RBB Bancorp

ANALYSIS OF RESULTS OF OPERATIONS

Financial Performance

Average Balance Sheet, Interest and Yield/Rate Analysis

The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans, cash and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (“TE”) basis by adjusting interest income utilizing the federal statutory tax rate of 21% for 2025 and 2024. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. For additional information see “Capital Resources and Liquidity Management” and Part I,Item 3. "Quantitative and Qualitative Disclosures about Market Risk" included in this Report.

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the periods presented. The average balances are daily averages and, for loans, include both performing and nonperforming balances.

The following table summarizes the extent to which changes in (1) interest rates and (2) volume of average interest-earning assets and average interest-bearing liabilities affected our net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average yield/rate.

Net Interest Income/Average Balance Sheet

Net interest income was $27.3 million for the second quarter of 2025, compared to $26.2 million for the first quarter of 2025. The $1.2 million increase was due to a $1.9 million increase in interest income, offset by a $698,000 increase in interest expense. The increase in interest income was mostly due to a $2.1 million increase in interest and fees on loans. The increase in interest expense was due to a $433,000 increase in interest on borrowings and a $265,000 increase in interest on deposits.

The net interest margin ("NIM") was 2.92% for the second quarter of 2025, an increase of 4 basis points from 2.88% for the first quarter of 2025. The NIM expansion was due to a 3 basis point increase in the yield on average interest-earning assets, combined with a 1 basis point decrease in the overall cost of funds. The yield on average interest-earning assets increased to 5.79% for the second quarter of 2025 from 5.76% for the first quarter of 2025 due mainly to a 2 basis point increase in the yield on average loans to 6.03%. Average loans represented 85% of average interest-earning assets in the second quarter of 2025, as compared to 84% in the first quarter of 2025.

The average cost of funds decreased to 3.14% for the second quarter of 2025 from 3.15% for the first quarter of 2025, driven by an 11 basis point decrease in the average cost of interest-bearing deposits, partially offset by a 75 basis point increase in the average cost of total borrowings. The average cost of interest-bearing deposits decreased to 3.66% for the second quarter of 2025 from 3.77% for the first quarter of 2025. The overall funding mix for the second quarter of 2025 remained relatively unchanged from the first quarter of 2025 with total deposits representing 91% of interest bearing liabilities and average noninterest-bearing deposits representing 17% of average total deposits. The average cost of borrowings increased as the majority of the $150 million in long term FHLB advances that matured during the first quarter of 2025 were replaced at current market rates. The all-in average spot rate for total deposits was 2.95% at June 30, 2025.

Net interest income was $27.3 million for the second quarter of 2025, compared to $24.0 million for the second quarter of 2024. The $3.4 million increase in net interest income was due to lower interest expense of $2.1 million and an increase in interest income of $1.3 million. The decrease in interest expense was driven largely by lower rates paid on interest-bearing deposits, partially offset by an increase in the average balance of those interest-bearing deposits. The increase in interest income was primarily due to the increase in the average balances of total loans and securities available for sale, partially offset by a decrease in the average balance of cash and cash equivalents from the same period in 2024.

The $1.3 million increase in interest income was due mostly to a $2.4 million increase in interest income from total loans, of which $2.9 million was attributed to an increase in the average outstanding balances. Average outstanding total loans were $3.2 billion for the quarter ended June 30, 2025, compared to $3.0 billion for the same period in 2024, an increase of $154.5 million due to strong loan growth in 2025. Average loans represented 85% of average interest-earning assets in the second quarter of 2025 compared to 84% in the second quarter of 2024. The impact of the increase in average outstanding total loans was partially offset by a 1 basis point reduction in the average rate earned on total loans to 6.03% for the quarter ended June 30, 2025. The increase in interest income was also the result of an increase in interest income from securities available for sale, attributable to an increase in the average balances outstanding of $81.2 million to $399.4 million for the quarter ended June 30, 2025, partially offset by a reduction of the yield on those securities of 35 basis points. Interest income on cash and cash equivalents decreased by $1.6 million mainly due to a reduction in the average balances outstanding of $92.1 million as cash balances were used to fund loan growth and purchase securities available for sale combined with the impact of an 82 basis point reduction in the average rate earned on those balances.

The $2.1 million decrease in interest expense was due mostly to a $3.0 million decrease in deposit interest expense. The decrease in interest expense on deposits was primarily due to a 70 basis point decrease in the average rates paid on such funds, partially offset by the impact of a $135.2 million increase in average interest-bearing deposits. Interest expense on FHLB advances increased $981,000 due mostly to a higher rate paid on such borrowings as the majority of the $150 million in long term FHLB advances costing 1.18% that matured in the first quarter of 2025 were replaced at current market rates. The cost of FHLB advances increased 240 basis points as certain term advances matured during the first quarter of 2025 and were replaced in the current rate environment.

The NIM was 2.92% for the second quarter of 2025, an increase of 25 basis points from 2.67% for the second quarter of 2024. The increase was primarily due to a 40 basis point decrease in the overall cost of funds to 3.14%, partially offset by a 10 basis point decrease in the yield on interest-earning assets to 5.79% for the second quarter of 2025 from 5.89% for the second quarter of 2024. The decrease in the yield on interest-earning assets was due mainly to lower market rates. The decrease in funding costs was due to the lower cost of interest-bearing deposits in response to lower market rates, offset by a higher average cost for FHLB advances. Average noninterest-bearing deposits totaled $526.1 million, or 17% of total average deposits, for the second quarter of 2025 compared to $529.5 million, or 17.6% of total average deposits, for the second quarter of 2024.

Net interest income was $53.5 million for the six months ended June 30, 2025, compared to $48.8 million for the six months ended June 30, 2024. The $4.7 million increase in net interest income was primarily due to a decrease in interest expense of $5.8 million, partially offset by a decrease in interest income of $1.1 million. The decrease in interest expense was primarily due to lower average rates paid on interest-bearing deposits, partially offset by an increase in the cost of FHLB advances. The decrease in interest income was primarily due to lower yields earned on cash and cash equivalents, loans and securities available for sale.

Interest income from cash and cash equivalents decreased by $4.7 million for the six months ended June 30, 2025 compared to the same period in 2024. The decrease was mainly due to a decrease in the yield on cash and cash equivalents from 5.77% for the six months ended June 30, 2024 to 4.77% for the six months ended June 30, 2025 combined with lower average balances of $131.5 million, as cash was used to fund loan growth and to purchase securities available for sale. Interest and fees on total loans increased $2.4 million for the six months ended June 30, 2025 to $93.3 million compared to $90.9 million for the six months ended June 30, 2024 primarily due to a $107.9 million increase in the average balance of total loans outstanding, due to strong loan growth in 2025. For the six months ended June 30, 2025 and 2024, the yield on loans was 6.02% and 6.06%. Interest income on available for sale securities also increased during the six months ended June 30, 2025 primarily due to an increase of $75.7 million in the average outstanding balances.

Interest expense on deposits decreased $7.2 million to $47.4 million for the six months ended June 30, 2025 compared to $54.6 million for the six months ended June 30, 2024. The decrease in interest expense on deposits was primarily due to a decrease in the average rates paid on interest-bearing deposits to 3.71% for the six months ended June 30, 2025 compared to 4.34% for the six months ended June 30, 2024. The decrease in the cost of deposits was partially offset by an increase in average interest-bearing deposits of $40.4 million to $2.6 billion. Average noninterest-bearing deposits decreased $5.8 million to $523.1 million for the first six months of 2025 compared to $528.9 million for the first six months of 2024. Average noninterest-bearing deposits as a percentage of total average deposits were approximately 17% for the first half of 2025 and 2024. Partially offsetting the decrease in interest expense on deposits was an increase in interest expense on FHLB advances of $1.5 million. The increase was mostly due to $150 million in term advances costing 1.18% that matured in the first quarter of 2025 that were replaced at current market rates. The average cost of FHLB advances was 2.89% for the six months ended June 30, 2025 compared to 1.18% for the six months ended June 30, 2024. Interest expense on FHLB advances was also impacted by an $18.0 million increase in the average outstanding balance of advances.

The NIM was 2.90% for the six months ended June 30, 2025, an increase of 22 basis points from 2.68% for the six months ended June 30, 2024. The increase was primarily due to a 39 basis point decrease in the average cost of funds, including a 63 basis point decrease in the cost of average interest-bearing deposits, partially offset by a 13 basis point decrease in the yield on average interest-earning assets, including lower yields on cash and cash equivalents, securities available for sale, and total loans.

Provision for Credit Losses

The provision for credit losses was $2.4 million for the second quarter of 2025 compared to $6.7 million for the first quarter of 2025. The second quarter of 2025 provision for credit losses was due to an increase in general reserves of $1.5 million due mainly to net loan growth, and an increase in specific reserves of $924,000 related to one lending relationship. The second quarter provision also took into consideration factors such as changes in the outlook for economic conditions and market interest rates, and changes in credit quality metrics, including changes in loans 30-89 days past due, nonperforming loans, and special mention and substandard loans during the period. Net charge-offs of $3.3 million in the second quarter were related to loans which had specific reserves at March 31, 2025. Net charge-offs on an annualized basis represented 0.42% of average loans for the second quarter of 2025 compared to 0.35% for the first quarter of 2025.

The provision for credit losses was $2.4 million for the second quarter of 2025 compared to a $557,000 provision for the second quarter of 2024. The second quarter of 2025 provision increased primarily due to an increase in general reserves due mainly to loan growth and an increase in specific reserves, as previously described. There were $3.3 million in net loan charge-offs in the second quarter of 2025, as compared to $551,000 in net loan charge-offs in the second quarter of 2024.

The provision for credit losses was $9.1 million for the six months ended June 30, 2025 compared to a $557,000 provision for the six months ended June 30, 2024. The provision for the first six months of 2025 was $8.6 million higher than the first six months of 2024 primarily due to increases in net charge-offs of $5.2 million and specific reserves of $1.2 million in the first six months of 2025 as compared to the 2024 period. General reserves also increased during the six months ended June 30, 2025 resulting primarily from loan growth. There were $5.9 million in net loan charge-offs for the six months ended June 30, 2025, as compared to $735,000 in net loan charge-offs for the six months ended June 30, 2024.

Noninterest Income

The following table presents the major components of our noninterest income for the periods presented:

Noninterest income for the second quarter of 2025 was $8.5 million, an increase of $6.2 million from $2.3 million for the first quarter of 2025. The second quarter of 2025 included other income of $5.2 million for the receipt of ERC funds from the Internal Revenue Service. The ERC was a grant program established under the Coronavirus Aid, Relief, and Economic Security Act in response to the COVID-19 pandemic and these funds relate to qualifying amended payroll tax returns the Company filed for the first and second quarters of 2021. Upon receipt of the ERC funds, certain professional and tax advisory costs associated with the assessment and compilation of the ERC refunds became due and payable. These amounts totaled $1.2 million and are included in legal and professional expense in our consolidated statements of income for the second quarter of 2025. There were no such ERC amounts received or associated costs recognized during the first quarter of 2025.

The second quarter of 2025 also included a higher gain on sale of loans of $277,000 and recoveries associated with fully-charged off loan acquired in a bank acquisition of $350,000, the latter included in other income.

Noninterest income increased $5.0 million to $8.5 million for the second quarter of 2025 from $3.5 million for the same quarter in the prior year. The increase in noninterest income primarily relates to the receipt of the ERC funds of $5.2 million recorded in the second quarter of 2025, discussed above. There were no such ERC amounts received during the quarter ended June 30, 2024. Offsetting this increase was a decrease in gain on OREO of $292,000 during the second quarter of 2025 compared to the same period in the prior year.

Noninterest income increased $3.9 million to $10.8 million for the six months ended June 30, 2025, compared to $6.9 million for the same period in the prior year. The increase was due to the receipt of the ERC funds of $5.2 million in the second quarter of 2025 and included in other income, as discussed above. There were no such ERC amounts received during the six months ended June 30, 2024. This increase in other income was partially offset by a $324,000 decrease in gain on sale of loans and a $1.0 million decrease in OREO-related gains.

The following table presents information on loan servicing income for the periods indicated:

As of June 30, 2025, we were servicing SFR mortgage loans for other financial institutions, the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA"), and SBA loans.

The following table presents loans serviced for others as of the dates indicated:

The following table presents information on loans sold and the related net gain (loss) on the sale of such loans for the periods indicated:

Noninterest Expense

The following table presents major components of our noninterest expense for the periods presented:

Noninterest expense for the second quarter of 2025 was $20.5 million, an increase of $2.0 million from $18.5 million for the first quarter of 2025. This increase was mostly due to higher legal and professional expense of $1.4 million, of which $1.2 million was attributed to the aforementioned ERC advisory costs, and a $437,000 increase in salaries and employee benefits expenses. The increase in compensation includes higher incentives related to sustained production levels, the impact of annual pay increases, and approximately $330,000 in costs related to executive management transitions, offset by lower payroll taxes. The annualized noninterest expense to average assets ratio was 2.05% for the second quarter of 2025, up from 1.90% for the first quarter of 2025 due primarily to the $1.2 million ERC advisory costs. The efficiency ratio was 57.22% for the second quarter of 2025, down from 65.09% for the first quarter of 2025 due mostly to higher noninterest income related to the ERC refund, partially offset by higher noninterest expense related to the ERC advisory costs.

Noninterest expense for the second quarter of 2025 was $20.5 million, an increase of $3.4 million compared to $17.1 million for the second quarter of 2024, mainly due to increases in salaries and employee benefits and legal and professional expenses. The increase in salaries and employee benefits expense of $1.5 million was due in part to higher incentives related to sustained production levels, one-time costs related to executive management transitions, and the impact of annual pay increases. The increase in legal and professional expense of $1.6 million was primarily attributable to the aforementioned ERC advisory costs. The efficiency ratio was 57.22%, down from 62.38% for the second quarter of 2024 due mostly to higher noninterest income related to the ERC refund, partially offset by higher noninterest expense related to the ERC advisory costs.

Noninterest expense for the six months ended June 30, 2025 was $39.0 million, an increase of $4.9 million from $34.1 million for the six months ended June 30, 2024. The increase in noninterest expense was primarily due to increases in salaries and employee benefits expense of $2.3 million and legal and professional fees of $2.3 million, as discussed above. These increases were partially offset by a decrease of $524,000 in insurance and regulatory assessments expense. The efficiency ratio was 60.70% for the first half of 2025, down from 61.21% for the first half of 2024 due in part to the impact of the ERC refund and associated advisory costs.

Income Tax Expense

We recorded an income tax provision of $3.6 million, $900,000, and $2.5 million, reflecting an effective tax rate of 27.8%, 28.2%, and 25.9% for the three months ended June 30, 2025, March 31, 2025, and June 30, 2024. We recorded an income tax provision of $4.5 million and $5.8 million, reflecting an effective tax rate of 27.9% and 27.4%, for the six months ended June 30, 2025 and 2024. The second quarter of 2025 income tax provision expense included a discrete adjustment of $379,000 resulting from a change in California tax law during the period. This change in tax law is expected to reduce our annual effective tax rate in future periods.