10-Q 1 rbb20220331_10q.htm FORM 10-Q rbb20220331_10q.htm
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Table of Contents



 

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, 2022 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

(Registrants 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:  19,191,761 outstanding as of May 4, 2022.

 



 

 

    

 

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.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

36

 

CRITICAL ACCOUNTING POLICIES

38

 

OVERVIEW

39

 

ANALYSIS OF THE RESULTS OF OPERATIONS

40

 

ANALYSIS OF FINANCIAL CONDITION

48

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

67

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

67

ITEM 4.

MINE SAFETY DISCLOSURES

67

ITEM 5.

OTHER INFORMATION

67

ITEM 6.

EXHIBITS

68

SIGNATURES

 

69

 

 

 

PART I - FINANCIAL INFORMATION (UNAUDITED)

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2022 (UNAUDITED) AND DECEMBER 31, 2021 (AUDITED)

(In thousands, except share amounts)

 

  March 31,  December 31, 
  

2022

  

2021

 

Assets

        

Cash and due from banks

 $149,767  $501,372 

Federal funds sold and other cash equivalents

  200,000   193,000 

Cash and cash equivalents

  349,767   694,372 

Interest-earning deposits in other financial institutions

  600   600 

Securities:

        

Available for sale

  420,448   368,260 

Held to maturity (fair value of $6,292 and $6,577 at March 31, 2022 and December 31, 2021, respectively)

  6,246   6,252 

Mortgage loans held for sale

  3,572   5,957 

Loans held for investment:

        

Real estate

  2,633,681   2,560,465 

Commercial and other

  376,786   375,684 

Total loans

  3,010,467   2,936,149 

Unaccreted discount on acquired loans

  (1,461)  (1,727)

Deferred loan fees, net

  (2,522)  (3,072)

Total loans, net of deferred loan fees and unaccreted discounts on acquired loans

  3,006,484   2,931,350 

Allowance for loan losses

  (33,292)  (32,912)

Net loans

  2,973,192   2,898,438 
         

Premises and equipment

  27,455   27,199 

Federal Home Loan Bank (FHLB) stock

  15,000   15,000 

Equity Securities

  19,977   19,992 

Other real estate owned (OREO)

  293   293 

Cash surrender value of life insurance (BOLI)

  56,313   55,988 

Goodwill

  71,498   69,243 

Servicing assets

  11,048   11,517 

Core deposit intangibles

  4,525   4,075 

Right-of-use assets- operating leases

  22,451   22,454 

Accrued interest and other assets

  31,184   28,554 

Total assets

 $4,013,569  $4,228,194 

 

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

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2022 (UNAUDITED) AND DECEMBER 31, 2021 (AUDITED) (CONTINUED)

(In thousands, except share amounts)

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 

Liabilities and Shareholders’ Equity

        

Deposits:

        

Noninterest-bearing demand

 $1,159,703  $1,291,484 

Savings, NOW and money market accounts

  885,050   927,609 

Time deposits $250,000 and under

  570,274   587,940 

Time deposits over $250,000

  553,226   578,499 

Total deposits

  3,168,253   3,385,532 
         

Reserve for unfunded commitments

  1,186   1,203 

FHLB advances

  150,000   150,000 

Long-term debt, net of debt issuance costs

  173,152   173,007 

Subordinated debentures

  14,556   14,502 

Lease liabilities - operating leases

  23,314   23,282 

Accrued interest and other liabilities

  18,283   13,985 

Total liabilities

  3,548,744   3,761,511 
         

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; 19,247,970 shares issued and outstanding at March 31, 2022 and 19,455,544 shares issues and outstanding at December 31, 2021

  279,836   282,335 

Additional paid-in capital

  4,392   4,603 

Retained earnings

  190,849   181,329 

Non-controlling interest

  72   72 

Accumulated other comprehensive loss, net

  (10,324)  (1,656)

Total shareholders’ equity

  464,825   466,683 

Total liabilities and shareholders’ equity

 $4,013,569  $4,228,194 

 

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

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(In thousands, except per share amounts)

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Interest and dividend income:

        

Interest and fees on loans

 $37,886  $34,516 

Interest on interest-earning deposits

  171   48 

Interest on investment securities

  1,007   627 

Dividend income on FHLB stock

  227   192 

Interest on federal funds sold and other

  275   157 

Total interest income

  39,566   35,540 

Interest expense:

        

Interest on savings deposits, now and money market accounts

  718   698 

Interest on time deposits

  1,574   2,964 

Interest on subordinated debentures and long-term debt

  2,348   1,958 

Interest on other borrowed funds

  435   435 

Total interest expense

  5,075   6,055 

Net interest income

  34,491   29,485 

Provision for loan losses

  366   1,500 

Net interest income after provision for loan losses

  34,125   27,985 

Noninterest income:

        

Service charges, fees and other

  1,121   1,415 

Gain on sale of loans

  1,174   3,841 

Loan servicing fees, net of amortization

  432   246 

Unrealized loss on equity investments

     (20)

(Loss) gain on derivatives

  (108)  225 

Increase in cash surrender value of life insurance

  325   187 
   2,944   5,894 

Noninterest expense:

        

Salaries and employee benefits

  9,369   9,242 

Occupancy and equipment expenses

  2,206   2,242 

Data processing

  1,258   1,440 

Legal and professional

  1,006   805 

Office expenses

  293   255 

Marketing and business promotion

  307   184 

Insurance and regulatory assessments

  441   348 

Core deposit premium

  279   301 

OREO expenses

  8   5 

Merger expenses

  37   42 

Other expenses

  857   928 
   16,061   15,792 

Income before income taxes

  21,008   18,087 

Income tax expense

  6,391   5,631 

Net income

 $14,617  $12,456 
         

Net income per share

        

Basic

 $0.75  $0.64 

Diluted

  0.74   0.63 

Cash dividends declared per common share

  0.14   0.12 

 

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

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(In thousands)

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Net income

 $14,617  $12,456 
         

Other comprehensive loss:

        

Unrealized losses on securities available for sale:

        

Change in unrealized losses

  (12,557)  (1,816)

Reclassification of gains recognized in net income

      
   (12,557)  (1,816)

Related income tax effect:

        

Change in unrealized losses

  3,889   537 

Reclassification of gains recognized in net income

      
   3,889   537 
         

Total other comprehensive loss

  (8,668)  (1,279)
         

Total comprehensive income

 $5,949  $11,177 

 

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

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(In thousands, except share amounts)

 

  

Common Stock

              

Accumulated

     
  

Shares

  

Amount

  

Additional Paid-in Capital

  

Retained Earnings

  

Non- Controlling Interest

  

Other Comprehensive (Loss) Income

  

Total

 

Balance at December 31, 2021

  19,455,544  $282,335  $4,603  $181,329  $72  $(1,656) $466,683 

Net income

           14,617         14,617 

Stock-based compensation

        257            257 

Restricted stock vested

     355   (355)            

Cash dividend

           (2,724)        (2,724)

Stock options exercised, net of expense recognized

  25,763   507   (113)           394 

Repurchase of common stock

  (233,337)  (3,361)     (2,373)        (5,734)

Other comprehensive loss, net of taxes

                 (8,668)  (8,668)

Balance at March 31, 2022

  19,247,970  $279,836  $4,392  $190,849  $72  $(10,324) $464,825 
                             

Balance at December 31, 2020

  19,565,921  $284,261  $4,932  $138,094  $72  $1,129  $428,488 

Net income

           12,456         12,456 

Stock-based compensation

        287            287 

Restricted stock granted

  60,000                   

Cash dividend

           (2,347)        (2,347)

Stock options exercised, net of expense recognized

  32,289   464   (124)           340 

Repurchase of common stock

  (129,961)  (1,880)     (397)        (2,277)

Other comprehensive loss, net of taxes

                 (1,279)  (1,279)

Balance at March 31, 2021

  19,528,249  $282,845  $5,095  $147,806  $72  $(150) $435,668 

 

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

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(In thousands)

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Operating activities

        

Net income

 $14,617  $12,456 

Adjustments to reconcile net income to net cash from Operating activities:

        

Depreciation and amortization of premises and equipment

  494   500 

Net accretion of securities, loans, deposits, and other

  (70)  (391)

Unrealized loss on equity securities

     20 

Amortization of investment in affordable housing tax credits

  255   259 

Amortization of intangible assets

  1,210   1,707 

Amortization of right-of-use asset

  1,290   1,314 

Change in operating lease liabilities

  (1,256)  (1,257)

Provision for loan losses

  366   1,500 

Stock-based compensation

  257   287 

Deferred tax expense (benefit)

  (244)  (880)

Gain on sale of loans

  (1,174)  (3,841)

Increase in cash surrender value of life insurance

  (325)  (187)

Loans originated and purchased for sale, net

  (24,015)  (68,236)

Proceeds from loans sold

  36,271   136,866 

Other items

  5,480   29,129 

Net cash provided by operating activities

  33,156   109,246 

Investing activities

        

Securities available for sale:

        

Purchases

  (185,335)  (176,164)

Maturities, prepayments and calls

  120,537   103,620 

Securities held to maturity:

        

Maturities, prepayments and calls

     500 

Purchase of other equity securities, net

  16   12 

Net increase of investment in qualified affordable housing projects

  (3)  (309)

Net increase in loans

  (76,643)  (61,207)

Net cash received in connection with a branch purchase

  71,352    

Purchases of premises and equipment

  (725)  (478)

Net cash used in investing activities

  (70,801)  (134,026)

Financing activities

        

Net (decrease) increase in demand deposits and savings accounts

  (256,038)  230,636 

Net decrease in time deposits

  (42,858)  (44,407)

Cash dividends paid

  (2,724)  (2,347)

Redemption of subordinated debentures

     (50,000)

Issuance of subordinated debentures, net of issuance costs

     118,111 

Common stock repurchased, net of repurchased costs

  (5,734)  (2,277)

Exercise of stock options

  394   340 

Net cash (used in) provided by financing activities

  (306,960)  250,056 

Net (decrease) increase in cash and cash equivalents

  (344,605)  225,276 

Cash and cash equivalents at beginning of period

  694,372   194,654 

Cash and cash equivalents at end of period

 $349,767  $419,930 

Supplemental disclosure of cash flow information

        

Cash paid during the period:

        

Interest paid

 $3,020  $5,298 

Taxes refunded

  (125)   

Non-cash investing and financing activities:

        

Loans transfer to held for sale, net

  8,697   52,771 

Additions to servicing assets

  462   705 

Net change in unrealized holding gain on securities available for sale

  (12,557)  (1,816)

Recognition of operating lease right-of-use assets

  (1,287)  (26,814)

Recognition of operating lease liabilities

  1,287   26,814 

Acquisition - Refer to Note 3

        

 

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

 

 

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, 2022, the Company had total consolidated assets of $4.0 billion, gross consolidated loans (held for investment and held for sale) of $3.0 billion, total consolidated deposits of $3.2 billion and total consolidated stockholders' equity of $464.8 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 and Ventura County in California, in Las Vegas, Nevada, the New York City, New York metropolitan area, including Edison, New Jersey, Chicago, Illinois, and Honolulu, Hawaii. Specific services include 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 Bank closed its acquisition of the Honolulu, Hawaii branch from Bank of the Orient ("BOTO") on January 14, 2022.

 

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, and Westlake Village, California; Las Vegas, Nevada; Manhattan, Brooklyn, Flushing, and Elmhurst, New York; the Chinatown and Bridgeport neighborhoods of Chicago, Illinois; Edison, New Jersey; and Honolulu, Hawaii. The Company’s primary source of revenue is providing loans to customers, who are predominantly small and middle-market businesses and individuals.  On May 2, 2022 we opened our Bensonhurst branch on 86th Street in Brooklyn, New York.

 

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, 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 whole bank acquisitions from July 2011 through January 2022. 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.  The Company announced the agreement to acquire Gateway Bank F.S.B., and believes the transaction will close in the fourth quarter of 2022.

 

The Board of Governors of the Federal Reserve System (“Federal Reserve”) announced the reduction of the reserve requirement ratio to zero percent across all deposit tiers, effective March 26, 2020. Depository institutions that were required to maintain deposits in a Federal Reserve bank account to satisfy reserve requirements will no longer be required to do so, and can use the additional liquidity to lend to individuals and businesses. The Federal Reserve has indicated that it may adjust reserve requirement ratios in the future if conditions warrant.

 

 

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, 2022 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, 2021, included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2021 and Amendment No. 1 to the Annual Report on Form 10-K/A (collectively our “2021 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.

 

9

 

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, 2021, included in our 2021 Annual Report.  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 December 31, 2022. EGCs are entitled to reduced regulatory and reporting requirements under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act, as compared to public business entities ("PBE").

 

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. Under the new guidance, the Company recognized on the Consolidated Balance Sheets right-of-use assets with a corresponding lease liability.  The Company early adopted this ASU on January 1, 2021 and recorded the right-of-use asset and lease liability of approximately $26.8 million.

 

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 are not 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 was originally proposed to be effective for interim and annual reporting periods for an emerging growth company beginning after December 15, 2020, but was subsequently extended until December 31, 2022. 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 will adopt CECL (ASU 2016-13) on December 31, 2022.

 

10

 

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.  At this point, RBB does not expect to take the option to phase in effect of CECL.

 

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.” For PBE's, ASU 2017-04 is effective for annual and any interim impairment tests performed in periods beginning after December 15, 2019. As an EGC, the Company will adopt this ASU on December 31, 2022. Adoption of ASU 2017-04 is not expected to have a significant 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 the Company incurs implementation costs for a CCA that is a service contract.

 

In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)”. This ASU is for equity securities accounted for by the equity method. The amendment clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.  The Company has equity securities on our balance sheet but are not material to be considered for the equity method. For an EGC, this ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.  The Company adopted this ASU on January 1, 2022 and this ASU did not have a material impact on the Company’s consolidated financial statements.

 

 

 

In February 2020, the FASB issued ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)”. This is an amendment to add the SEC Staff guidance on CECL to the FASB codification. It contains guidance on what the SEC would expect the Company to perform and document when measuring and recording its allowance for credit losses for financial assets recorded at amortized cost. As an EGC, the Company will implement CECL on December 31, 2022.

 

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”). This pronouncement is applicable to all companies with contracts or hedging relationships that reference an interest rate that is expected to be discontinued. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022). For contract modifications, companies can account for the modification as a continuation of the existing contract without additional analysis. For held-to-maturity (“HTM”) debt securities, one-time sale and/or transfer to available-for-sale or trading may be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. Regarding the effective date and transition: (1) companies can apply the ASU as of the beginning of the interim period that includes March 12, 2020 (e.g. January 1, 2020 for calendar year-end companies) or any date thereafter, (2) the ASU applies prospectively to contract modifications and hedging relationships, and (3) the one-time election to sell and/or transfer debt securities classified as HTM may be made at any time after March 12, 2020. The optional relief generally does not apply to contract modifications made, sales and transfers of HTM debt securities, and hedging relationships entered into or evaluated after December 31, 2022. The guidance was effective upon issuance and generally can be applied through December 31, 2022. Of the Company’s $3.0 billion in total gross loans as of March 31, 2022, approximately 6.8% have a LIBOR based reference rate. The Company has several issuances of LIBOR based long-term debt and subordinated debentures. Refer to Notes 9 and 10 of the Company’s consolidated financial statements included in this Form 10-Q.  The Company is developing new SOFR-based loan products that will be equivalent to prior LIBOR-based loan products.  We anticipate a neutral financial impact.

 

In October 2021, the FASB issued ASU 2021-08, "Accounting for Contract Assets and Contract Liabilities", to require an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue recognition guidance as if the acquirer had originated the contract. That is, such acquired contracts will not be measured at fair value. The ASU is potentially material to the Company, depending on the materiality of an acquired contract asset or liability.  The Update is effective for public companies in fiscal years starting after  December 15, 2022. Early adoption is permitted.  This ASU will be effective for the Company on  January 1, 2023.

 

In November 2021, the FASB issued ASU 2021-10 "Disclosures by Business Entities about Government Assistance".  The amendments in this Update require the annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This Update is applicable to the Company and was adopted  January 1, 2022.

 

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326):  Troubled Debt Restructurings and Vintage Disclosures. This pronouncement eliminates the accounting guidance on troubled debt restructurings ("TDRs") for creditors and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty.  As the Company will adopt ASU 2016-13 (“CECL”) on December 31, 2022, ASU 2022-02 will also be effective for the Company on December 31, 2022.

 

12

 
 

NOTE 3 ACQUISITION

 

Honolulu, Hawaii Branch Purchase

 

On January 14, 2022, the Bank completed the acquisition of the Honolulu, Hawaii branch office of BOTO. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of January 14, 2022. The total fair value of assets acquired approximated $8.5 million, which included $312,000 in cash and cash equivalents, $7.4 million in selected performing loans, $729,000 in core deposit intangible assets and $64,000 in other assets. The total fair value of liabilities assumed was $81.8 million, which included $81.7 million in deposits, $27,000 in certificate of deposit premium, and $90,000 in other liabilities.  The Bank received $71.0 million in cash in connection with the acquisition which represented consideration for the deposits assumed by the Bank, partially offset by the purchase price of the assets acquired and the premium paid.  Goodwill of $2.3 million and core deposit premium of $729,000 was recognized from the Honolulu branch purchase.

 

The Company acquired this branch to strategically establish a presence in the Hawaiian Islands area. Goodwill in the amount of $2.3 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 the BOTO Honolulu branch as of January 14, 2022 and the fair value adjustments and amounts recorded by the Company under the acquisition method of accounting:

 

  

BOTO

  

Fair Value

  

Fair

 

(dollars in thousands)

 

Book Value

  

Adjustments

  

Value

 

Assets acquired

            

Cash and cash equivalents

 $312  $  $312 

Loans, gross

  7,352   38   7,390 

Bank premises and equipment

  12      12 

Core deposit premium

     729   729 

Other assets

  412   (360)  52 

Total assets acquired

 $8,088  $407  $8,495 
             

Liabilities assumed

            

Deposits

 $81,673  $27  $81,700 

Escrow Payable

  2      2 

Other liabilities

  460   (372)  88 

Total liabilities assumed

  82,135   (345)  81,790 

Excess of assets acquired over liabilities assumed

  (74,047)  752   (73,295)
  $8,088  $407     

Cash received

          71,040 

Goodwill recognized

         $2,255 

 

The fair values are estimates and are subject to adjustment for up to one year after the acquisition date. 

 

The Company accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.

 

The loan portfolio of the Honolulu branch was recorded at fair value at the date of acquisition with the assistance of a third-party valuation. A valuation of the loan portfolio was performed as of the acquisition date to assess the fair value of the loan portfolio. The loan portfolio was segmented into two groups; loans with credit deterioration and loans without credit deterioration, and then split further by loan type. There were no loans acquired with credit deterioration.  The fair value was calculated on an individual loan basis using a discounted cash flow analysis. The discount rate utilized was based on a weighted average cost of capital, considering the cost of equity and cost of debt. Also factored into the fair value estimates were loss rates, recovery period and prepayment rates based on industry standards.

 

The Company also determined the fair value of the core deposit intangible, premises and equipment and deposits with the assistance of third-party valuations.

 

The core deposit intangible on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates, service charge income, overhead expense and costs of alternative funding. Since the fair value of intangible assets are calculated as if they were stand-alone assets, the presumption is that a hypothetical buyer of the intangible asset would be able to take advantage of potential tax benefits resulting from the asset purchase. The value of the benefit is the present value over the period of the tax benefit, using the discount rate applicable to the asset.

 

13

 

In determining the fair value of certificates of deposit, a discounted cash flow analysis was used, which involved present valuing the contractual payments over the remaining life of the certificates of deposit at market-based interest rates.

 

Third-party acquisition related expenses are recognized as incurred and continue until the acquired system is converted and operational functions become fully integrated. The Company incurred third-party acquisition related expenses in the consolidated statements of income for the periods indicated in the Statements of Income in the expense item “Merger expenses”.

 

For the Honolulu branch, during the first quarter of 2022, revenue was $96,000 and the net loss was $87,000.

 

 

 

 

NOTE 4 - INVESTMENT SECURITIES

 

The following table summarizes the amortized cost and fair value of available for sale (“AFS”) debt securities and held to maturity (“HTM”) debt securities as of  March 31, 2022 and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

 

      

Gross

  

Gross

     

(dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 

March 31, 2022

 

Cost

  

Gains

  

Losses

  

Value

 

Available for sale

                

Government agency securities

 $5,373  $  $(307) $5,066 

SBA agency securities

  3,182      (60)  3,122 

Mortgage-backed securities- Government sponsored agencies

  48,686      (3,220)  45,466 

Collateralized mortgage obligations

  122,621      (7,103)  115,518 

Commercial paper

  205,326      (216)  205,110 

Corporate debt securities

  37,477   69   (1,492)  36,054 

Municipal securities

  12,693      (2,581)  10,112 

Total

 $435,358  $69  $(14,979) $420,448 
                 

Held to maturity

                

Municipal taxable securities

 $1,505  $36  $  $1,541 

Municipal securities

  4,741   16   (6)  4,751 

Total

 $6,246  $52  $(6) $6,292 

 

 

      

Gross

  

Gross

     

(dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 

December 31, 2021

 

Cost

  

Gains

  

Losses

  

Value

 

Available for sale

                

Government agency securities

 $5,689  $4  $(83) $5,610 

SBA agency securities

  3,351   118      3,469 

Mortgage-backed securities- Government sponsored agencies

  55,534   31   (540)  55,025 

Collateralized mortgage obligations

  121,377   128   (1,994)  119,511 

Commercial paper

  129,962      (36)  129,926 

Corporate debt securities

  41,999   460   (254)  42,205 

Municipal securities

  12,701      (187)  12,514 

Total

 $370,613  $741  $(3,094) $368,260 
                 

Held to maturity

                

Municipal taxable securities

 $1,506  $77  $  $1,583 

Municipal securities

  4,746   248      4,994 

Total

 $6,252  $325  $  $6,577 

 

One security with a fair value of $99,000 and $117,000 at March 31, 2022 and December 31, 2021, respectively, was pledged to secure a local agency deposit.

 

There were no sales of investment securities during the three months ended March 31, 2022 and 2021, respectively.

15

 

The amortized cost and fair value of the investment securities portfolio at March 31, 2022 and December 31, 2021 are shown by expected maturity below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

  

Less than One Year

  

More than One Year to Five Years

  

More than Five Years to Ten Years

  

More than Ten Years

  

Total

 
  

Amortized

  

Estimated

  

Amortized

  

Estimated

  

Amortized

  

Estimated

  

Amortized

  

Estimated

  

Amortized

  

Estimated

 

(dollars in thousands)

 

Cost

  

Fair Value

  

Cost

  

Fair Value

  

Cost

  

Fair Value

  

Cost

  

Fair Value

  

Cost

  

Fair Value

 

March 31, 2022

                                        

Government agency securities

 $  $  $5,373  $5,066  $  $  $  $  $5,373  $5,066 

SBA securities

        1,382   1,344   1,800   1,778         3,182   3,122 

Mortgage-backed securities- Government sponsored agencies

        20,341   19,525   25,528   23,378   2,817   2,563   48,686   45,466 

Collateralized mortgage obligations

  3,130   3,129   28,604   27,171   90,887   85,218         122,621   115,518 

Commercial paper

  205,326   205,110