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 increased $1.9 million to $29.3 million for the third quarter of 2025, compared to $27.3 million for the second quarter of 2025. The $1.9 million increase was due to a $3.2 million increase in interest income, offset by a $1.2 million increase in interest expense. The increase in interest income was mostly due to a $2.4 million increase in interest and fees on loans. The increase in interest expense was due to a $1.0 million increase in interest on deposits and a $235,000 increase in interest on borrowings.

The net interest margin ("NIM") was 2.98% for the third quarter of 2025, an increase of 6 basis points from 2.92% for the second quarter of 2025. The NIM expansion included a 6 basis point increase in the yield on average interest-earning assets, combined with a 2 basis point decrease in the overall cost of funds. The yield on average interest-earning assets increased to 5.85% for the third quarter of 2025 from 5.79% for the second quarter of 2025 driven by a 9 basis point increase in the yield on average loans to 6.12%. Average loans represented 83% of average interest-earning assets in the third quarter of 2025, as compared to 84% in the second quarter of 2025.

The average cost of funds decreased to 3.12% for the third quarter of 2025 from 3.14% for the second quarter of 2025, due to a 3 basis point decrease in the average cost of interest-bearing deposits and a 9 basis point decrease in the average cost of total borrowings. The average cost of interest-bearing deposits decreased to 3.63% for the third quarter of 2025 from 3.66% for the second quarter of 2025. The overall funding mix for the third quarter of 2025 remained relatively unchanged from the second quarter of 2025 with average interest-bearing deposits representing 89% of average interest-bearing liabilities and average noninterest-bearing deposits representing 17% of average total deposits. The spot rate for total deposits was 2.97% at September 30, 2025.

Net interest income increased $4.7 million to $29.3 million for the third quarter of 2025, compared to $24.5 million for the third quarter of 2024. The increase in net interest income was due to an increase in interest income of $3.0 million, combined with a $1.8 million decrease in interest expense. The increase in interest income was primarily due to average interest-earning asset growth of $247.7 million, or 6.8%, as compared to the same quarter in 2024. The growth in average interest-earning assets included higher average total loans and securities available for sale, offset partially by a decrease in average cash and cash equivalents. The impact of higher average interest-earning assets on income was partially offset by lower market interest rates as compared to the same period in 2024. 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 $3.0 million increase in interest income was due mainly to a $2.8 million increase in interest income from average total loans, of which $3.3 million was attributed to higher average balances, offset by a $550,000 decrease due to lower rates. Average total loans were $3.2 billion for the quarter ended September 30, 2025, an increase of $175.6 million from the third quarter of 2024 due to strong loan growth in 2025. The yield on average total loans declined 1 basis point to 6.12% for the quarter ended September 30, 2025 compared to 6.13% for the quarter ended September 30, 2024.

The $1.8 million decrease in interest expense was due mainly to a $2.9 million decrease in interest expense on deposits, partially offset by higher interest expense on FHLB advances of $1.2 million. The decrease in interest expense on deposits was primarily due to a 76 basis point decrease in the rates paid on average interest-bearing deposits, partially offset by the impact of a $193.7 million increase in the average balance of interest-bearing deposits. Interest expense on FHLB advances increased due mainly to a 234 basis point increase in the average rate paid on FHLB advances as $150 million of fixed rate term advances matured during the first quarter of 2025 and were replaced in the current rate environment.

The NIM was 2.98% for the third quarter of 2025, an increase of 30 basis points from 2.68% for the third quarter of 2024. The increase was primarily due to a 45 basis point decrease in the total cost of funds to 3.12%, partially offset by a 9 basis point decrease in the yield on average interest-earning assets to 5.85% for the third quarter of 2025 from 5.94% for the third quarter of 2024. The decrease in the yield on average interest-earning assets was due mainly to lower market rates. The decrease in funding costs was due to the lower average cost of interest-bearing deposits in response to lower market rates, offset by the higher average cost for FHLB advances. Average noninterest-bearing deposits totaled $541.1 million, or 17% of total average deposits, for the third quarter of 2025 compared to $528.1 million, or 17% of total average deposits, for the third quarter of 2024.

Net interest income increased $9.4 million to $82.8 million for the nine months ended September 30, 2025, compared to $73.4 million for the nine months ended September 30, 2024. The increase in net interest income was due to a decrease in interest expense of $7.6 million, combined with an increase in interest income of $1.8 million. The decrease in interest expense was primarily due to lower average rates paid on interest-bearing deposits, partially offset by higher average balances of such deposits and an increase in the average rates paid on FHLB advances.

Interest expense on deposits decreased $10.2 million to $72.2 million for the nine months ended September 30, 2025 compared to $82.3 million for the nine months ended September 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 3.69% for the nine months ended September 30, 2025 compared to 4.35% for the nine months ended September 30, 2024. The effect of the decrease in the average rate paid on deposits was partially offset by an increase in average interest-bearing deposit balances of $91.9 million to $2.6 billion for the nine months ended September 30, 2025. Average noninterest-bearing deposits totaled $529.2 million, or 17% of total average deposits, for the first nine months of 2025, which is approximately the same as 2024.

Partially offsetting the decrease in interest expense on deposits was an increase in interest expense on FHLB advances of $2.7 million for the first nine months of 2025. The increase was mostly due to $150 million in term advances costing 1.18% that matured in the first quarter of 2025 and were replaced at current market rates. The average cost of FHLB advances was 3.13% for the nine months ended September 30, 2025 compared to 1.18% for the nine months ended September 30, 2024. Interest expense on FHLB advances was also impacted by a $23.6 million increase in the average outstanding balance.

The $1.8 million increase in interest income was primarily due to an increase in the average balance of loans and securities available for sale, partially offset by a decrease in market rates and lower average cash and cash equivalents. Interest and fees on total loans increased $5.2 million for the nine months ended September 30, 2025 primarily due to a $130.8 million increase in the average balance of total loans from strong loan growth in 2025. The yield on loans decreased 2 basis points to 6.06% for the nine months ended September 30, 2025 from 6.08% for the same period in 2024. Interest income on available for sale securities increased $2.6 million during the nine months ended September 30, 2025 primarily due to an increase of $94.3 million in average portfolio balances, offset partially by lower market rates. Interest income from cash and cash equivalents decreased by $6.0 million for the nine months ended September 30, 2025, compared to the same period in 2024 due to lower average balances of $106.8 million, as cash was used to fund loan growth, combined with a 98 basis point decrease in the yield on cash and cash equivalents to 4.73% for the nine months ended September 30, 2025 from 5.71% for the nine months ended September 30, 2024.

The NIM was 2.93% for the nine months ended September 30, 2025, an increase of 25 basis points from 2.68% for the nine months ended September 30, 2024. The increase was primarily due to a 41 basis point decrease in the average cost of funds, including a 53 basis point decrease in the cost of average deposits, partially offset by a 12 basis point decrease in the yield on average interest-earning assets.

Provision for Credit Losses

The provision for credit losses was $625,000 for the third quarter of 2025 compared to $2.4 million for the second quarter of 2025. The third quarter of 2025 provision for credit losses reflected a provision for loan losses of $750,000 due mainly to net loan growth and a reversal of provision for unfunded commitments of $125,000 due to a lower volume of unfunded commitments. The third 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 decreases in nonperforming, classified, criticized, and loans 30-89 days past due during the period. Net charge-offs totaled $6.9 million in the third quarter and related almost entirely to a commercial construction loan, of which $6.6 million of this credit loss was reserved for in prior periods, and the borrower filed for bankruptcy this quarter. Net charge-offs on an annualized basis represented 0.84% of average loans for the third quarter of 2025 compared to 0.42% for the second quarter of 2025.

The provision for credit losses was $625,000 for the third quarter of 2025 compared to a $3.3 million provision for the third quarter of 2024. The third quarter of 2025 provision was primarily due to loan growth, as previously described, and we saw a reduction in nonperforming, classified, criticized and delinquent loans during the current quarter. The third quarter of 2024 provision for credit losses included an increase in nonperforming, classified, and criticized loans at that date. Net loan charge-offs of $6.9 million for the third quarter of 2025, as previously described, were higher than $1.2 million for the same quarter last year.

The provision for credit losses was $9.8 million for the nine months ended September 30, 2025 compared to a $3.9 million provision for the nine months ended September 30, 2024. The provision for the first nine months of 2025 was $5.9 million higher than the same period in 2024 primarily due to increases in net charge-offs, partially offset by the impact of a decline in nonperforming, classified, and criticized loans as of September 30, 2025. There were $12.8 million in net loan charge-offs for the nine months ended September 30, 2025, as compared to $1.9 million in net loan charge-offs for the nine months ended September 30, 2024. The 2025 charge-offs included $6.8 million of credit loss that was reserved for in prior periods.

Noninterest Income

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

Noninterest income for the third quarter of 2025 was $3.3 million, a decrease of $5.2 million from $8.5 million for the second quarter of 2025. The decrease was mostly due to the second quarter of 2025 including other income of $5.2 million for the receipt of ERC funds from the Internal Revenue Service. There were no such ERC amounts received or associated advisory costs recognized during the third quarter of 2025. In addition, other income increased $148,000 due to higher equity investment income of $498,000, offset by lower recoveries on fully charged-off acquired loans of $350,000.

Noninterest income decreased $2.5 million to $3.3 million for the third quarter of 2025 from $5.8 million for the same quarter in the prior year. The decrease in noninterest income primarily relates to a $2.8 million recovery of a fully charged-off loan, which had been acquired in a bank acquisition, that was recognized in other income during the third quarter of 2024.

Noninterest income increased $1.5 million to $14.1 million for the nine months ended September 30, 2025, compared to $12.6 million for the same period in the prior year. The increase was mainly due to the increase in other income from ERC funds of $5.2 million recognized in the second quarter of 2025 with no similar income in 2024, offset by lower recoveries of fully charged-off loans of $2.4 million. We recognized recoveries of fully charged-off loans, which had been acquired in bank acquisitions, of $360,000 and $2.8 million for the nine months ended September 30, 2025 and 2024. The increase in other income was partially offset by a decrease in OREO-related gains of $1.0 million and gain on sale of loans of $511,000 for the nine months ended September 30, 2025 compared to the same 2024 period.

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

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

As of September 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:

Noninterest Expense

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

Noninterest expense for the third quarter of 2025 was $18.7 million, a decrease of $1.8 million from $20.5 million for the second quarter of 2025. The decrease was mainly due to lower legal and professional expense of $1.5 million, including $1.2 million of ERC advisory costs incurred in the second quarter of 2025. Salaries and employee benefits expense also decreased by $480,000, of which $330,000 related to executive management transitions recognized in the prior quarter. The efficiency ratio was 57.36% for the third quarter of 2025, compared to 57.22% for the second quarter of 2025.

Noninterest expense for the third quarter of 2025 was $18.7 million, an increase of $1.3 million compared to $17.4 million for the third 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 $592,000 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 $492,000 was primarily attributable to elevated legal costs related to credit, operations, and other corporate governance. The efficiency ratio was 57.36% for the third quarter of 2025 and 57.51% for the third quarter of 2024.

Noninterest expense for the nine months ended September 30, 2025 was $57.7 million, an increase of $6.2 million from $51.5 million for the nine months ended September 30, 2024. The increase in noninterest expense was primarily due to increases in salaries and employee benefits expense of $2.9 million, legal and professional fees of $2.8 million, and data processing expenses of $762,000. The increase in salaries and employee benefits expense was due in part to staffing and incentives supporting higher production levels, one-time costs related to executive management transitions, and the impact of annual pay increases. The increase in legal and professional fees was due mainly to $1.2 million of ERC advisory costs incurred in the second quarter of 2025 along with higher legal costs related to credit, operations, and other corporate governance. These increases were partially offset by a decrease of $450,000 in insurance and regulatory assessments. The efficiency ratio was 59.58% for the nine months ended September 30, 2025, down from 59.90% for the nine months ended September 30, 2024.

Income Tax Expense

We recorded an income tax provision of $3.1 million, $3.6 million, and $2.6 million, reflecting an effective tax rate of 23.5%, 27.8%, and 26.9% for the three months ended September 30, 2025, June 30, 2025, and September 30, 2024. We recorded an income tax provision of $7.6 million and $8.3 million, reflecting an effective tax rate of 25.9% and 27.2%, for the nine months ended September 30, 2025 and 2024. The effective tax rate is lower than the statutory rate for the 2025 reporting periods due in part to the realization of purchased Federal tax credits and a change in California tax law during the second quarter of 2025, which changes the way banks and financial institutions apportion income for California tax law purposes. The second quarter of 2025 income tax provision included a discrete charge of $379,000 resulting from this change in California tax law during the period. The effective tax rate is lower than the statutory rate for the 2024 reporting periods due in part to the realization of purchased Federal tax credits. The annual effective tax rate for fiscal 2025 is estimated to be in the range of 26% to 27%.