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More M&A in RBB's future after resolving internal governance, regulatory issues


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More M&A in RBB's future after resolving internal governance, regulatory issues

RBB Bancorp's inorganic growth strategy will not be deterred by its recent struggles.

Since early 2022, the Los Angeles-based company has faced several headwinds related to internal controls and governance and regulatory probes, which likely contributed to the recent termination of its acquisition of Gateway Bank FSB. However, M&A is not off the table for the company.

"We remain open to considering actionable strategic transactions that may be accretive to our shareholders," CEO David Morris said in a statement.

The timing of future M&A will likely be determined by how quickly the company rectifies its internal controls and governance, analysts told S&P Global Market Intelligence. For the time being, M&A is likely "off limits" for the company, Kelly Motta, managing director at Keefe Bruyette & Woods, said in an interview. But once RBB finishes its clean-up job, more M&A is on the horizon.

"RBB is a company on the mend. They just kind of ran out of time, and the regulators ... want to see that they've resolved these prior issues before letting RBB proceed with any kind of acquisition," Timothy Coffey, managing director and associate director of depository research at Janney Montgomery Scott LLC, said in an interview. "This hasn't dissuaded RBB from pursuing M&A in the future."

Once the company shows a "track record of improvement," it will likely look for deals in the Los Angeles and San Francisco areas, according to Coffey.

The company was an active acquirer in the years leading up to the recent tumult, striking three bank deals between 2015 and 2019. In interviews with Market Intelligence after the Gateway deal was announced, executives said they were looking for M&A throughout California and hoped to eventually expand to Texas and other markets that have a growing first-generation immigrant population, such as Seattle, Phoenix, Atlanta, Miami and Boston. RBB is an Asian-American or Pacific-Islander minority depository institution, a regulatory designation for banks that are owned or primarily operated by minority communities.

Recent struggles

RBB announced its acquisition of Gateway in December 2021 but encountered several speed bumps.

Shortly after the deal was announced, President and CEO Alan Thian took a leave of absence due to an internal investigation and later resigned in April 2022 after the investigation identified violations of company policies and procedures. Thian's departure began a succession of executive and board member turnover, including the departure of its chief lending officer in February 2022, the resignation of its vice chair and another board director in May 2022, and a slew of board director departures toward the end of 2022 and into 2023. The most recent director departure was in May.

Now, the US SEC is probing that turnover. In July, the company disclosed that the SEC requested information about certain company policies and procedures, expenditures, and former officers and directors. The SEC's request also encompasses the officers and directors' roles and relationships and the circumstances relating to their departures, including potential violations of laws and/or regulations.

In the face of those difficulties, the company has made steps toward improvement, including the addition of a new CEO, CFO, president and chief banking officer, and several new directors.

"RBB is committed to good corporate governance. Seven of the Bank's [10] directors joined the Board in the last 18 months, one of whom is a former bank regulator. We believe the enhancement of our Board of Directors reaffirms RBB's commitment to good corporate governance and regulatory compliance," the company's CEO said in a statement.

However, regulators likely want to see more progress before they greenlight a deal, analysts said.

"That uncertainty makes it really difficult for the regulators to sign off on a deal, I would imagine," Motta said. "I think they're working toward doing the right things, and it's just not enough time has elapsed since making those changes to really show stability."

The company's stock price took a hit amid all the news, down over 50% since the deal was announced Dec. 28, 2021, according to Market Intelligence data.

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Still, RBB is in a better position now than it was two years ago, Coffey said.

"The problems that RBB has or had are in the past. They're a very different company — they just need to prove it. And I think they will," Coffey said. "It's just the regulators weren't willing to wait."

Although the issues are specific to RBB, the situation underscores the importance of having strong internal controls when trying to get a deal approved.

"Regardless of what's happening in the banking industry today, regulators still care about processes like internal controls and stability at the management- and board-levels," Coffey said.