las Vegas, Nevada. .

We generate our revenue primarily from interest received on loans and leases to customers, who are predominately small and middle-market businesses and individuals, and to a lesser extent, from interest received on investment securities. We have also derived income from noninterest sources, such as fees received in connection with various lending and deposit services, residential mortgage loan originations, loan servicing and gain on sales of loans. Our 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.

We completed four acquisitions between July 8, 2011 and February 19, 2016. Our 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. See Note 3 – Acquisitions, for more information about our acquisition transactions.

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 six months ended June 30, 2018 are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2017, included in our annual report filed on Form 10-K for the fiscal year ended December 31, 2017 (our “2017 Annual Report”).

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.

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, 2017, included in our 2017 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 and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018.

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 plans to adopt ASU 2014-09 as of January 1, 2019, utilizing the modified prospective approach. Company will perform an overall assessment of revenue streams potentially affected by the ASU, including certain deposit related fees and interchange fees, to determine the impact this guidance will have on our consolidated financial statements.

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. 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. Based upon an evaluation of the guidance in ASU 2016-01 the Company determined the ASU will not have a material impact on the Company’s consolidated financial statements as the accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Company adopted this ASU as of January 1, 2018 but will continue to monitor any updates to the guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance. The amendments in this Update are effective for interim and annual periods beginning after December 15, 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, 2019.

California	27-2776416
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)

660 S. Figueroa Street, Suite 1888
Los Angeles, California	90017
(Address of principal executive offices)	(Zip Code)


Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒	Smaller reporting company ☐

Emerging growth company ☒


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	48

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	64

ITEM 4.	CONTROLS AND PROCEDURES	65

PART II - OTHER INFORMATION		66

ITEM 1.	LEGAL PROCEEDINGS	66

ITEM 1A.	RISK FACTORS	66

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	66

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	66

ITEM 4.	MINE SAFETY DISCLOSURES	66

ITEM 5.	OTHER INFORMATION	66

ITEM 6.	EXHIBITS	67

SIGNATURES		68