RBB Bancorp
Annual Report 2016

Plain-text annual report

1 2 3 ABOUT US 2016 ORIGIN RBB Bancorp is a bank holding company owning Royal Business Bank (“Bank”) and RBB Asset Management Company (“RAM”). The Bank was formed in 2008 to serve the banking needs of the Chinese-American community in the Los Angeles area and has since expanded to serve Orange and Ventura Coun�es, as well as the Clark County, Nevada market. GROWTH duc�on office. The Bank has grown to $1.4 billion in assets with 13 branches and one loan pro- Our Bank is customer-focused, community-oriented and commi�ed to making our neighborhoods be�er places to live and work. We take pride in being involved in the communi�es that we serve. SERVICES Personal and Business Banking Mobile Banking Mortgage Lending SBA Lending Commercial Lending Commercial Real Estate Lending Construc�on Lending Interna�onal Trade Financing Cash Management CONSTRUCTION REAL ESTATE CASH MANAGEMENT Cash Vault ACH Business Online Banking Business Bill Payment Remote Capture Deposit Wire Transfer Zero Balance Account COMMERCIAL & INDUSTRY WHAT WE DO Building personal rela�onships with our customers is central to our philosophy. We want to help them meet their goals and help secure a brighter future for genera�ons to come. We provide the kind of security and stability that you can count on. Visit us online at www.rbbusa.com or at any of our branches. MOBILE BANKING RBB Mobile Banking allows you to securely view account balances and recent transac�ons, transfer funds between your accounts, pay your bills, send Popmoney transfers, find branch loca�ons, set up account alerts, and even make mobile deposits...all from the convenience of your mobile device. HIGHLIGHTS OF THE YEAR 4 HIGHLIGHTS OF THE YEAR ABOUT US 2016 ORIGIN RBB Bancorp is a bank holding company owning Royal Business Bank (“Bank”) and RBB Asset Management Company (“RAM”). The Bank was formed in 2008 to serve the banking needs of the Chinese-American community in the Los Angeles area and has since expanded to serve Orange and Ventura Coun�es, as well as the Clark County, Nevada market. GROWTH The Bank has grown to $1.4 billion in assets with 13 branches and one loan pro- duc�on office. Our Bank is customer-focused, community-oriented and commi�ed to making our neighborhoods be�er places to live and work. We take pride in being involved in the communi�es that we serve. SERVICES Personal and Business Banking Mobile Banking Mortgage Lending SBA Lending Commercial Lending Commercial Real Estate Lending Construc�on Lending Interna�onal Trade Financing Cash Management CONSTRUCTION REAL ESTATE CASH MANAGEMENT Cash Vault ACH Business Online Banking Business Bill Payment Remote Capture Deposit Wire Transfer Zero Balance Account HIGHLIGHTS OF THE YEAR COMMERCIAL & INDUSTRY WHAT WE DO Building personal rela�onships with our customers is central to our philosophy. We want to help them meet their goals and help secure a brighter future for genera�ons to come. We provide the kind of security and stability that you can count on. Visit us online at www.rbbusa.com or at any of our branches. MOBILE BANKING RBB Mobile Banking allows you to securely view account balances and recent transac�ons, transfer funds between your accounts, pay your bills, send Popmoney transfers, find branch loca�ons, set up account alerts, and even make mobile deposits...all from the convenience of your mobile device. HIGHLIGHTS OF THE YEAR 5 EXECUTIVES ROYAL BUSINESS BANK (In Thousands) NET INCOME 2011 2012 2013 2014 2015 2016 $7,920 $4,046 $7,003 $10,428 $12,973 $19,079 ASSETS (In Thousands) 2012 $502,427 2012 $576,484 2013 $723,409 2014 $925,891 2015 $1,023,084 $1,395,551 2016 (In Thousands) TOTAL EQUITY 2011 2012 2013 2014 2015 2016 $71,552 $108,113 $137,992 $151,980 $163,645 $181,585 6 Alan Thian 田詒鴻 Chairman of the Board CEO / President Simon C Pang 馮振發 Executive Vice President Chief Strategy Officer Vincent Liu 劉憶明 Executive Vice President Chief Operations Officer David Morris Executive Vice President Chief Financial Officer Jeffrey Yeh 葉士杰 Executive Vice President Chief Credit Officer Tsu Te Huang 黃祖德 Executive Vice President Branch Administrator Larsen Lee Executive Vice President Director of Mortgage Lending 7 BOARD OF DIRECTORS ROYAL BUSINESS BANK Louis Chang 張見齊 Emeritus Chairman Founder Alan Thian 田詒鴻 Chairman of the Board CEO / President Peter Chang 張銘輝 Board Member Wendell Chen 陳文杰 Board Member Peggy Huang 蘇百瑾 Board Member Dr. Ruey-Chyr Kao 高瑞治 Board Member James Kao PhD 高文環 Board Member 2016 ANNUAL REPORT 8 Christopher Koo CPA 古志明 Board Member Christopher Lin PhD 林創一 Board Member Ko-Yen Lin 林國彥 Board Member Paul Lin 林柏彥 Board Member Richard Lin 林鋒 Board Member Catherine Thian 田慧明 Board Member 2016 ANNUAL REPORT 9 10 RBB BANCORP AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITOR'S REPORT DECEMBER 31, 2016, 2015 AND 2014 This statement has not been reviewed or confirmed for accuracy or relevance by the Federal Reserve Deposit Insurance Company 11 CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 1 13 14 2 16 4 17 5 18 6 19 7 20 through 61 8 through 49 12 Vavrinek, Trine, Day & Co., LLP Certified Public Accountants VALUE THE DIFFERENCE REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM Board of Directors and Shareholders of RBB Bancorp and Subsidiaries Los Angeles, California We have audited the accompanying consolidated financial statements of RBB Bancorp and Subsidiaries, which are comprised of the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2016, and the related notes to the consolidated financial statements. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of RBB Bancorp and Subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016 in accordance with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), RBB Bancorp's internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 22, 2017, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Laguna Hills, California March 22, 2017 25231 Paseo De Alicia, Suite 100 Laguna Hills, CA 92653 Tel: 949.768.0833 www.vtdcpa.com Fax: 949.768.8408 1 13 RBB BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2016 AND 2015 (In thousands, except for share amounts) ASSETS Cash and Due from Banks Federal Funds Sold and Other Cash Equivalents TOTAL CASH AND CASH EQUIVALENTS 2016 2015 $ 74,213 44,500 118,713 $ 80,391 33,500 113,891 Interest-Bearing Deposits in Other Financial Institutions 345 7,462 Securities: Available for Sale Held to Maturity (Fair Value 2016 - $6,553; 2015 - $7,144) Mortgage Loans Held for Sale Loans Held for Investment: Real Estate Commercial TOTAL LOANS Unaccreted Discount on Acquired Loans Deferred Loan Costs (Fees), Net Allowance for Loan Losses NET LOANS Premises and Equipment Federal Home Loan Bank ("FHLB") Stock Net Deferred Tax Assets Other Real Estate Owned ("OREO") Cash Surrender Value of Life Insurance Goodwill Servicing Assets Core Deposit Intangibles Accrued Interest and Other Assets 39,277 6,214 44,345 755,301 361,227 1,116,528 (8,085) 2,003 1,110,446 (14,162) 1,096,284 6,585 6,770 11,097 833 21,958 29,940 3,704 1,793 7,693 20,416 6,678 41,496 525,433 267,266 792,699 (1,712) 1,375 792,362 (10,023) 782,339 6,860 4,149 7,449 293 21,398 4,001 2,105 466 4,081 $ 1,395,551 $ 1,023,084 The accompanying notes are an integral part of these consolidated financial statements. 2 14 RBB BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2016 AND 2015 (In thousands, except for share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-Bearing Demand Savings, NOW and Money Market Accounts Time Deposits Under $250,000 Time Deposits $250,000 and Over TOTAL DEPOSITS Reserve for Unfunded Commitments Income Tax Payable Long-Term Debt Subordinated Debentures Accrued Interest and Other Liabilities TOTAL LIABILITIES Commitments and Contingencies - Notes 6 and 12 Shareholders' Equity: Preferred Stock - 100,000,000 Shares Authorized, No Par Value; None Outstanding Common Stock - 100,000,000 Shares Authorized, No Par Value; 12,827,803 and 12,770,571 Shares Issued and Outstanding for 2016 and 2015 Respectively Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) - Net Unrealized Loss on Securities Available for Sale, Net of Tax of $186 in 2016 and $134 in 2015 TOTAL SHAREHOLDERS' EQUITY 2016 2015 $ 174,272 296,699 310,969 370,823 1,152,763 $ 114,647 243,585 209,748 285,437 853,417 604 793 49,383 3,334 7,089 1,213,966 - - 320 1,174 - - 4,528 859,439 - - 142,651 8,417 30,784 141,873 7,706 14,259 (267) 181,585 1,395,551 $ (193) 163,645 1,023,084 $ The accompanying notes are an integral part of these consolidated financial statements. 3 15 RBB BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (In thousands, except per share amounts) INTEREST AND DIVIDEND INCOME Interest and Fees on Loans Interest on Interest-Bearing Deposits Interest on Investment Securities Dividend Income on FHLB Stock Interest on Federal Funds Sold and Other TOTAL INTEREST INCOME INTEREST EXPENSE Interest on Savings Deposits, NOW and Money Market Accounts Interest on Time Deposits Interest on Subordinated Debentures and other Interest on Other Borrowed Funds TOTAL INTEREST EXPENSE NET INTEREST INCOME Provision for Loan Losses NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES NONINTEREST INCOME Service Charges, Fees and Other Gain on Sale of Loans Recoveries on Loans Acquired in Business Combinations Increase in Cash Surrender of Life Insurance Gain on Sale of Securities Gain on Sale of OREO (Loss) Gain on Sale of Fixed Assets NONINTEREST EXPENSE Salaries and Employee Benefits Occupancy and Equipment Expenses Data Processing Legal and Professional Office Expenses Marketing and Business Promotion Insurance and Regulatory Assessments Amortization of Intangibles OREO Expenses (Income), net Other Expenses INCOME BEFORE INCOME TAXES Income Tax Expense NET INCOME NET INCOME PER SHARE - BASIC NET INCOME PER SHARE - DILUTED 2016 2015 2014 $ 65,888 334 872 800 295 68,189 $ 41,026 246 553 474 214 42,513 $ 36,614 62 969 287 217 38,149 1,975 6,968 2,547 217 11,707 56,482 4,974 51,508 2,373 5,847 170 560 19 - (3) 8,966 1,343 5,592 - 1 6,936 35,577 1,386 34,191 1,568 4,316 103 579 78 1,218 - 7,862 1,104 3,412 - 6 4,522 33,627 1,446 32,181 1,415 2,496 204 608 268 493 12 5,496 13,784 3,098 2,018 1,565 598 542 883 372 28 5,018 27,906 32,568 13,489 19,079 1.49 1.39 $ $ $ 11,122 2,359 1,532 954 353 475 761 117 (18) 2,429 20,084 21,969 8,996 12,973 1.02 0.96 $ $ $ 10,426 2,356 1,446 2,417 312 317 591 131 112 2,004 20,112 17,565 7,137 10,428 0.82 0.79 $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 4 16 RBB BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (In thousands) Net Income $ 19,079 $ 12,973 $ 10,428 2016 2015 2014 OTHER COMPREHENSIVE INCOME (LOSS): Unrealized Gains (Losses) on Securities Available for Sale: Change in Unrealized Gains (Losses) Reclassification of Gains Recognized in Net Income Related Income Tax Effect: Change in Unrealized Gains (Losses) Reclassification of Gains Recognized in Net Income TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (107) (19) (126) 44 8 52 (74) (161) (78) (239) 66 32 98 (141) 672 (268) 404 (276) 110 (166) 238 TOTAL COMPREHENSIVE INCOME $ 19,005 $ 12,832 $ 10,666 The accompanying notes are an integral part of these consolidated financial statements. 5 17 RBB BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (In thousands, except share amounts) Balance at December 31, 2013 Net Income Exercise of Stock Options, Including Tax Benefits of $67 Stock-Based Compensation Common Stock Amount Shares 11,658,259 Additional Paid-in Capital Retained Earnings $ 125,707 $ 5,201 $ 7,375 10,428 164,600 2,150 (438) 1,610 5% Stock Dividend 587,540 8,355 (8,355) Other Comprehensive Income, Net of Taxes Accumulated Other Comprehensive Income (Loss) $ (290) Total $ 137,993 10,428 1,712 1,610 - 238 238 Balance at December 31, 2014 12,410,399 $ 136,212 $ 6,373 $ 9,448 $ (52) $ 151,981 Net Income Exercise of Stock Options, Including Tax Benefits of $21 Stock-Based Compensation 48,729 613 (122) 1,455 2.5% Stock Dividend 311,443 5,048 Cash Dividend Other Comprehensive Loss, Net of Taxes 12,973 (5,048) (3,114) 12,973 491 1,455 - (3,114) (141) (141) Balance at December 31, 2015 12,770,571 $ 141,873 $ 7,706 $ 14,259 $ (193) $ 163,645 Net Income Exercise of Stock Options, Including Tax Benefits of $10 Stock-Based Compensation Cash Dividend Other Comprehensive Loss, Net of Taxes 57,232 778 (183) 894 19,079 (2,554) 19,079 595 894 (2,554) (74) (74) Balance at December 31, 2016 12,827,803 $ 142,651 $ 8,417 $ 30,784 $ (267) $ 181,585 The accompanying notes are an integral part of these consolidated financial statements. 6 18 RBB BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (In thousands) OPERATING ACTIVITIES Net Income Adjustments to Reconcile Net Income to Net Cash From Operating Activities: Depreciation and Amortization of Premises, Equipment and Intangibles Net Amortization (Accretion) of Securities, Loans, Deposits, and Other Provision for Loan Losses Stock-Based Compensation Deferred Tax Expense (Benefit) Gain on Sale of Securities Gain on Sale of Loans Gain on Sale of Other Real Estate Owned Increase in Cash Surrender Value of Life Insurance Loans Originated and Purchased for Sale Proceeds from Loans Sold Other Items NET CASH FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Decrease (Increase) in Interest-Bearing Deposits Securities Available for Sale: Purchases Maturities, Prepayments and Calls Sales (Purchase) Redemption of FHLB Stock and Other Equity Securities, net Net Decrease (Increase) in Loans Proceeds from Sales of Other Real Estate Owned Net Cash Paid in Connection with Acquisition Purchases of Premises and Equipment NET CASH FROM INVESTING ACTIVITIES FINANCING ACTIVITIES Net (Decrease) Increase in Demand Deposits and Savings Accounts Net (Decrease) Increase in Time Deposits Net Change in FHLB Advances Cash Dividends Paid Issuance of Subordinated Debentures, net of issuance costs Issuance of Common Stock NET CASH FROM FINANCING ACTIVITIES INCREASE IN CASH AND CASH EQUIVALENTS Cash and Cash Equivalents at Beginning of Period CASH AND CASH EQUIVALENTS AT END OF YEAR Supplemental Disclosures of Cash Flow Information: Interest Paid Taxes Paid Transfer from Loans to Other Real Estate Owned Transfer of Loans to Held for Sale Securities Held to Maturity Transferred to Available for Sale 2016 2015 2014 $ 19,079 $ 12,973 $ 10,428 1,360 (7,199) 4,974 894 1,289 (19) (5,847) - (560) (184,030) 221,328 3,950 55,219 1,020 (1,012) 1,386 1,455 1,361 (78) (4,316) (1,218) (579) (157,409) 176,744 (1,232) 29,095 919 (2,204) 1,446 1,610 (218) (268) (2,496) (493) (608) (95,143) 52,442 2,533 (32,052) 9,437 (7,262) (100) (12,485) 4,403 5,083 (3,265) 40,290 - (35,051) (210) 8,202 (5,471) 4,115 5,514 (766) (103,128) 2,086 - (468) (105,380) - 11,272 25,606 164 (122,445) 843 - (417) (85,077) (47,679) (58,235) - (2,554) 49,274 595 (58,599) 4,822 113,891 118,713 $ 65,761 20,343 - (3,114) - 491 83,481 7,196 106,695 113,891 $ 12,724 180,614 (7,000) - - 1,712 188,050 70,921 35,774 106,695 $ $ $ $ $ $ 12,342 12,515 540 71,626 433 $ 6,872 7,120 $ $ - 53,127 $ $ - $ 4,487 $ 5,810 $ - $ 89,359 $ - The accompanying notes are an integral part of these consolidated financial statements. 7 19 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Nature of Operations The accompanying consolidated financial statements include the accounts of RBB Bancorp and its wholly-owned subsidiaries Royal Business Bank ("Bank") and RBB Asset Management Company ("RAM"), collectively referred to herein as "the Company". All significant intercompany transactions have been eliminated. RBB Bancorp was formed in January 2011 as a bank holding company. 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 Royal Business Bank and RAM. Parent only condensed financial information on RBB Bancorp is provided in Note 21. The Company operates full-service banking offices in Los Angeles, San Gabriel, Torrance, Rowland Heights, Westlake Village, Oxnard, Monterey Park, Diamond Bar, Cerritos, West LA, Arcadia, and Silverlake, California and Las Vegas, Nevada and a loan production office in the City of Industry, California. The Company's primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals. Subsequent Events The Company has evaluated subsequent events for recognition and disclosure through March 22, 2017, which is the date the financial statements were available to be issued. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, term federal funds sold and interest-bearing deposits in other financial institutions with original maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions and interest-bearing deposits in other financial institutions. Cash and Due from Banks Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. The reserves required to be held as of December 31, 2016 and 2015 were $9,811,000 and $4,560,000, respectively. The Company maintains amounts in due from bank accounts, which may exceed federally insured limits. The Company has not experienced any losses in such accounts. 8 20 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Interest-Bearing Deposits in Other Financial Institutions Interest-bearing deposits in other financial institutions not included in cash and cash equivalents are carried at cost. Investment Securities Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities not classified as held to maturity are classified as available for sale. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a semi-annual basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows; OTTI related to credit loss, which must be recognized in the income statement and; OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings. Loans Held For Sale Mortgage loans originated or acquired and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans held for sale consist primarily of first trust deed mortgages on single-family residential properties located in California. Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right, when applicable. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loans sold. 9 21 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loans Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Premiums and discounts on loans purchased are grouped by type and certain common risk characteristics and amortized or accreted as an adjustment of yield over the weighted-average remaining contractual lives of each group of loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days or when, in the opinion of management, there is reasonable doubt as to collectability based on contractual terms of the loan. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each segment. The Company determines a separate allowance for each portfolio segment. The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan's effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. 10 22 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Allowance for Loan Losses - Continued The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired with measurement of impairment as described above. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. General reserves cover non-impaired loans and are based on historical loss rates of peer institutions for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment's historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements. Portfolio segments identified by the Company include real estate and commercial loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios, and financial performance. Certain Acquired Loans As part of business acquisitions, the Company acquires certain loans that have shown evidence of credit deterioration since origination. These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller's allowance for loan losses. Such acquired loans are accounted for individually. The Company estimates the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan's contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income. 11 23 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Servicing Rights When mortgage and Small Business Administration ("SBA") loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Servicing fee income, which is reported on the income statement as Service Charges, Fees and Other, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal. The amortization of mortgage servicing rights is netted against loan servicing fee income. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Gains on sales of mortgage and SBA loans totaled $5.8 million, $4.3 million, and $2.5 million in 2016, 2015, and 2014, respectively. Gains on sale of mortgage loans totaled $3.4 million, $1.6 million, and $182,000, and gains on sale of SBA loans totaled $2.4 million, $2.7 million, and $2.3 million in 2016, 2015, and 2014 respectively. Premises and Equipment Land is carried at cost. Premises, leasehold improvements and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which is thirty years for premises and ranges from three to ten years for leasehold improvements and equipment. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred. 12 24 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Other Real Estate Owned Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for loan losses, if necessary. Other real estate owned is carried at the lower of the Company's carrying value of the property or its fair value, less estimated carrying costs and costs of disposition. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as a valuation allowance. Operating expenses and related income of such properties and gains and losses on their disposition are included in other operating income and expenses. Goodwill and Other Intangible Assets Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill resulting from whole bank acquisitions is not amortized, but tested for impairment at least annually. The Company has selected December 31 as the date to perform the annual impairment test. Goodwill amounted to $29.9 million and $4.0 million as of December 31, 2016 and 2015, respectively, and is the only intangible asset with an indefinite life on the balance sheet. No impairment was recognized on goodwill during 2016 and 2015. Other intangible assets consist of core deposit intangible ("CDI") assets arising from whole bank acquisitions. CDI assets are amortized on an accelerated method over their estimated useful life of 8 to 10 years. CDI was recognized in the 2013 acquisition of Los Angeles National Bank and in the 2016 acquisition of TFC Holding Company. The unamortized balance as of December 31, 2016 and 2015 was $1,793,000 and $466,000, respectively. CDI amortization expense was $372,000, $117,000, and $131,000 in 2016, 2015 and 2014, respectively. Estimated CDI amortization expense for the next 5 years is as follows (dollars in thousands): 2017 2018 2019 2020 2021 $ 355 311 274 244 172 13 25 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Company Owned Life Insurance The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Federal Home Loan Bank ("FHLB") Stock The Company is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Stock-Based Compensation Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. This cost is recognized over the period which an employee is required to provide services in exchange for the award, generally defined as the vesting period. Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense. Retirement Plans The Company established a 401(k) plan in 2010. The Company contributed $221,000, $125,000, and $46,000 in 2016, 2015, and 2014, respectively. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale. 14 26 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Financial Instruments In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note 12. Such financial instruments are recorded in the financial statements when they are funded. Earnings Per Share ("EPS") Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Fair Value Measurement Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. See Note 16 and Note 17 for more information and disclosures relating to the Company's fair value measurements. Operating Segments Management has determined that since generally all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. 15 27 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Reclassifications Certain reclassifications have been made in the 2015 and 2014 financial statements to conform to the presentation used in 2016. These reclassifications had no impact on the Company's previously reported financial statements. Newly Issued Not Yet Effective Accounting Standards In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). This Update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. These amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and one year later for nonpublic business entities. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The guidance does not apply to revenue associated with financial instruments and therefore the Company does not expect the new guidance to have a material impact on revenue closely associated with financial instruments, including interest income. The Company plans to perform an overall assessment of revenue streams that may be affected by the ASU including deposit related fees to determine if there would be a potential impact on the Company’s Consolidated Financial Statements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018. In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). Changes made to the current measurement model primarily affect the accounting for equity securities and readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and one year later for nonpublic business entities. Based upon a preliminary evaluation of the guidance in ASU No. 2016- 01 the Company does not believe that the ASU will have a material impact on the Company’s Consolidated Financial Statements. The Company will continue to monitor any updates to the guidance. 16 28 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2018, for public business entities and one year later for all other entities. The Company has several lease agreements which are currently considered operating leases and are therefore not included on the Company’s Consolidated Balance Sheets. Under the new guidance the Company expects that some of the lease agreements will have to be recognized on the Consolidated Balance Sheets as a right-of-use asset with a corresponding lease liability. Based upon a preliminary evaluation the Company expects that the ASU will have an impact on the Company’s Consolidated Balance Sheets. The Company will continue to evaluate how extensive the impact will be under the ASU on the Company’s Consolidated Financial Statements. In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718.) ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Under ASU 2016-09, excess tax benefits and certain tax deficiencies will no longer be recorded in additional paid-in capital ("APIC"). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. In addition, the guidance requires excess tax benefits be presented as an operating activity on the statement of cash flows rather than as a financing activity. ASU 2016-09 also permits an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. This guidance is effective for public business entities for interim and annual reporting periods beginning after December 15, 2016, and for nonpublic business entities annual reporting periods beginning after December 15, 2017, and interim periods within the reporting periods beginning after December 15, 2018. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company plans to adopt ASU 2016-09 on January 1, 2018. The Company plans to recognize forfeitures as they occur. The adoption of the ASU will not have a material effect on the Company’s Financial Statements or Disclosures. The adoption of ASU 2016-09 could result in increased volatility to income tax expense that is reported related to excess tax benefits and tax. 17 29 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instrument (Topic 326). This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today's guidance delays recognition of credit losses. The standard will replace today's "incurred loss" approach with an "expected loss" model. The new model, referred to as the current expected credit loss ("CECL") model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held to maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available for sale ("AFS") debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity's assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, for SEC filers, one year later for non SEC filing public business entities and annual reporting periods beginning after December 15, 2020, for nonpublic business entities and interim periods within the reporting periods beginning after December 15, 2021. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its evaluation of the impact of the implementation of ASU 2016-13. The implementation of the provisions of ASU No. 2016-13 will most likely impact the Company’s Consolidated Financial Statements as to the level of reserves that will be required for credit losses. The Company will continue to access the potential impact that this ASU will have on the Company’s Consolidated Financial Statements. 18 30 In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instrument (Topic 326). This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today's guidance delays recognition of credit losses. The standard will replace today's "incurred loss" approach with an "expected loss" model. The new model, referred to as the current expected credit loss ("CECL") model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held to maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available for sale ("AFS") debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity's assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, for SEC filers, one year later for non SEC filing public business entities and annual reporting periods beginning after December 15, 2020, for nonpublic business entities and interim periods within the reporting periods beginning after December 15, 2021. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its evaluation of the impact of the implementation of ASU 2016-13. The implementation of the provisions of ASU No. 2016-13 will most likely impact the Company’s Consolidated Financial Statements as to the level of reserves that will be required for credit losses. The Company will continue to access the potential impact that this ASU will have on the Company’s Consolidated Financial Statements. RBB BANCORP AND SUBSIDIARIES RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued TFC HOLDING COMPANY ACQUISITION: NOTE 2 – ACQUISITIONS On February 19, 2016, the Company acquired all the assets and assumed all the liabilities of TFC Holding Company in exchange for cash of $86.7 million. TFC Holding Company operated six branches in the Los Angeles metropolitan area. The Company acquired TFC Holding Company to strategically increase its existing presence in the Los Angeles area. Goodwill in the amount of $25.9 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 TFC Holding Company as of February 19, 2016 and the fair value adjustments and amounts recorded by the Company in 2016 under the acquisition method of accounting: (dollars in thousands) TFC Book Value Fair Value Adjustments Fair Value ASSETS ACQUIRED Cash and Cash Equivalents Interest-Bearing Deposits in Other Financial Institutions Net Investments - Available for Sale Loans, gross Allowance for Loan Losses Bank Premises and Equipment Deferred Income Taxes Other Assets Total Assets Acquired LIABILITIES ASSUMED Deposits Subordinated Debentures Other Liabilities Total Liabilities Assumed Excess of Assets Acquired Over Liabilities Assumed Cash Paid Goodwill Recognized $ $ - $ - (106) (13,211) 9,857 - 858 1,699 (903) $ 51,613 2,320 15,846 387,676 - 225 4,885 7,294 469,859 $ $ $ $ 51,613 2,320 15,952 400,887 (9,857) 225 4,027 5,595 470,762 404,465 5,155 566 410,186 60,576 470,762 848 (1,900) - (1,052) 149 (903) $ 405,313 3,255 566 409,134 60,725 86,664 25,939 $ $ $ The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of loans, leases, core deposit intangible, deposits, and Subordinated Debentures with the assistance of a third party valuation. 18 19 31 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 2 - ACQUISITIONS – Continued The estimated fair values are subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period. While additional significant changes to the closing date fair values are not expected, any information relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed as of the acquisition date. During the measurement period, any such changes will be recorded as part of the closing date fair value. In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was that of acquired loans. The excess of expected cash flows above the fair value of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20. For loans acquired, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows: (dollars in thousands) Contractual Amounts Due Cash Flows not Expected to be Collected Expected Cash Flows Interest Component of Expected Cash Flows Fair Value of Acquired Loans $ Acquired Loans 441,275 - 441,275 53,599 387,676 $ None of the loans acquired had evidence of deterioration of credit quality since origination for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. In accordance with generally accepted accounting principles there was no carryover of the allowance for loan losses that had been previously recorded by TFC Holding Company. 20 32 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 3 - INVESTMENT SECURITIES The following table summarizes the amortized cost and fair value of securities available for sale and held to maturity at December 31, 2016 and 2015, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income: (dollars in thousands) December 31, 2016 Available for Sale Government Agency Securities Mortgage-Backed Securities- Government Sponsored Agencies Corporate Debt Securities Held to Maturity Municipal Taxable Securities Municipal Securities December 31, 2015 Available for Sale Mortgage-Backed Securities- Government Sponsored Agencies Corporate Debt Securities Held to Maturity Municipal Taxable Securities Municipal Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 5,453 $ - $ (136) $ 5,317 23,913 10,364 39,730 $ 38 21 59 $ (311) (65) (512) $ 23,640 10,320 39,277 $ $ $ $ $ 5,301 913 6,214 328 11 339 - $ - $ - $ $ 5,629 924 6,553 $ $ 15,292 5,451 20,743 - $ - $ - $ $ (263) (64) (327) 15,029 5,387 20,416 $ $ $ $ $ $ 5,741 937 6,678 440 26 466 - $ - $ - $ $ 6,181 963 7,144 During 2016, 2015 and 2014 the Company sold $5.1 million, $5.5 million and $25.6 million of securities available for sale, recognizing gross gains of $19,000, $78,000 and $268,000, respectively. One security with a fair value of $933,000 and $1,220,000 was pledged to secure a local agency deposit at December 31, 2016 and December 31, 2015, respectively. 21 33 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 3 - INVESTMENT SECURITIES - Continued The amortized cost and fair value of the investment securities portfolio as of December 31, 2016 are shown by expected maturity below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale Held to Maturity (dollars in thousands) Within One Year Due From One through Five Years Due from Five to Ten Years Amortized Cost RBB BANCORP AND SUBSIDIARIES $ Fair Value $ Amortized Cost - $ 26,432 13,298 Fair Value $ - 26,215 13,062 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 1,002 1,957 3,255 1,016 2,092 3,445 NOTE 3 - INVESTMENT SECURITIES - Continued $ 39,730 $ 39,277 $ 6,214 $ 6,553 The following table summarizes securities with unrealized losses at December 31, 2016 and December 31, 2015, The amortized cost and fair value of the investment securities portfolio as of December 31, 2016 are shown by aggregated by major security type and length of time in a continuous unrealized loss position. There were no expected maturity below. Expected maturities may differ from contractual maturities if borrowers have the right Held to Maturity Securities in a continuous unrealized loss position at December 31, 2016 and December 31, to call or prepay obligations with or without call or prepayment penalties. 2015: (dollars in thousands) Within One Year December 31, 2016 Government Agency Securities Due From One through Five Years Due from Five to Ten Years Mortgage-Backed Securities- Government Sponsored Agencies Corporate Debt Securities Twelve Months or More Held to Maturity Total Fair Value Estimated Unrealized Amortized Fair Fair Value Losses Cost Value $ $ 1,002 - $ - $ - 26,215 1,957 5,317 3,255 13,062 Unrealized Fair Losses Value $ $ Estimated Fair Value $ 5,317 Less than Twelve Months Available for Sale Estimated Unrealized $ $ Amortized Losses Cost $ - 26,432 (136) 13,298 (221) 39,730 (65) (422) 1,016 2,092 (136) 3,445 (311) 6,553 (65) (512) 6,214 39,277 $ $ Total Available for Sale 16,231 $ 5,147 26,695 The following table summarizes securities with unrealized losses at December 31, 2016 and December 31, 2015, aggregated by major security type and length of time in a continuous unrealized loss position. There were no December 31, 2015 Held to Maturity Securities in a continuous unrealized loss position at December 31, 2016 and December 31, Government Agency Securities 2015: Mortgage-Backed Securities- Government Sponsored Agencies Corporate Debt Securities (90) $ - (90) 2,504 - 2,504 5,147 29,199 $ - $ - $ - $ - $ - $ - $ $ 18,735 $ Total $ $ $ (79) Unrealized Less than Twelve Months 10,581 Estimated 5,387 Fair Value $ 15,968 (64) (143) $ Losses Twelve Months or More 4,448 Estimated - Fair Value $ 4,448 (184) Unrealized - (184) Losses $ (263) Unrealized (64) (327) Losses $ 15,029 Estimated 5,387 Fair Value $ 20,416 December 31, 2016 Government Agency Securities Mortgage-Backed Securities- Unrealized losses have not been recognized into income because the issuer bonds are of high credit quality, Government Sponsored Agencies 16,231 management does not intend to sell, it is not more likely than not that management would be required to sell the Corporate Debt Securities 5,147 securities prior to their anticipated recovery and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach maturity. $ 26,695 Total Available for Sale 2,504 - 2,504 5,147 29,199 (90) - (90) (65) (512) (65) (422) $ - $ - $ $ 18,735 $ $ 5,317 5,317 $ $ $ (221) (136) (311) (136) $ $ Total Available for Sale December 31, 2015 Government Agency Securities Mortgage-Backed Securities- Government Sponsored Agencies Corporate Debt Securities Total Available for Sale $ - $ - $ - $ - $ - $ - (79) (64) (143) $ 22 10,581 34 5,387 15,968 $ (184) - (184) $ 4,448 - 4,448 $ (263) 15,029 (64) (327) $ 5,387 20,416 $ Unrealized losses have not been recognized into income because the issuer bonds are of high credit quality, management does not intend to sell, it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach maturity. 22 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 4 - LOANS The Company's loan portfolio consists primarily of loans to borrowers within Los Angeles and Orange County, California. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries. A summary of the changes in the allowance for loan losses as of December 31 follows: (dollars in thousands) 2016 Beginning Balance Additions to the Allowance Charged to Expense Recoveries on Loans Charged-Off Less Loans Charged-Off Ending Balance $ 10,023 4,974 - 14,997 (835) 2015 $ 8,848 1,386 211 10,445 (422) 2014 $ 7,549 1,446 95 9,090 (242) $ 14,162 $ 10,023 $ 8,848 The following table presents the recorded investment in loans and impairment method as of December 31, 2016, 2015 and 2014 and the activity in the allowance for loan losses for the years then ended, by portfolio segment: 23 35 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 4 - LOANS – Continued (dollars in thousands) December 31, 2016 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries Reserves: Specific General Loans Acquired with Deteriorated Credit Quality Loans Evaluated for Impairment: Individually Collectively Loans Acquired with Deteriorated Credit Quality December 31, 2015 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries Reserves: Specific General Loans Acquired with Deteriorated Credit Quality Loans Evaluated for Impairment: Individually Collectively Loans Acquired with Deteriorated Credit Quality December 31, 2014 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries Reserves: Specific General Loans Acquired with Deteriorated Credit Quality Loans Evaluated for Impairment: Individually Collectively Loans Acquired with Deteriorated Credit Quality Real Estate Commercial Total $ $ $ 5,788 2,323 - - 8,111 - $ 8,111 - 8,111 $ $ $ $ $ $ $ $ $ $ $ 3,577 359,234 - 362,811 6,133 1,103,583 730 1,110,446 $ $ $ $ $ $ $ $ $ - $ 5,788 - 5,788 $ - $ 4,235 - 4,235 $ - $ 10,023 - 10,023 $ $ $ $ $ $ $ $ $ $ 4,235 2,651 (835) - 6,051 1,782 4,269 - 6,051 3,152 1,494 (422) 11 4,235 4,630 264,610 - 269,240 2,442 952 (242) - 3,152 10,023 4,974 (835) - 14,162 1,782 12,380 - 14,162 8,848 1,386 (422) 211 10,023 6,112 784,573 1,677 792,362 7,550 1,445 (242) 95 8,848 2,556 744,349 730 747,635 5,696 (108) - 200 5,788 1,482 519,963 1,677 523,122 5,108 493 - 95 5,696 $ $ $ $ - 5,696 - 5,696 $ $ - 3,152 - 3,152 $ $ - 8,848 - 8,848 $ $ $ $ 3,216 517,873 1,933 523,022 593 176,821 - 177,414 3,809 694,694 1,933 700,436 $ $ $ 24 36 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 4 - LOANS - Continued The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings: Pass - Loans classified as pass include loans not meeting the risk ratings defined below. Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Impaired - A loan is considered impaired, when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, all loans classified as troubled debt restructurings are considered impaired. 25 37 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 4 - LOANS - Continued The risk category of loans by class of loans was as follows as of December 31, 2016 and 2015: (dollars in thousands) December 31, 2016 Real Estate: Construction and Land Development Residential Real Estate Commercial Real Estate Commercial: Other SBA December 31, 2015 Real Estate: Construction and Land Development Residential Real Estate Commercial Real Estate Commercial: Other SBA Pass Special Mention Substandard Impaired Total $ 87,174 258,415 353,290 194,227 151,066 1,044,172 $ $ 1,932 13,950 4,562 $ - 6,272 19,484 $ 303 - 2,253 $ 89,409 278,637 379,589 - 1,934 22,378 $ 9,616 2,391 37,763 $ - 3,577 6,133 $ 203,843 158,968 1,110,446 $ $ 67,278 231,771 218,844 - $ - - - $ - 3,747 $ 315 - 1,167 $ 67,593 231,771 223,758 157,394 103,846 779,133 $ 999 - 999 $ 2,086 285 6,118 $ - 4,630 6,112 $ 160,479 108,761 792,362 $ 26 38 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 4 - LOANS – Continued The following tables present the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2016 and December 31, 2015: (dollars in thousands) Commercial: SBA Non-Accrual 2016 2015 Loans Past Due Over 90 Days Still Accruing 2016 2015 $ 3,577 $ 4,365 $ - $ - The following table presents the aging of the recorded investment in past-due loans as of December 31, 2016 and 2015 by class of loans: (dollars in thousands) December 31, 2016 Real Estate: Construction and Land Development Residential Real Estate Commercial Real Estate Commercial: Other SBA December 31, 2015 Real Estate: Construction and Land Development Residential Real Estate Commercial: Other SBA 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Past Due Total Past Due Loans Not Past Due Total - $ - - - $ - - - $ - - - $ - - $ 89,409 278,637 379,589 $ 89,409 278,637 379,589 343 - $ 343 - - $ - - 3,577 3,577 $ 343 3,577 3,920 $ 203,500 155,391 1,106,526 $ 203,843 158,968 1,110,446 $ - $ - - - $ - - - $ - - - $ - - $ 67,593 231,771 223,758 $ 67,593 231,771 223,758 271 - 271 $ - - $ - - 4,365 4,365 $ 271 4,365 4,636 $ 160,208 104,396 787,726 $ 160,479 108,761 792,362 $ 27 39 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 4 - LOANS - Continued Information relating to individually impaired loans presented by class of loans was as follows as of December 31, 2016 and 2015: (dollars in thousands) December 31, 2016 With no Related Allowance Recorded Construction and Land Development Commercial Real Estate Commercial - SBA Subtotal With an Allowance Recorded Commercial - SBA Total December 31, 2015 With no Related Allowance Recorded Construction and Land Development Commercial Real Estate Commercial - SBA Total December 31, 2014 With no Related Allowance Recorded Construction and Land Development Commercial Real Estate Commercial - SBA Unpaid Principal Balance Recorded Investment Average Balance Interest Income Related Allowance $ 303 2,253 18 2,574 $ 303 2,253 18 2,574 $ 309 1,710 93 2,112 $ 21 280 - 301 $ - - - - 3,559 6,133 $ 3,559 6,133 $ 3,559 5,671 $ $ - 301 1,782 1,782 $ $ $ $ $ $ $ 320 1,145 4,545 6,010 $ 4 195 14 213 $ - $ - - $ - $ $ $ $ 1,382 2,507 588 4,477 216 327 9 552 $ - - - $ - $ $ $ $ 315 1,167 4,630 6,112 702 2,519 593 3,814 315 1,167 4,630 6,112 697 2,519 593 3,809 No interest income was recognized on a cash basis as of December 31, 2016, 2015 and 2014. 28 40 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 4 - LOANS - Continued The Company had six and seven loans identified as troubled debt restructurings ("TDR's") at December 31, 2016 and 2015, respectively. A specific reserve for $1,782,000 has been allocated for one loan as of December 31, 2016. There are no commitments to lend additional amounts as of December 31, 2016 and 2015, respectively, to customers with outstanding loans that are classified as TDR's. During the year ended December 31, 2016, the terms of certain loans were modified as TDR's. The modification of the terms generally included loans where a moratorium on loan payments was granted. Such moratoriums ranged from three months to six months on the loans restructured in 2016. The following table presents loans by class modified as TDR's that occurred during the year ended December 31, 2016: (dollars in thousands) December 31, 2016 Commercial Real Estate December 31, 2015 Commercial - SBA Pre- Modification Recorded Investment Post- Modification Recorded Investment $ 1,047 $ 1,047 $ 4,606 $ 4,606 Number of Loans 1 3 Two loans to the same customer which were modified in 2015 later defaulted. Default for this purpose is defined as the loan being 90 days or more past due under the modified terms. The total carrying value of those two loans as of December 31, 2015 was approximately $4,365,000, of which approximately $4,163,000 was supported by SBA guarantees. The Company has purchased loans as part of its whole bank acquisitions, for which there was at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance and carrying amount of purchased credit-impaired loans as of December 31 were as follows: (dollars in thousands) Outstanding Balance Carrying Amount 2016 $ $ 878 730 2015 $ $ 2,444 1,677 For these purchased credit-impaired loans, the Company did not increase the allowance for loan losses during 2016 or 2015 as there were no significant reductions in the expected cash flows. 29 41 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 4 - LOANS - Continued Below is a summary of activity in the accretable yield on purchased credit-impaired loans for 2016 and 2015: (dollars in thousands) Balance, Beginning of Year Disposals Restructuring as TDR Accretion of Income Balance, End of Year NOTE 5 - LOAN SERVICING 2016 $ 349 - (22) (185) 2015 $ 574 (99) - (126) 2014 $ 771 - - (197) $ 142 $ 349 $ 574 Mortgage and SBA loans serviced for others are not reported as assets. The principal balances as of December 31 are as follows: (dollars in thousands) 2016 2015 Loans Serviced for Others: Mortgage Loans SBA Loans Activity for servicing assets follows: $ $ 259,207 110,263 $ $ 106,866 74,371 (dollars in thousands) Servicing Assets: Beginning of year Additions Amortized to expense End of year 2016 2015 2014 Mortgage Loans SBA Loans Mortgage Loans SBA Loans Mortgage Loans SBA Loans $ $ $ $ 298 912 (208) 1,002 1,807 1,353 (458) 2,702 - $ 329 (31) 298 $ 720 1,268 (181) 1,807 - $ - - $ - $ $ $ $ 128 724 (132) 720 The fair value of servicing assets for mortgage loans was $1,184,000 and $298,000 as of December 31, 2016 and 2015, respectively. The fair value of servicing assets for SBA loans was $3,142,000 and $2,305,000 as of December 31, 2016 and 2015, respectively. Servicing fees net of servicing asset amortization totaled $615,000, $272,000, and $54,000 for the years ended December 31, 2016, 2015, and 2014, respectively. 30 42 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 6 - PREMISES AND EQUIPMENT A summary of premises and equipment as of December 31 follows: (dollars in thousands) Land and Buildings Leasehold Improvements Furniture, Fixtures, and Equipment Less Accumulated Depreciation and Amortization 2016 $ 2015 $ 5,423 2,885 2,950 11,258 (4,673) 6,585 5,424 2,728 2,675 10,827 (3,967) 6,860 $ $ Depreciation and amortization expense was $750,000, $625,000, and $591,000 for 2016, 2015, and 2014, respectively. 19The Company leases several of its operating facilities under various noncancellable operating leases expiring at various dates through 2022. The Company is also responsible for common area maintenance, taxes and insurance at the various branch locations. Future minimum rent payments on the Company's leases were as follows as of December 31, 2016: (dollars in thousands) 2017 2018 2019 2020 2021 Thereafter $ $ 1,568 1,270 704 440 330 129 4,441 The minimum rent payments shown above are given for the existing lease obligation and are not a forecast of future rental expense. Total rental expense, recognized on a straight-line basis, was $1.6 million, $1.2 million, and $1.2 million for 2016, 2015, and 2014, respectively. 31 43 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 7 - DEPOSITS At December 31, 2016 the scheduled maturities of time deposits are as follows: (dollars in thousands) One year Two to three years $ $ 668,913 12,879 681,792 NOTE 8 - LONG-TERM DEBT At December 31, 2016 long-term debt was as follows: (dollars in thousands) 6.5% fixed to floating rate subordinated debentures, due March 31, 2026 Principal Unamortized Debt Issuance Costs $ 50,000 $ 617 In March 2016, the Company issued $50 million of 6.5% fixed to floating rate subordinated debentures, due March 31, 2026. The interest rate is fixed through March 31, 2021 and floats at 3 month LIBOR plus 516 basis points thereafter. The sub-debt is considered Tier-two capital at the Company. The Company allocated $35 million to the Bank as Tier-one capital. NOTE 9 - SUBORDINATED DEBENTURES The Company, through the acquisition of TFC Bancorp, acquired TFC Statutory Trust. The Trust contained a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1,000 per security. TFC Bancorp issued $5,000,000 of subordinated debentures to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities sold by the trust. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability at market value as of the close of the acquisition which was $3,255,000. There was a $1,900,000 valuation reserve recorded to arrive at market value which is treated as a yield adjustment and is amortized over the life of the security. The amount of amortization expense recognized in 2016 was $79,000. The Company also purchased an investment in the common stock of the trust for $155,000 which is included in other assets. The Company may redeem the subordinated debentures, subject to prior approval by the Federal Reserve Bank on or after March 15, 2012, at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on March 15, 2037. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The Company has been paying interest on a quarterly basis. The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The subordinated debentures have a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 1.65%, which was 2.61% at December 31, 2016. 32 44 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 10 - BORROWING ARRANGEMENTS The Company has established secured and unsecured lines of credit. The Company may borrow funds from time to time on a term or overnight basis from the Federal Home Loan Bank of San Francisco ("FHLB"), the Federal Reserve Bank of San Francisco ("FRB") and other financial institutions as indicated below. Federal Funds Arrangements with Commercial Banks. As of December 31, 2016 the Company may borrow on an unsecured basis, up to $20 million, $10 million, $12 million and $5 million overnight from Zions Bank, Wells Fargo Bank, First Tennessee National Bank, and Pacific Coast Bankers' Bank, respectively. Letter of Credit Arrangements. As of December 31, 2016 the Company had an unsecured commercial letter of credit line with Wells Fargo Bank for $2 million. FRB Secured Line of Credit. The secured borrowing capacity of $15 million at December 31, 2016 is collateralized by loans pledged with a carrying value of $25.6 million. FHLB Secured Line of Credit. The secured borrowing capacity of $387.3 million at December 31, 2016 is collateralized by loans pledged with a carrying value of $434.6 million. There were no amounts outstanding under any of the arrangements above as of December 31, 2016 and 2015. 2 33 45 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 11 - INCOME TAXES The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income tax expense consists of the following: (dollars in thousands) 2016 2015 2014 Current: Federal State Deferred $ $ $ 9,359 2,841 12,200 1,289 13,489 5,662 1,973 7,635 1,361 8,996 5,580 1,775 7,355 (218) 7,137 $ $ $ A comparison of the federal statutory income tax rates to the Company's effective income tax rates at December 31 follows: 2016 2015 2014 (dollars in thousands) Amount Rate Amount Rate Amount Rate Statutory Federal Tax State Franchise Tax, Net of Federal Benefit Tax-Exempt Income Other Items, Net $ 11,399 2,281 (202) 11 35.0% 7.0% 0.6%) 0.0% ( $ 7,469 1,550 (203) 180 34.0% 7.1% 0.9%) 0.8% ( $ 5,972 1,224 (213) 154 34.0% 7.0% 1.2%) 0.9% ( Actual Tax Expense $ 13,489 41.4% $ 8,996 41.0% $ 7,137 40.6% 34 46 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 11 - INCOME TAXES – Continued Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying balance sheets at December 31: (dollars in thousands) 2016 2015 Deferred Tax Assets: Pre-Opening Expenses Allowance For Loan Losses Stock-Based Compensation Off Balance Sheet Reserve Operating Loss Carryforwards Other Real Estate Owned Acquisition Accounting Fair Value Adjustments Unrealized Loss on AFS Securities Other Deferred Tax Liabilities: Depreciation Other Net Deferred Tax Assets $ 287 5,954 2,576 254 693 17 1,779 186 2,520 14,266 $ 321 4,076 2,345 132 796 13 457 134 1,905 10,179 (917) (2,252) (3,169) 11,097 $ (1,024) (1,706) (2,730) 7,449 $ The Company has net operating loss carryforwards from acquisitions of approximately $697,000 for federal income and approximately $6.4 million for California franchise tax purposes. Net operating loss carry forwards, to the extent not used will begin to expire in 2027. Net operating loss carryforwards available from acquisitions are substantially limited by Section 382 of the Internal Revenue Code and benefits not expected to be realized due to the limitation have been excluded from the deferred tax asset and net operating loss carryforward amounts noted above. The Company is subject to federal income tax and franchise tax of the state of California. Income tax returns for the years ended after December 31, 2012 are open to audit by the federal authorities and for the years ended after December 31, 2011 are open to audit by California state authorities. 35 47 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 12 - COMMITMENTS In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company's financial statements. The Company's exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements. As of December 31, 2016 and 2015, the Company had the following financial commitments whose contractual amount represents credit risk: (dollars in thousands) Commitments to Make Loans Unused Lines of Credit Commercial and Similar Letters of Credit Standby Letters of Credit 2016 Fixed Rate Variable Rate 2015 Fixed Rate Variable Rate $ 54,812 38,943 8,966 1,100 $ 13,191 53,435 - 150 $ 31,597 48,351 10,424 780 $ 10,613 37,723 - 205 $ 103,821 $ 66,776 $ 91,152 $ 48,541 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the customer. The Company is involved in various matters of litigation which have arisen in the ordinary course of business and accruals for estimates of potential losses have been provided when necessary and appropriate under generally accepted accounting principles. In the opinion of management, the disposition of such pending litigation will not have a material effect on the Company's financial statements. 36 48 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 13 - RELATED PARTY TRANSACTIONS Loans to principal officers, directors, and their affiliates were as follows: (dollars in thousands) Balance, Beginning of Year New Loans and Advances Repayments Balance, End of Year 2016 $ 2015 $ 3,971 1,274 (1,800) 3,445 9,283 11,888 (17,200) 3,971 $ $ Loan commitments outstanding to executive officers, directors and their related interests with whom they are associated totaled approximately $2.3 million and $2.1 million as of December 31, 2016 and 2015, respectively. Deposits from principal officers, directors, and their affiliates at year-end 2016 and 2015 were $37.2 million and $42.1 million. NOTE 14- STOCK OPTION PLAN Under the terms of the Company's 2010 Stock Option Plan, officers and key employees may be granted both nonqualified and incentive stock options and directors and organizers, who are not also an officer or employee, may only be granted nonqualified stock options. The Plan provides for options to purchase up to 30 percent of the outstanding common stock at a price not less than 100 percent of the fair market value of the stock on the date of the grant. Stock options expire no later than ten years from the date of the grant and generally vest over three years. The Company recognized stock-based compensation expense of $894,000, $1.5 million, and $1.6 million in 2016, 2015, and 2014 and recognized income tax benefits on that expense of $267,000, $482,000, and $454,000, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions presented below: Expected Volatility Expected Term Expected Dividends Risk Free Rate Grant Date Fair Value 2016 35.0% 6.0 Years None 1.93% 6.76 $ 2015 35.0% 6.0 Years None 1.84% 6.29 $ Since the Company has a limited amount of historical stock activity the expected volatility is based on the historical volatility of similar banks that have a longer trading history. The expected term represents the estimated average period of time that the options remain outstanding. Since the Company does not have sufficient historical data on the exercise of stock options, the expected term is based on the "simplified" method that measures the expected term as the average of the vesting period and the contractual term. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds over the expected term of the options. 37 49 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 14 - STOCK OPTION PLAN - Continued A summary of the status of the Company's stock option plan as of December 31, 2016 and changes during the year then ended is presented below: (dollars in thousands, except for share amounts) Outstanding at Beginning of Year Granted Exercised Forfeited or Expired Shares 2,374,657 210,000 (57,232) (32,291) Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Weighted- Average Exercise Price $ $ $ $ 10.68 18.25 10.22 15.81 Outstanding at End of Year 2,495,134 $ 11.26 4.7 Years $ 17,449 Options Exercisable 2,166,308 $ 10.35 4.1 Years $ 17,123 As of December 31, 2016 there was approximately $1,453,000 of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted-average period of 1.5 years. The intrinsic value of options exercised was $216,000, $231,000, and $609,000 in 2016, 2015, and 2014, respectively. NOTE 15 - REGULATORY MATTERS Holding companies (with assets over $1 billion at the beginning of the year) and banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. The new rules became effective on January 1, 2015, with certain of the requirements phased-in over a multi-year schedule. Under the rules, minimum requirements increased for both the quantity and quality of capital held by the Bank. The rules include a new common equity Tier 1 ("CET1") capital to risk-weighted assets ratio with minimums for capital adequacy and prompt corrective action purposes of 4.5% and 6.5%, respectively. The minimum Tier 1 capital to risk-weighted assets ratio was raised from 4.0% to 6.0% under the capital adequacy framework and from 6.0% to 8.0% to be well-capitalized under the prompt corrective action framework. In addition, the rules introduced the concept of a "conservation buffer" of 2.5% applicable to the three capital adequacy risk-weighted asset ratios (CET1, Tier 1, and Total). The conservation buffer will be phased-in on a pro rata basis over a four year period beginning in 2016. If the capital adequacy minimum ratios plus the phased-in conservation buffer amount exceed actual risk-weighted capital ratios, then dividends, share buybacks, and discretionary bonuses to executives could be limited in amount. 38 50 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 15 - REGULATORY MATTERS - Continued Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The capital conservation buffer for 2016 is 9.057%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes, as of December 31, 2016 and 2015, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2016, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table sets forth RBB Bancorp's consolidated and the Bank's actual capital amounts and ratios and related regulatory requirements for the Bank as of December 31, 2016: Amount of Capital Required Actual For Capital Adequacy Purposes To Be Well- Capitalized Under Prompt Corrective Provisions Amount Ratio Amount Ratio Amount Ratio 217,244 $ $ 192,784 19.2% 17.1% NA 90,417 $ 153,682 $ $ 178,645 13.6% 15.8% NA 67,813 $ 150,786 $ $ 178,645 13.3% 15.8% NA 50,860 $ $ 153,682 $ 178,645 11.0% 12.8% NA 55,777 $ NA 8.0% NA 6.0% NA 4.5% NA 4.0% NA $ 113,021 NA 10.0% NA 90,417 $ NA 73,464 $ NA 69,722 $ NA 8.0% NA 6.5% NA 5.0% (dollars in thousands) As of December 31, 2016: Total Capital (to Risk-Weighted Assets) Consolidated Bank Tier 1 Capital (to Risk-Weighted Assets) Consolidated Bank CET1 Capital (to Risk-Weighted Assets) Consolidated Bank Tier 1 Capital (to Average Assets) Consolidated Bank 39 51 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 15 - REGULATORY MATTERS – Continued The following table sets forth RBB Bancorp's consolidated and the Bank's actual capital amounts and ratios and related regulatory requirements for the Bank as of December 31, 2015: Amount of Capital Required Actual For Capital Adequacy Purposes To Be Well- Capitalized Under Prompt Corrective Provisions Amount Ratio Amount Ratio Amount Ratio 168,851 $ $ 154,468 21.5% 19.7% NA 62,625 $ 159,020 $ $ 144,675 20.2% 18.5% NA 46,969 $ 159,020 $ $ 144,675 20.2% 18.5% NA 35,227 $ $ 159,020 $ 144,675 15.3% 13.9% NA 41,514 $ NA 8.0% NA 6.0% NA 4.5% NA 4.0% NA 78,281 $ NA 10.0% NA 62,625 $ NA 50,883 $ NA 51,893 $ NA 8.0% NA 6.5% NA 5.0% (dollars in thousands) As of December 31, 2015: Total Capital (to Risk-Weighted Assets) Consolidated Bank Tier 1 Capital (to Risk-Weighted Assets) Consolidated Bank CET1 Capital (to Risk-Weighted Assets) Consolidated Bank Tier 1 Capital (to Average Assets) Consolidated Bank The California Financial Code generally acts to prohibit banks from making a cash distribution to its shareholders in excess of the lesser of the bank's undivided profits or the bank's net income for its last three fiscal years less the amount of any distribution made by the bank's shareholders during the same period. The California general corporation law generally acts to prohibit companies from paying dividends on common stock unless its retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend. If a company fails this test, then it may still pay dividends if after giving effect to the dividend the company's assets are at least 125% of its liabilities. Additionally, the Federal Reserve Bank has issued guidance which requires that they be consulted before payment of a dividend if a bank holding company does not have earnings over the prior four quarters of at least equal to the dividend to be paid, plus other holding company obligations. 40 52 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 16 - FAIR VALUE MEASUREMENTS The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2). Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect an expectation of the amount to be ultimately collected and selling costs (Level 3). Appraisals for other real estate owned are performed by state licensed appraisers (for commercial properties) or state certified appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. When a Notice of Default is recorded, an appraisal report is ordered. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison to independent data sources such as recent market data or industry wide-statistics for residential appraisals. Commercial appraisals are sent to an independent third party to review. The Company also compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraisal values on any remaining other real estate owned to arrive at fair value. If the existing appraisal is older than twelve months a new appraisal report is ordered. No significant adjustments to appraised values have been made as a result of this comparison process as of December 31, 2016. 41 53 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 16 - FAIR VALUE MEASUREMENTS - Continued The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31, 2016 and 2015: (dollars in thousands) December 31, 2016 Assets Measured at Fair Value: On a Recurring Basis: Securities Available for Sale On a Non-Recurring Basis: Other Real Estate Owned December 31, 2015 Assets Measured at Fair Value: On a Recurring Basis: Securities Available for Sale On a Non-Recurring Basis: Other Real Estate Owned Fair Value Measurements Using: Level 2 Level 3 Level 1 Total $ - $ 39,277 $ - $ 39,277 $ - $ - $ 833 $ 833 $ - $ 20,416 $ - $ 20,416 $ - $ - $ 293 $ 293 No write-downs to OREO were recorded in 2016 or 2015. Quantitative information about the Company's non-recurring Level 3 fair value measurements as of December 31, 2016 and 2015 is as follows: (dollars in thousands) December 31, 2016 Other Real Estate Owned Fair Value Amount $ 833 December 31, 2015 Other Real Estate Owned $ 293 Unobservable Valuation Technique Input Third Party Management Adjustments 10% - 15% Appraisals Adjustment Range to Reflect Current Conditions and Selling Costs Weighted- Average Adjustment 12% Third Party Management Adjustments Appraisals to Reflect Current Conditions and Selling Costs 13% 13% 42 54 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments not previously presented: Cash and Cash Equivalents The carrying amounts of cash and short-term instruments approximate fair values. Time Deposits in Other Banks Fair values for time deposits with other banks are estimated using discounted cash flow analyses, using interest rates currently being offered with similar terms. Loans For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. 43 55 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Deposits The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits. Early withdrawal of fixed-rate certificates of deposit is not expected to be significant Long-Term Debt The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. Subordinated Debentures The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification. Off-Balance Sheet Financial Instruments The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material. The fair value hierarchy level and estimated fair value of significant financial instruments at December 31, 2016 and 2015 are summarized as follows: 44 56 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued (dollars in thousands) Financial Assets: Cash and Due From Banks Federal Funds Sold and Other Cash Equivalents Interest-Bearing Deposits in Other Financial Institutions Investment Securities - AFS Investment Securities - HTM Mortgage Loans Held for Sale Loans, Net Financial Liabilities: Deposits Long-Term Debt Subordinated Debentures 2016 2015 Fair Value Hierarchy Carrying Value Fair Value Carrying Value Fair Value Level 1 $ 74,213 $ 74,213 $ 80,391 $ 80,391 Level 1 44,500 44,500 33,500 33,500 Level 1 Level 2 Level 2 Level 1 Level 3 345 39,277 6,214 44,345 1,096,284 345 39,277 6,553 45,433 1,095,944 7,462 20,416 6,678 41,496 782,339 7,462 20,416 7,144 42,096 807,290 Level 2 Level 2 Level 3 $ 1,152,763 49,383 3,334 $ 1,140,707 48,447 3,334 $ 853,417 - - $ 848,639 - - 45 57 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 18 - EARNINGS PER SHARE ("EPS") The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS: 2016 2015 2014 (dollars in thousands) Net Income as Reported Shares Outstanding at Year End Impact of Weighting Shares Purchased During the Year Income $ 19,079 Used in Basic EPS 19,079 Dilutive Effect of Outstanding Stock Options Used in Dilutive EPS $ 19,079 Shares 12,827,803 (26,813) 12,800,990 894,910 13,695,900 Income $ 12,973 12,973 $ 12,973 Shares 12,770,571 (8,739) 12,761,832 790,850 13,552,682 Income $ 10,428 10,428 $ 10,428 Shares 12,720,659 (78,599) 12,642,060 528,625 13,170,685 Stock options for 321,000, 139,225, and 159,400 shares of common stock were not considered in computing diluted earnings per common share for 2016, 2015, and 2014, respectively, because they were anti-dilutive. NOTE 19 - STOCK DIVIDENDS The Company issued a 2.5% and a 5% stock dividend in 2015, and 2014 respectively. No stock dividend was issued in 2016. The per share data in the statements of income and the footnotes have been adjusted to give retroactive effect to these dividends. NOTE 20 – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS . The Company began investing in qualified housing projects in 2016. At December 31, 2016 the balance of the investment for qualified affordable housing projects was $986,000. This balance is reflected in the accrued interest and other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in qualified housing projects totaled $840,000 at December 31, 2016. The Company expects to fulfill these commitments during the year ending 2027. During the year ending December 2016, the Company recognized amortization expense of $14,000, which was included within income tax expense on the consolidated statements of income. Additionally, during the year ended December 31, 2016, the Company recognized tax credits and other benefits from its investment in affordable housing tax credits of $12,000. 46 58 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 21 - PARENT ONLY CONDENSED FINANCIAL INFORMATION December 31, 2016 and 2015 (Dollars in Thousands) 2016 2015 ASSETS Cash and Cash Equivalents Investment in Bank Subsidiary Investment in Royal Asset Management ("RAM") Other Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Long Term Debt Subordinated Debentures Other Liabilities Total Liabilities Shareholders' Equity: Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Total Liabilities and Shareholders' Equity $ $ 17,497 209,727 6,125 1,455 234,804 8,852 149,300 5,851 106 164,109 $ $ 49,383 3,334 8 52,725 - - (30) (30) 142,651 8,417 31,278 (267) 182,079 234,804 $ 141,873 7,706 14,753 (193) 164,139 164,109 $ CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31, 2016, 2015 and 2014 (Dollars in Thousands) Interest Expense Noninterest Expense Loss Before Equity in Undistributed Income of Subsidiaries Equity in Undistributed Income of: Royal Business Bank Royal Asset Management Income before Income Taxes Income Tax Benefit Net Income Other Comprehensive Income (Loss) Total Comprehensive Income 2016 $ 2,728 123 2015 $ - 298 2014 - $ 117 (2,851) (298) (117) 20,483 274 17,906 1,173 19,079 (74) 19,005 $ 12,310 804 12,816 125 12,941 (141) 12,800 $ 10,037 450 10,370 48 10,418 238 10,656 $ 47 59 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 NOTE 21 - PARENT ONLY CONDENSED FINANCIAL INFORMATION - Continued CONDENSED STATEMENTS OF CASH FLOW Years Ended December 31, 2016, 2015 and 2014 (Dollars in Thousands) 2016 2015 2014 Cash Flows from Operating Activities: Net Income Provision for deferred income taxes Undistributed Income of Subsidiaries Change in Other Assets and Liabilities Cash Flows from Investment Activities: Outlays for business acquisitions Investment in Subsidiaries Cash Flows from Financing Activities: Issuance of Subordinated Debentures, net of issuance costs Dividends Paid Issuance of Common Stock $ 19,079 (1,172) (20,757) 29 (2,821) $ 12,941 (125) (13,114) 135 (163) $ 10,418 (49) (10,487) (9) (127) (839) (35,000) (35,839) 49,274 (2,554) 585 47,305 - 5,000 5,000 - (3,114) 470 (2,644) - (10,000) (10,000) - - 1,645 1,645 Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents Beginning of Year Cash and Cash Equivalents End of Year 8,645 8,852 17,497 $ 2,193 6,659 8,852 $ (8,482) 15,141 6,659 $ 48 60 RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 AND 2014 Note 22 - Subsequent Events On January 18, 2017, the Company announced that the Board of Directors had declared a cash dividend of $0.30 per common share. The cash dividend is payable on February 28, 2017 to stockholders of record at the close of business on February 15, 2017 in the amount of $3,848,000. We have evaluated events that have occurred subsequent to December 31, 2016 through March 22, 2017, and have concluded there are no subsequent events that would require recognition in the accompanying consolidated financial statements. 49 61 62 63 64 

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