KBRA Downgrades Ratings for RBB Bancorp; Revises Outlook to Stable

KBRA downgrades the senior unsecured debt rating to BBB from BBB+, the subordinated debt rating to BBB- from BBB, and the short-term debt rating to K3 from K2 for Los Angeles, California-based, RBB Bancorp (NASDAQ: RBB; “the company”). In addition, KBRA downgrades the deposit and senior unsecured debt ratings to BBB+ from A- and the subordinated debt rating to BBB from BBB+, and affirms and the short-term deposit and debt ratings of K2 for its primary subsidiary, Royal Business Bank. The Outlook for all long-term ratings is revised to Stable from Negative.

The downgrade reflects the challenges RBB has faced in recent years, particularly with respect to earnings (ROA remaining below 0.8% over the past two years) and asset quality performance (NPA ratio ranging between 1.5%-3.0% in recent years, while the NCO ratio increased to 0.45% in FY25). Historically, the company outperformed peers in these areas, which supported above-average ratings; however, these measures have not yet returned to previous levels and are unlikely to fully recover over the medium term. Although pressures have moderated, with key metrics showing improvement over the past year, the overall credit profile continues to lag higher-rated peers. Following this rating action, we view RBB as appropriately situated within the current rating category, which encompasses institutions with sound credit fundamentals and solid loss-absorbing capacity. This assessment is reinforced by RBB’s best-in-class capital levels, including a CET1 ratio of 17.5% at YE25, which provide a substantial buffer against unexpected losses and meaningful protection for uninsured depositors and bondholders.

The structural factors that contributed to weaker profitability and credit performance are being actively addressed by the company’s new leadership team, with both the CEO and CFO joining within the past three years. From an earnings perspective, performance was pressured by a relatively concentrated asset and liability mix, which created headwinds amid heightened interest rate volatility. The balance sheet’s liability-sensitive positioning was evident during the Fed’s tightening cycle, reflecting a higher-cost funding base concentrated in time deposits (~60% of total), largely attributable to the company’s affluent retail (largely Chinese-American) deposit mix. To address this concentration, management has implemented strategic initiatives focused on expanding commercial banking activities, which should enhance the deposit mix and funding costs, diversify the loan portfolio, and reduce reliance on residential mortgage loans with multi-year fixed-rate periods (52% of total loans, primarily 5/7-year ARMs). Over time, these actions are expected to support a more stable and durable NIM, which has exhibited notable volatility in recent years, peaking above 4.25% in 2022 and troughing at 2.65% in 2024. Although NIM has improved over the past 18 months as short-term rates declined, it has not yet fully recovered.

From a credit standpoint, performance is expected to benefit from leadership’s deeper commercial banking expertise, the addition of experienced bankers, and a reduction in single-name borrower concentrations. Recent weakness appears concentrated in a limited number of legacy problem credits rather than reflecting broad-based deterioration. The largest exposure remains a mixed-use construction relationship, where the borrower’s bankruptcy resulted in a sizable 3Q25 charge-off, and management is targeting resolution of the remaining balance by YE26. Upon exit of this relationship, we expect NPA levels to move closer to peer levels. While the elevated level of NPAs (related ratio of 1.6% as of YE25) remains a near-term constraint, management expects minimal incremental loss content within the current NPA composition, reflecting updated collateral valuations.

Looking ahead, management expects ROA to return above 1.0%, supported by NIM tailwinds from continued loan repricing, incremental loan growth, and the potential for additional rate cuts, which would allow for declining deposit costs (targeting an 80% beta). Collectively, these factors are expected to move NIM toward a more normalized level of approximately 3.25% throughout the year. The leadership team has also increased participation in non-QM loan sales, as demonstrated in 4Q25, highlighting the portfolio’s liquidity and providing an additional source of balance sheet flexibility and fee-generating opportunities. With respect to liquidity, the company maintains relatively elevated loan-to-asset and loan-to-deposit ratios, and balance sheet positioning is not expected to materially deviate from current levels. Moreover, given mid-to-high single-digit growth guidance, liquidity management and deposit gathering are likely to remain areas of focus.

Robust core capitalization continues to anchor the ratings, though it could be modestly pressured by management’s balance sheet growth expectations, increased commercial lending (and associated higher risk-weighted assets), and a potentially more accommodative approach to shareholder returns, including higher dividends and share repurchases. However, we expect capital ratios to remain comfortably above peer averages absent a material event, such as M&A.

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