KBRA Affirms Ratings for RBB Bancorp

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Los Angeles, California-based, RBB Bancorp (NASDAQ: RBB; “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating BBB+, 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 Negative.

Key Credit Considerations

The ratings are supported by RBB’s historically strong core capital measures, including TCE and CET1 ratios of 11.1% and 17.9%, respectively, as of YE24. This robust position offers a significantly higher level of loss-absorbing capacity compared to the rated peer average, though KBRA recognizes the ongoing challenges related to credit quality and earnings—primary drivers of the Negative Outlook—could potentially place pressure on the company's favorable capital profile. With respect to credit issues, RBB’s NPA ratio has risen significantly over the past year—reaching 2.6% as of 4Q24—and is now notably higher than that of similarly rated peers. This increase is partly attributable to headwinds in the C&D portfolio, where certain pandemic-era projects have faced delays, supply chain disruptions, and a substantial rise in interest expenses. However, these problems appear largely idiosyncratic rather than systemic, given that the top eight non-performing loans (NPLs) account for nearly 90% of total NPLs, with 55% concentrated in just three C&D credits. While C&D loans represent the majority of NPLs, the company’s overall exposure to this segment remains modest at 6% of total loans, or 28% of total risk-based capital as of YE24. Moreover, despite the elevated NPAs, material loss content has yet to emerge, as evidenced by a modest NCO ratio of 0.13% in 2024. However, the company has increased its reserve position, with higher provision for loan losses in recent quarters, combined with a depressed NIM, weighing on profitability (ROA of 0.68% during 2024). The ratings reflect our opinion that earnings will remain somewhat challenged in the short-to-intermediate term. While ratings were historically supported by generally solid and consistent earnings performance, weakened profitability driven by the aforementioned heightened deposit costs in tandem with deposit mix attrition continue to support the Negative Outlook. RBB’s funding base generally reflects above average cost given a business model that naturally lends itself to concentration in time deposits; however, the elevated interest rate environment catalyzed a meaningful shift in the deposit mix, with time deposits accounting for 60% of total deposits at YE24 (compared to 32% at YE21). In concordance, there has been a significant rise in deposit costs (3.38% during 4Q24), thus leading to considerable NIM compression in recent periods. Positively, the company's liability-sensitive balance sheet is, in theory, well-positioned to benefit from a declining rate environment. With >80% of deposits effectively indexed to short-term interest rates, the three Fed cuts thus far have yet to provide noticeable relief. However, the $650 million of CDs set to mature in 1Q25 are projected to reprice at an average rate 60 bps lower, somewhat offsetting any potential decline in interest-earning asset yields, which should still receive support from certain legacy, lower yielding fixed-rate assets repricing at higher levels.

Rating Sensitivities

Given the Negative Outlook, a rating upgrade is unlikely. However, maintaining core capital ratios that remain significantly above peer levels, returning to stronger profitability—including a higher fee income component—and resolving current credit quality issues could foster positive ratings momentum over time. Conversely, a downgrade of likely one notch remains possible in the near-to-intermediate term if credit quality and earnings fail to show meaningful improvement within the next year or if core capital ratios decline significantly.

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