Item 1A. Risk Factors.
Risks Related to Interest Rates
Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we receive on our assets, such as loans, may rise more quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to increase. However, when interest rates decrease, the rate of interest we receive on our assets, such as loans, may decline more quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to decrease. The impact on earnings is more adverse when the slope of the yield curve flattens or becomes inverted, that is, when short-term interest rates remain constant or increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates.
Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates. At December 31, 2025, total loans held for investment ("HFI") were 84.4% of our earning assets and exhibited a positive 4% sensitivity to rising interest rates in a 100 basis point parallel shock.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.
Rising interest rates will result in a decline in the value of the fixed-rate debt securities we hold in our investment securities portfolio. The unrealized losses resulting from holding these securities would be recognized in accumulated other comprehensive income (loss) and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced. If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.
If short-term interest rates remain constant but longer-term interest rates fall, we could experience net interest margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This would have a material adverse effect on our net interest income and our results of operations.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
As of December 31, 2025, the fair value of our securities portfolio was approximately $411.3 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.
At
December 31, 2025,
$407.2 million of our securities were classified as AFS with an aggregate pre-tax net unrealized loss of $18.9 million. We increase or decrease shareholders’ equity by the amount of change from the unrealized gain or loss (the difference between the estimated fair value and the amortized cost) of our AFS securities portfolio, net of the related tax, under the category of accumulated other comprehensive income (loss). Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported shareholders’ equity, book value per common share, and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold and there are no credit impairments, the decrease will be recovered over the life of the securities. In the case of equity securities, which have no stated maturity, the declines in fair value may or may not be recovered over time.
Risks Related to Our Business
Changes in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our business, financial position, results of operations and growth prospects.
Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly in the states of California, Nevada, Illinois, New Jersey, Hawaii and New York, and the Los Angeles, New York City, Chicago, Las Vegas and Honolulu metropolitan areas. Unfavorable or uncertain economic and market conditions could lead to credit quality concerns related to repayment ability and collateral protection as well as reduced demand for the products and services we offer. In addition, economic conditions in foreign countries, including global political hostilities, U.S. and foreign tariff policies and uncertainty over the stability of the euro currency, could affect the stability of global financial markets, which could hinder domestic economic growth. Concerns about the performance of international economies can impact the economy and financial markets here in the U.S. in several ways. For example, a significant deterioration of economic conditions in Asia could expose us to, among other things, economic and transfer risk, and we could experience an outflow of deposits by those of our customers with connections to Asia. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of investments with, or loans made to, such entities.
If the national, regional and local economies experience a decline in economic conditions, including high levels of unemployment, our growth and profitability could be constrained. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in the debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, lower home sales and commercial activity, and fluctuations in the commercial and Federal Housing Administration financing sector. A significant outbreak of disease pandemics or other adverse public health developments in the population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could adversely affect our customers’ businesses and results of operations. Our business is significantly affected by monetary and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities.
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In recent years, economic growth has been uneven, and opinions vary on the strength and direction of the economy. Uncertainties also have arisen regarding the potential for a reversal or renegotiation of international trade agreements with China, the European Union and the United Kingdom, and the impact such actions may have on economic and market conditions. A trade war or other governmental action related to tariffs or international trade agreements or policies, as well as military conflicts, including the military actions between Ukraine and Russia, war and conflicts in the Middle East and tension between China and Taiwan, or other potential epidemics or pandemics, have the potential to negatively impact our and/or our customers’ costs, demand for our customers’ products, and/or the U.S. economy or certain sectors thereof and, thus, adversely affect our business, financial condition, and results of operations.
Although inflation levels moved closer to the Federal Open Market Committee’s (“FOMC”) target rate of 2% in 2025, as of December 31, 2025, inflation rates remained elevated above the target rate. To the extent inflation persists, it poses a risk to the economy overall, and could pose direct or indirect challenges to our clients and to our business. Elevated inflation can impact our business customers through loss of purchasing power for their customers, leading to lower sales. Elevated inflation can also increase input and inventory costs for our customers, forcing them to raise their prices or lower their profitability. Supply chain disruption, also leading to inflation, can delay our customers’ shipping ability, or timing on receiving inputs for their production or inventory. Inflation can lead to higher wages for our business customers, increasing costs. All of these inflationary risks for our business customer base can be financially detrimental, leading to increased likelihood that the customer may become delinquent or otherwise default on a loan. To the extent such conditions exist or worsen, we could experience adverse effects on our business, financial condition, and results of operations.
Health crises have in the past, and could in the future, materially and adversely affect our business and our customers, counterparties, employees, and third-party service providers.
Pandemics, epidemics, or other health crises, including COVID-19, have had and could have repercussions that could impact household, business, economic, and market conditions. These events have in the past caused, and could in the future cause, us to implement measures to combat such health crises, including restrictions impacting individuals, including our current and potential investors and customers, and the manner in which business continues to operate. Additionally, our operations may be impacted by the need to close certain offices and limit how customers conduct business through our branch network.
Pandemics, epidemics, or other health crises could impact our business, capital, liquidity, financial position, results of operations, and business prospects due to the potential effect on our customers, employees, and third-party service providers. In addition, health crises can lead to lingering impacts on economies and markets, for example, the unprecedented extent of economic stimulus during the COVID-19 pandemic that caused and/or exacerbated inflationary pressures.
We are subject to liquidity risk, which could adversely affect our financial condition and results of operations.
Effective liquidity management is essential for the operation of our business. Although we have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, an inability to raise funds through deposits, borrowings, the sales of investment securities and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market disruption, a decrease in the borrowing capacity assigned to our pledged assets by our secured creditors, or adverse regulatory action against us. Deterioration in economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit our access to some of our customary sources of liquidity, including, but not limited to, inter-bank borrowings and borrowings from the Federal Reserve and FHLB. Our ability to acquire deposits or borrow, and the possibility of deposit outflows, could also be impaired by various stress environments and other factors that are not specific to us, including a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry generally as a result of conditions faced by banking organizations in the domestic and international credit markets. Other factors, for example a cybersecurity breach that is specific to us, could also impair our ability to acquire or retain deposits. The inability to maintain adequate liquidity could materially and adversely affect our business, results of operations or financial condition.
Our business depends on our ability to attract and retain Asian-American immigrants as clients.
A significant portion of our business is based on successfully attracting and retaining Asian-American immigrants as clients for both our non-qualified residential mortgage loans and deposits. We may be limited in our ability to attract Asian-American clients to the extent the U.S. adopts restrictive domestic immigration laws. Changes to U.S. immigration policies that restrain the flow of immigrants may inhibit our ability to meet our goals and budgets for non-qualified SFR mortgage loans and deposits, which may adversely affect our net interest income and net income.
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Risks Related to Our Loans
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
At December 31, 2025, approximately 94.0% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
At December 31, 2025, we had $1.6 billion of commercial loans, consisting of $1.3 billion of CRE loans, $140.1 million of C&I loans for which real estate is not the primary source of collateral and $155.5 million of C&D loans. Commercial loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy. Accordingly, a downturn in the real estate market and a challenging business and economic environment may increase our risk related to commercial loans, particularly commercial real estate loans. Unlike residential mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the commercial venture. Our C&I loans, which represented 4.2% of our total loan portfolio at December 31, 2025, are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations.
We have a concentration in commercial real estate, which could cause our regulators to restrict our ability to grow.
As a part of their regulatory oversight, the federal regulators have issued the CRE Concentration Guidance on sound risk management practices with respect to a financial institution’s concentrations in commercial real estate lending activities. These guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or more of total risk-based capital; or (2) total CRE loans as defined in the regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidelines, loans secured by owner occupied commercial real estate are not included for purposes of CRE Concentration calculation. As of December 31, 2025, our CRE loans represented 226% of our Bank total risk-based capital, as compared to 207% as of December 31, 2024. We actively work to manage our CRE concentration and we have discussed the CRE Concentration Guidance with the FDIC and believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance. Nevertheless, the FDIC or the DFPI could become concerned about our CRE loan concentrations, and they could limit our ability to grow by restricting their approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities.
Our SFR loan product consists primarily of non-qualified SFR mortgage loans, which may be considered less liquid and more risky.
As of December 31, 2025, our SFRmortgage loan portfolio amounted to $1.66 billion or 50.0% of our loan portfolio. As of that date, 97.4% of our SFR mortgage loans consisted of non-qualified mortgage loans, which are considered to have a higher degree of risk and are less liquid than qualified mortgage loans. We offer two SFRmortgage products, a low loan-to-value, alternative document hybrid non-qualified SFR mortgage loan, which we refer to as non-qualified SFR mortgage loan, and a qualified SFR mortgage loan. As of December 31, 2025, our non-qualified SFR mortgage loans had an average loan-to-value of 54.6% and an average FICO score of 763. As of December 31, 2025, 3.0% of our total SFRmortgage loan portfolio were loans originated to foreign nationals. The non-qualified SFR mortgage loans that we originate are designed to assist Asian-Americans who have recently immigrated to the United States and as such are willing to provide higher down payment amounts and pay higher interest rates and fees in return for reduced documentation requirements. Non-qualified SFRmortgage loans are considered less liquid than qualified SFRmortgage loans because such loans are not able to be securitized and can only be sold directly to other financial institutions. Since non-qualified loans may be considered more risky than qualified mortgage loans, we attempt to address this enhanced risk through our underwriting process, including requiring larger down payments and, in some cases, interest reserves.
We also have a concentration in our SFRsecondary sale market, as a substantial portion of our non-qualified mortgage loans have been historically sold to a small number of banks. We are taking steps to reduce our dependence on these banks by expanding the number of banks that we sell our non-qualified SFRmortgages to, but may not be successful in expanding our sales market for our non-qualified mortgage loans. These loans also present a pricing risk as rates change, and our sale premiums cannot be guaranteed. Further, the criteria for our loans to be purchased by other banks may change from time to time, which could result in a lower volume of corresponding loan originations.
Mortgage production, including refinancing activity, historically declines in rising interest rate environments, which we have experienced in recent years.
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The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of SBA loans that we sell could expose us to various credit and default risks.
We originated $27.2 million of SBA loans for the year ended December 31, 2025. We sold $10.8 million of the guaranteed portion of our SBA loans for the year ended December 31, 2025. Consequently, as of December 31, 2025, we held $56.0 million of SBA loans on our balance sheet, of which $45.1 million or 80.5% consisted of the non-guaranteed portion of SBA loans and $10.9 million or 19.5% consisted of the guaranteed portion of SBA loans. The non-guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans. We attempt to limit this risk by generally requiring such loans to be collateralized and limiting the overall amount that can be held on our balance sheet to 75% of our total capital.
When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the SBA loan and the manner in which they were originated. Under these agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected. Further, we generally retain the non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the borrowers of such loans experience financial difficulties, our financial condition and results of operations could be adversely impacted.
Curtailment of government guaranteed loan programs could affect a segment of our business.
A significant segment of our business consists of originating and periodically selling U.S. government guaranteed loans, in particular those guaranteed by the SBA. Presently, the SBA guarantees 75% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program. There is no assurance that the U.S. government will maintain the SBA 7(a) loan program or if it does, that such guaranteed portion will remain at its current level. In addition, from time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee future loans. In addition, these agencies may change their rules for qualifying loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan guarantee programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small businesses, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability associated with the sale of the guaranteed portion of these loans could decline as a result of market displacements due to increases in interest rates, and could cause the premiums realized on the sale of the guaranteed portions to decline from current levels. As the funding and sale of the guaranteed portion of SBA 7(a) loans is a portion of our business and a part of our noninterest income, any significant changes to the funding for the SBA 7(a) loan program and any prolonged government shutdown may have an unfavorable impact on our prospects, future performance and results of operations.
Real estate construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
Real estate construction loans, including land development loans, comprised approximately 4.7% of our total loan portfolio as of December 31, 2025. Such lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it. If any of these events occur, our financial condition, results of operations and cash flows could be materially and adversely affected.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future.
As of December 31, 2025, our nonperforming assets totaled $53.5 million, or 1.27%, of total assets, comprised of nonperforming loans of $44.6 million and other real estate owned ("OREO") of $8.8 million. Nonaccrual loans HFI were 1.35% of our loan HFI portfolio at December 31, 2025.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming assets also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.
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Risks Related to Our Deposits
Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to a relatively small number of clients.
As a commercial bank, we provide services to a number of clients whose deposit levels vary considerably and have a significant amount of seasonality. Our deposits include $1.3 billion, or approximately 40%, of the Bank's total deposits, related to 166 client relationships who maintain balances greater than $2 million, when aggregating all related accounts, including multiple business entities and personal funds of business owners, at December 31, 2025. In addition, our ten largest depositor relationships accounted for approximately 12.5% of our deposits at December 31, 2025. Our largest depositor relationship accounted for approximately 2.0% of our deposits at December 31, 2025. These deposits can and do fluctuate. The loss of any combination of these depositors, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’ businesses, would adversely affect our liquidity and require us to raise deposit rates to attract new deposits, or otherwise purchase federal funds or borrow funds on a short-term basis to replace such deposits. Depending on the interest rate environment and competitive factors, low cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income. Consequently, the occurrence of these events could have a material adverse impact to our operations and financial results.
Risk Related to our Allowance for Credit Losses (“ACL”)
If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans and charge-offs, which could require increases in our provision for credit losses.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit underwriting and monitoring procedures will reduce these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the U.S., generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for credit losses, which would cause our net income, return on equity and capital to decrease.
Our ACL may prove to be insufficient to absorb potential credit losses in our loan portfolio.
We establish our ACL and maintain it at a level that management considers adequate to absorb expected credit losses based on an analysis of our portfolio and market environment. The ACL represents our estimate of expected credit losses in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains provisions for expected credit losses that have been identified relating to specific borrowing relationships, as well as expected credit losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the ACL, which are charged to earnings through the provision for credit losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience, reasonable and supportable forecasts and an evaluation of current economic conditions in our market areas. The actual amount of credit losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.
We estimate credit losses using the CECL model, which incorporates the use of and is more reliant on reasonable and supportable forecasts of economic conditions, including, but not limited to: forecasts of GDP growth rates, levels of unemployment, vacancy rates, and changes in the value of commercial real estate properties. Because the CECL methodology is more dependent on future economic forecasts, assumptions, and models than the previous accounting standards, it may result in increases and add volatility to our ACL and future provisions for credit losses. The forecasts, assumptions, and models required by CECL are based upon third-party forecasts, subject to management’s review and adjustment in light of information currently available.
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As of December 31, 2025, our ACL as a percentage of total loans HFI was 1.32% and as a percentage of total nonperforming loans HFI was 98.3%. Although management believes that the ACL is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for credit losses in the future to further supplement the ACL, due to a variety of factors. Our bank regulatory agencies will periodically review our ACL and the value attributed to nonaccrual loans or to OREO and may require us to adjust our determination of the value for these items. These adjustments may adversely affect our business, financial condition and results of operations.
Risks Related to our Growth Strategy
Acquisitions may disrupt our business.
We successfully completed six whole bank acquisitions and one branch acquisition since July 2011. The success of future acquisitions we may consummate may depend, in part, on the ability to realize the estimated cost savings and combine the acquired businesses with our existing operations in a manner that does not materially disrupt the existing customer relationships of either institution, or result in decreased revenues resulting from any loss of customers, and that permits growth opportunities to occur. If we are not able to successfully achieve these objectives, the anticipated benefits of future acquisitions may not be realized fully or at all or may take longer to realize than expected.
There are risks associated with our growth strategy. To the extent that we grow through acquisitions, we cannot ensure that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches or other assets, as well as other expansion activities, involves various risks including the risks of incorrectly assessing the credit quality of acquired assets, encountering greater than expected costs of integrating acquired banks or branches, the risk of loss of customers and/or employees of the acquired institution or branch, executing cost savings measures, not achieving revenue enhancements and otherwise not realizing the transaction’s anticipated benefits. Our ability to address these matters successfully cannot be assured. There is also the risk that the requisite regulatory approvals might not be received and other conditions to consummation of a transaction might not be satisfied during the anticipated timeframes, or at all. In addition, our strategic efforts may divert resources or management’s attention from ongoing business operations, may require investment in integration and in development and enhancement of additional operational and reporting processes and controls, and may subject us to additional regulatory scrutiny. To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing stockholders.
It is possible that the potential cost savings of one or more acquisitions could turn out to be more difficult to achieve than anticipated and the integration process associated with an acquisition could result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships with clients, customers, depositors, and employees or to achieve the anticipated benefits of the acquisitions. Integration efforts could also divert management attention and resources. These integration matters could have an adverse effect on the combined Company.
In addition, if we were to conclude that the value of an acquired business has decreased and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge to us, which would adversely affect our results of operations.
Our business strategy includes plans for organic growth, and our financial condition and results of operation could be adversely affected if we fail to grow or fail to manage our growth effectively.
As part of our general growth strategy, we expect to continue to pursue organic growth, while also continuing to evaluate potential acquisitions and expansion opportunities that we believe provide a strategic or geographic fit with our business. There can be no assurance that we will successfully execute our organic growth strategy, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful.
Our growth initiatives may also require us to recruit experienced personnel to assist in such initiatives. Accordingly, the failure to identify and retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In addition, to the extent we expand our lending beyond our current market areas, we could incur additional risks related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.
If we do not successfully execute our growth plan, it could adversely affect our business, financial condition, results of operations, reputation and growth prospects. While we believe we have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage growth.
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As we expand our business outside of California markets, we may encounter risks that could adversely affect us.
We primarily operate in California, New York, New Jersey and Illinois markets with a concentration of Asian-American individuals and businesses; however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Asian-American individuals and businesses. We also currently have operations in Las Vegas, Nevada and Honolulu, Hawaii, including operating a branch office, and would consider strategic opportunities for additional branch expansion. In the course of any expansion, we may encounter significant risks and uncertainties that could have a material adverse effect on our operations. These risks and uncertainties include increased expenses and operational difficulties arising from, among other things, our ability to attract sufficient business in new markets, to manage operations in noncontiguous market areas, to comply with all of the various local laws and regulations, and to anticipate events or differences in markets in which we have no current experience. Expansion of our business beyond California could have a material adverse effect on our operations and financial results.
Other Risks Related to Our Business
If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on that system of internal control. In the past, material weaknesses have been identified in our internal controls over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Our actions to maintain effective controls and remedy any weakness or deficiency may not be sufficient to result in an effective internal control environment and any future failure to maintain effective internal control over financial reporting could impair the reliability of our financial statements, which in turn could harm our business, impair investor confidence in the accuracy and completeness of our financial reports, impair our access to the capital markets, cause the price of our common stock to decline and subject us to increased regulatory scrutiny and/or penalties, and higher risk of shareholder litigation.
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We are exposed to risks related to fraud and cyber-attacks.
We continue to enhance and expand our digital products and services to meet client needs and business objectives. These digital products and services often require storing, transmitting, and processing sensitive client, employee, financial, and proprietary business information. Because this information can be valuable to threat actors, we and our third-party service providers remain exposed to cyber-attacks, fraud attempts, and other malicious activities seeking to gain unauthorized access to systems or data, misuse or steal information, disrupt operations, or deploy malicious software.
In addition, our clients and vendors rely on technology and systems not managed by us—such as personal computers, mobile devices, networking equipment, and software—to conduct business with us. If the technology or systems of our clients or vendors is compromised, it could result in unauthorized access to, misuse of, or loss of confidential client, employee, financial, or business information. Threat actors using stolen personal or financial information may attempt to fraudulently obtain loans, lines of credit, or other financial products from us, or attempt to deceive our employees, clients, or other users of our systems to disclose additional information to obtain unauthorized access to our systems.
We maintain robust preventive, detective, and administrative safeguards designed to reduce the likelihood and impact of a material cybersecurity event. However, because the tactics used by threat actors evolve rapidly and may not be identified until after an incident has occurred, we may be unable to anticipate or implement timely protections against all emerging threats.
Cybersecurity remains a priority for us, and we continue to develop and enhance controls, processes, and practices designed to protect client information, systems, computers, software, data, and networks. As threats continue to evolve, we may be required to allocate additional resources to further strengthen our security measures.
To date, we have no knowledge of any successful cyber-attack or material information security breach affecting our systems. However, our exposure remains heightened due to the evolving nature of the threats, the continued use of remote work arrangements by employees and service providers, our ongoing expansion of digital banking services, and our reliance on third-party information systems including cloud-based infrastructure, platforms, and software. Recent attacks targeting financial services institutions demonstrate that the risk to our systems remains significant. A successful cyber-attack or data breach involving us or a critical third-party vendor could result in reputational harm, productivity losses, remediation and response costs associated with investigation and resumption of services, client notification and credit monitoring expenses, increased insurance premiums, regulatory investigations or penalties, civil litigation, and other costs, any of which could have a material adverse effect on our business, financial condition, and results of operations.
We also incur costs when our customers become the victims of cyber-attacks. For example, various retailers have reported that they have been the victims of a cyber-attack in which large amounts of their clients’ data, including debit and credit card information, is obtained. Our clients may be the victims of phishing scams, providing cyber criminals access to their accounts, or credit or debit card information. In these situations, we incur costs to replace compromised cards and address fraudulent transaction activity affecting our clients.
Both internal and external fraud and theft present significant risks. Mishandling or misuse of confidential client, employee, financial, or business information—whether through system errors, employee actions, or third-party misconduct—could result in regulatory consequences, reputational harm, and financial loss. Fraud can occur in connection with loan originations, lines of credit, ACH transactions, wire transfers, ATM activity, and other transactions, or could result from unauthorized access, employee misconduct, or the interception or theft of information by third parties resulting in financial losses as well as reputational damage.
Operational errors—including information system misconfiguration, clerical mistakes, or disruptions caused by technology failures—may be repeated or amplified before detection due to the high volume of transactions we process. With these transactions, there is a risk that technical flaws, tampering, or manipulation of automated systems, arising from events wholly or partially beyond our control, may give rise to disruption of service to customers and to financial loss or liability. We are also exposed to the risk that our business continuity and data security systems may prove inadequate under certain circumstances.
The occurrence of any of these risks could impair our ability to operate effectively, result in additional costs to remediate issues, expose us to client claims, or cause reputational harm, any of which could have a material adverse effect on our business, financial condition and results of operations.
The development and use of new technologies, including artificial intelligence ("AI"), can present risks and uncertainties that could adversely affect our business and financial condition.
Banking and financial services technology is rapidly evolving, including the development and deployment of AI. We and our third party vendors may develop or integrate AI or other emerging technologies into certain business products, processes, or services to increase efficiency and better serve our customers at a reduced cost. The ability to successfully deploy and manage these emerging technologies, or to integrate them into existing systems, may adversely impact operations resulting in the disruption of service to our customers and liability or financial loss.
AI technologies may produce undesirable results such as producing false data, generating inaccurate calculations, improperly handling or leaking sensitive information, reflecting unintended bias, or otherwise failing to perform as intended. Using third-party providers may result in limited visibility and control over these risks. Any failures in the use of AI or related-technologies, or evolving legal and regulatory requirements governing their use, could result in regulatory consequences, reputational harm, and financial loss, and could have a material adverse effect on our business, results of operations, and financial condition.
Potential environmental liabilities associated with commercial lending could materially and adversely affect our business and financial condition.
In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clear up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of any contaminated site, we may be subject to common law claims by third parties based on damages, and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations could be materially and adversely affected. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.
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A natural or man-made disaster or recurring energy shortage in our geographic markets, especially in California, could harm our business.
We are based in California and at December 31, 2025, approximately 58.8% of the aggregate outstanding principal of our total loan portfolio was secured by real estate located in California or businesses in California. In addition, the computer systems that operate our Internet websites and some of their back-up systems are located in California. Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Certain of these natural disasters may be exacerbated by climate change. Natural or man-made disasters and recurring energy shortages could harm our operations directly through interference with communications, including the interruption or loss of our information technology structure and websites, which could prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. A natural or man-made disaster or recurring power outages may also impair the value of our largest class of assets, our loan portfolio, which is comprised substantially of real estate loans. Uninsured or underinsured disasters may reduce borrowers’ ability to repay mortgage loans. Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on defaulted loans through foreclosure and making it more likely that we would suffer losses on defaulted loans. California has also experienced energy shortages, which, if they recur, could impair the value of the real estate in those areas affected. Although we have implemented several back-up systems and protections (and maintain business interruption insurance), these measures may not protect us fully from the effects of a natural disaster. For example, the California wildfires in Los Angeles County in January 2025 destroyed considerable commercial and residential properties impacting the businesses and lives of clients, employees and other shareholders. Direct and indirect costs and impacts from wildfires may include potential adverse changes to the level of our nonperforming assets and charge-offs. The occurrence of natural and man-made disasters or energy shortages in California could have a material adverse effect on our business prospects, financial condition and results of operations.
Climate change could have a material negative impact on us and clients.
Our business, as well as the operations and activities of our clients, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to us and our clients, and these risks are expected to increase over time. Climate change presents multi-faceted risks, including: operational risk from the physical effects of climate events on us and our clients’ facilities and other assets; credit risk from borrowers with significant exposure to climate risk; transition risks associated with the transition to a less carbon-dependent economy; and reputational risk from stakeholder concerns about our practices related to climate change, our carbon footprint, and our business relationships with clients who operate in carbon-intensive industries.
In addition, California remains at the forefront of climate-related disclosure regulations, including the Climate-Related Financial Risk Act (SB 261), as amended by California Senate Bill 219. While these laws are currently subject to legal challenge and the extent to which these laws may be pre-empted by federal law is uncertain, in the absence of federal preemption the Climate-Related Financial Act would apply to us. Related compliance costs represent hard costs beyond current regulatory costs and would also involve the cost of management and personnel resources. In addition, we have multiple stakeholders, among them stockholders, customers, federal and state regulatory authorities, and political entities, who often have differing, and sometimes conflicting, priorities and expectations regarding environmental, social and governance issues. For instance, we operate extensively in California, which is at the forefront of requiring climate-related disclosures, but we also operate in states throughout the country, and there is an increasing number of state-level initiatives opposing environmental, social and governance practices.
New or increased regulations could result in increased compliance costs or capital requirements. Additionally, our reputation and customer relationships may be damaged due to our practices related to climate change, including our involvement, or our customers’ involvement, in certain industries or projects associated with causing or exacerbating climate change, as well as any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change. Ongoing legislative or regulatory developments and changing climate risk management and related practices may result in higher regulatory, compliance and credit risks and costs.
We are making efforts to enhance our governance of climate change-related risks and integrate climate considerations into our risk governance framework. Nonetheless, the risks associated with climate change are rapidly changing and evolving in an escalating fashion, making them difficult to assess due to limited data and other uncertainties. We could experience increased expenses resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and reduced investor and stakeholder confidence due to our response to climate change and our climate change strategy, which, in turn, could have a material negative impact on our business, results of operations, and financial condition.
We face strong competition from financial services companies and other companies that offer banking and mortgage banking services, which could harm our business.
Our operations consist of offering banking and mortgage banking services to generate both interest and noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment service providers. Increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking and mortgage loan customers and expand our sales market for such loans, we may be unable to continue to grow our business, which could have a material negative impact on our business, results of operations and financial condition.
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Federal and state banking regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.
In addition, other new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.
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Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.
We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third party vendors and other ongoing third party business relationships. In certain cases, we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
Risks Related to an Investment in Our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common stock owned by you at times or at prices you find attractive.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
● failure to meet analysts’ revenue or earnings estimates;
● speculation in the press or investment community;
● acquisitions of other banks or financial institutions;
● actions by institutional stockholders;
● fluctuations in the stock price and operating results of our competitors;
● adverse audit opinion on the effectiveness of our internal controls;
● successful management of reputational risk;
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified above in “Forward-Looking Statements,” and in this Item 1A. Risk Factors. The capital and credit markets can experience volatility and disruption. Such volatility and disruption can reach unprecedented levels, resulting in downward pressure on stock prices and credit availability for certain issuers without regard to their underlying financial strength. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.
Our dividend policy may change.
We have paid quarterly dividends since our initial public offering in the third quarter of 2017. We paid total dividends of $0.64 per share in 2023, 2024, and 2025. We have no obligation to pay dividends and we may change our dividend policy at any time without notice to our shareholders. Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of funds legally available for such payments. Furthermore, consistent with our strategic plans, growth initiatives, capital availability and requirements, projected liquidity needs, financial condition, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to our common shareholders.
We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from the Bank, which we use as the principal source of funds to pay our expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If the Bank does not receive regulatory approval or if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our ability to pay our expenses and our business, financial condition or results of operations could be materially and adversely impacted.
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Our business and financial results could be impacted materially by adverse results in legal proceedings.
Various aspects of our operations involve the risk of legal liability. We have been, and expect to continue to be, named or threatened to be named as defendants in legal proceedings arising from our business activities. We establish accruals for legal proceedings when information related to the loss contingencies represented by those proceedings indicates both that a loss is probable and that the amount of the loss can be reasonably estimated, but we do not have accruals for all legal proceedings where we face a risk of loss. In addition, amounts accrued may not represent the ultimate loss to us from those legal proceedings. Thus, our ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for loss contingencies arising from legal proceedings, and these losses could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.
Future sales or equity issuances could result in dilution, which could cause our common stock price to decline.
We have outstanding options to purchase 151,000 shares of our common stock and unvested restricted stock units of 191,091 as of December 31, 2025, that may be exercised or vest and then otherwise be sold (assuming all vesting requirements are met), and we have the ability to issue equity awards for up to an additional 878,916 shares of common stock pursuant to our 2017 Omnibus Stock Incentive Plan. The sale of any such shares could cause the market price of our stock to decline, and concerns that those sales may occur could cause the trading price of our common stock to decrease or to be lower than it might otherwise be.
We are also generally not restricted from issuing additional shares of our common stock, up to the 100 million shares of common stock and 100 million shares of preferred stock authorized in our articles of incorporation, which in each case could be increased by a vote of a majority of our shares. We may issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.
Provisions in our charter documents and California law may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.
Provisions of our charter documents and the California General Corporation Law (“CGCL”) could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders. Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. Moreover, the combination of these provisions effectively inhibits certain mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.
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Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Cybersecurity threats continue to evolve as the threat landscape evolves. The Company continuously works to evolve its cybersecurity practices with the changing landscape. Significant resources are devoted to protecting and enhancing the security of networks, computer systems, data storage devices, and other systems and technology. The Company's security efforts and implemented controls are designed to protect against, among other things, cybersecurity attacks that can result in unauthorized access of confidential information, the destruction of data, disruptions to or degradations of service, the sabotaging of systems or other damage.
Third parties with which the Company does business, which facilitate the Company's business activities, e.g., vendors, supply chain, exchanges, clearing houses, central depositories, and financial intermediaries are sources of cybersecurity risk to the Company. Third-party incidents such as system breakdowns or failures, misconduct by the employees of such parties, or cyber-attacks, including ransomware and supply-chain compromises could have a material adverse effect on the Company, including in circumstances in which an affected third party is unable to deliver a product or service to the Company or results in lost or compromised information of the Company or its clients or customers.
Company customers are also sources of cybersecurity risk to the Company and its information assets, particularly when their activities and systems are beyond the Company’s own security and control systems. The Company provides information to its customers and other external parties concerning cybersecurity risks, including opportunities to reduce cybersecurity risk.
The security program is commensurate with the size and complexity of the Company. Risks from cybersecurity threats, including any previous cybersecurity events, have not materially affected the Company or its business strategy, results of operations or financial condition.
Cybersecurity Risk Management
The Company maintains an Information Security and Cybersecurity Program to support the management of cybersecurity risk as a component of the Company’s Enterprise Risk Management (“ERM”) framework. The information security and cybersecurity program is designed to manage risks relating to cybersecurity threats and leverages controls, best practices recommendations, and standards from the Federal Financial Institutions Examination Council (“FFIEC”), the National Institute of Standards and Technology (“NIST”) Cybersecurity Framework (CSF) 2.0, the ISO/IEC 27001 Security Framework, and standards set by relevant legal and regulatory authorities.
The Information Security Officer (“ISO”) oversees the Company's Information Security and Cybersecurity Program and leads the Information Security team. Reporting to the Chief Risk Officer (“CRO”) and Chief Information Officer (“CIO”), the ISO and his team are responsible for identifying, assessing and managing information security and cybersecurity risks, and for implementing and maintaining controls to prevent, detect and respond to cybersecurity threats and incidents, safeguarding the confidentiality, integrity and availability of the Company s information systems and data.
As part of the Information Security and Cybersecurity Program, the Company conducts periodic employee training to educate employees on information and cybersecurity risks and to reinforce security management practices and compliance with the Company's security policies and standards. Training is mandatory for all employees and is supplemented by testing initiatives, including periodic phishing tests.
The Company's policies and procedures concerning cybersecurity matters include processes to safeguard its information systems, monitor these systems, protect the confidentiality and integrity of its data, detect intrusions into its systems, and respond to cybersecurity incidents. Extensive technical controls are in place for identifying and managing cybersecurity risks and safeguarding Company information systems and information. The Company uses sophisticated industry-recognized monitoring and threat detection technologies that continuously monitor its information systems and provide threat detection alerts. The Company’s strategy for assessing, identifying, and managing cybersecurity risks and for evaluating the effectiveness of its cybersecurity program includes periodic risk assessments and testing of its systems, processes and procedures through audits, penetration testing, vulnerability scans, tabletop exercises, and other related exercises.
The Company has an incident response program designed to enable the Company to respond to cybersecurity incidents, coordinate as appropriate with law enforcement and other government agencies, notify clients and customers, as applicable, and recover from such incidents. In addition, the Company actively partners with appropriate government and law enforcement agencies and peer industry forums to participate in threat intelligence discussions and simulations to assist with understanding the full spectrum of cybersecurity risks and enhancing defenses and improving resiliency in the Company’s operating environment.
The Company engages third parties on a regular basis to assess, test, audit or assist with the implementation of risk management strategies, policies, and procedures to enhance the detection and management of cybersecurity risks. Cybersecurity risk management strategies include but are not limited to, consultants who assist with assessing risks, assessing systems alignment with the NIST Cybersecurity Framework and FFIEC standards, penetration testing, tabletop exercises and other regulatory agency requirements.
The Company maintains a process to evaluate and manage risks associated with third-party service providers. We conduct a full vendor due diligence review before engagement, review specific security measures in our contracts, and maintain continued monitoring during the engagement including yearly due diligence reviews.
Governance
The IT Committee and Audit Committee are the principal board committees that oversee the Company’s assessment and management of cybersecurity risk, including oversight of the implementation and maintenance of appropriate controls in support of the Company’s Information Security and Cybersecurity Program. Both the IT and Audit Committees are comprised of professionals with risk management and information technology expertise to manage any material risk from a cybersecurity threat standpoint.
The membership of the IT Committee includes members of the executive management team and directors of the Company. The CIO and ISO actively participate in all IT Committee meetings. The CIO has over 20 years of work experience in the development, operation and management of Information Technology at financial institutions. The ISO has over 10 years of work experience in building and overseeing cybersecurity programs at financial institutions. Both CIO and ISO have extensive experience and qualifications in various technology and information security disciplines, including relevant experience at the Company. Additionally, the Audit Committee has oversight of the management of cybersecurity risk via validation and review of IT and cybersecurity risk assessments and audits. The ISO provides reporting metrics on cybersecurity risks to the IT Committee, which meets at least four times a year. The IT and Audit Committees assist the Board of Directors in its oversight.
As part of its oversight of management’s implementation and maintenance of the Company’s risk management framework, the Company’s Board of Directors receives regular updates directly from both IT and Audit Committees concerning cybersecurity matters. These updates generally include information regarding cybersecurity and technology developments, the Company’s Information Security Program and recommended changes to that program, cybersecurity policies and practices, and ongoing initiatives to improve information security, as well as any significant cybersecurity incidents and the Company's efforts to address those incidents.
Notwithstanding the Company's efforts at cybersecurity, the Company cannot guarantee that those efforts will successfully prevent or mitigate a cybersecurity incident that could have a material adverse effect on it. To our knowledge, cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected the Company, including its business strategy, results of operations or financial condition. With regard to the possible impact of future cybersecurity threats or incidents, see Item 1A. Risk Factors–Risks Related to Our Business.
Item 2. Properties.
We are headquartered in Los Angeles County, California. We have 14 branches in our Western Region with 12 branches in Southern California. We operate nine branches in Los Angeles County located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silver Lake, Arcadia, Cerritos, and Diamond Bar, one branch in Irvine, Orange County, California, two branches in Ventura County, California, in Westlake Village and in Oxnard. We also operate one branch in Las Vegas, Nevada, and one branch in Honolulu, Hawaii.
We have ten branches in the Eastern Region, with seven branches in the New York City metropolitan area located in Manhattan, Brooklyn, and Queens, two branches in Chicago, Illinois and one branch in New Jersey.
Our Eastern Region loan center, located at 4101 8th Avenue, Brooklyn, New York, houses our Eastern Region mortgage unit, FNMA and Freddie Mac servicing, commercial lending and credit administration areas.
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Our headquarters office is located at 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017. The headquarters is in downtown Los Angeles and houses our risk management unit, including audit, compliance and BSA groups, our single-family residential mortgage group, SBA lending, commercial lending, credit administration, human resources and administrative group.
Our administrative center is located at 1055 Wilshire Blvd., Suite 1200, Los Angeles, California 91776 and houses our branch administration. Our operations center is located at 7025 Orangethorpe Avenue, Buena Park, California 90621 and houses the operations, IT, marketing and finance teams.
We lease 20 locations and own six locations for our operations. We believe that the leases to which we are subject are generally on terms consistent with prevailing market terms. None of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing. The owned locations include our Monterey Park, California branch, our Buena Park, California operations center, our Eastern region loan center, our Bensonhurst, New York branch and two branches in Chicago.
Item 3. Legal Proceedings.
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our business. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.
We accrue reserves for outstanding lawsuits, claims and proceedings when a loss contingency is probable and can be reasonably estimated in accordance with FASB guidance ASC 450, “Contingencies." The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the NASDAQ Global Select Market ("NASDAQ") under the symbol “RBB” on July 27, 2017. Prior to that, there was no public market for our common stock.
Shareholders
As of February 27, 2026, we had approximately 5,075 common stock shareholders of record, and the closing price of our common stock was $21.50 per share. The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.
Dividend Policy
It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to generally maintain our current dividend levels. Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.
Under the terms of our subordinated notes issued in March 2021, and the related subordinated note purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the subordinated notes. Additionally, under the terms of such notes, we are not permitted to declare or pay any dividends on our capital stock if we are not “well capitalized” for regulatory purposes immediately prior to the payment of such dividend. The terms of the debentures underlying our Trust Preferred Securities also prohibit us from paying dividends on our capital stock if we are in deferral of interest payments on those debentures. There have been no events of default under the terms of the subordinated notes as of December 31, 2025.
As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. Information on regulatory restrictions on our ability to pay dividends is set forth in Item 1. Business—Supervision and Regulation – The Company – Dividend Payments. In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us, as further discussed in Item 1. Business—Supervision and Regulation—The Bank—Dividend Payments.
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Stock Performance Graph
The following graph compares the cumulative total shareholder return on our common stock from December 31, 2020 through December 31, 2025. The graph compares our common stock with the Russell 2000 Index and the SNL Bank $1B-$5B Index. The graph assumes an investment of $100.00 in our common stock and each index on December 31, 2020 and reinvestment of all quarterly dividends. Measurement points are December 31, 2020 and the last trading day of each year-end through December 31, 2025. There is no assurance that our common stock performance will continue in the future with the same or similar results as shown in the graph.
Period Ending
Source: S&P Global Market Intelligence
Unregistered Sales and Issuer Purchases of Equity Securities
On May 29, 2025, the Company announced a new stock repurchase program providing for the repurchase of up to $18.0 million of the Company's outstanding common stock. The stock repurchase program will expire on June 30, 2026 but may be discontinued or amended at any time.
The Company did not repurchase any shares of common stock during the fourth quarter of 2025. During the year ended December 31, 2025, the Company repurchased 746,949 shares of common stock at a weighted average share price of $18.55 per share as part of the Company's stock repurchase program.
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Item 6. [Reserved.]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our audited consolidated financial statements are based upon its audited consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of these audited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Allowance for Credit Losses (“ACL”) - Loans Held for Investment
We account for credit losses on loans in accordance with ASC 326, which requires us to record an estimate of expected lifetime credit losses for loans at the time of origination. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheets. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts.
The use of reasonable and supportable forecasts requires significant judgment, such as utilizing the Federal Open Market Committee's projected unemployment rate as part of the economic forecast, determining the appropriate length of the forecast horizon and determining the appropriate weighting and degree of risk assigned to each of the qualitative factors based on management's direct control or influence over specific qualitative factors and internal understanding of such levels of exposure. Management estimates the allowance balance required using past loan loss experience, peer loss history, loan prepayment speeds, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Any unexpected adverse changes or uncertainties to these factors that are beyond our control could result in increases in the ACL through additional provision for credit losses.
A sensitivity analysis of our ACL was performed as of December 31, 2025. Based on this sensitivity analysis, a 25% increase in loan prepayment speeds would result in a $891,000, or 2.0%, decrease to the ACL. Conversely, a 25% decrease in loan prepayment speeds would result in a $1.1 million, or 2.5%, increase to the ACL. Additionally, a one percentage point increase in the forecasted unemployment rate would result in a $1.0 million, or 2.4%, increase to the ACL and a one percentage point decrease in the forecasted unemployment rate would result in a $943,000, or 2.1%, decrease to the ACL. Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.
On a quarterly basis, we stress test the qualitative factors, which are lending policy, procedures & strategies, economic conditions, changes in nature and volume of the portfolio, credit & lending staff, problem loan trends, loan review results, collateral value, concentrations and regulatory and business environment by creating two scenarios, moderate risk and major risk. In the Moderate Stress scenario, the status of all nine risk factors across all pooled loan segments were set at “Moderate Risk.” In the Major Stress scenario, the status of all nine risk factors across all pooled loan segments were set at “Major Risk.” Under the Moderate Stress scenario, ACL increased by $11.0 million, or 24.8%, as of December 31, 2025. Under the Major Stress scenario, ACL increased by $31.2 million or 70.6% as of December 31, 2025.
Goodwill
Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill resulting from whole bank acquisitions is not amortized but tested for impairment at least annually.
We perform goodwill impairment tests in accordance with ASC 350 “Intangibles-Goodwill and Other.” Fair value of goodwill is based on selection and weighting of valuation methods using management assumptions not limited to discounted cash flow (“DCF”), diversification, market position, customer dependence, access to capital markets, financial risk, growth, and earnings trends. Consideration of economic conditions is also an important part of the valuation process. Changes to assumptions, to selection and weighting in the valuation methods, and to economic conditions could result in goodwill impairment losses that negatively impact our earnings. As discussed more fully herein, we have not recognized any goodwill impairment.
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Income Taxes
We file our income taxes on a consolidated basis with our subsidiaries. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.
Under ASC 740, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of our deferred tax assets will not be realized. Our policy is to evaluate the deferred tax assets on a quarterly basis and record a valuation allowance for the deferred tax assets if there is not sufficient positive evidence available to demonstrate utilization of the deferred tax assets. An initial setup or an increase to the deferred tax asset valuation allowance would be charged to income tax expense that would negatively impact our earnings.
Our significant accounting policies are described in greater detail in our 2025 audited financial statements included in Item 8. Financial Statements and Supplementary Data - Note 2—Basis of Presentation and Summary of Significant Accounting Policies, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
For the year ended December 31, 2025, we reported net earnings of $32.0 million, a 19.8% increase, compared to $26.7 million for the year ended December 31, 2024. This represented an increase of $5.3 million, or 19.8%, from the prior year due to a $12.9 million increase in net interest income and a $1.5 million increase in noninterest income, partially offset by increases of $501,000 in the provision for credit losses, $7.5 million in noninterest expenses, and $1.2 million in income tax expense. The increase in net interest income was attributed mostly to the decrease in the average rate paid on interest-bearing deposits and the increase in the average balance of total loans. Pre-tax pre-provision income totaled $52.5 million for the year ended December 31, 2025, a 15.3% increase compared to $45.5 million for the year ended December 31, 2024 (see Non-GAAP Financial Measures for a reconciliation of this amount). Diluted earnings per share was $1.83 for the year ended December 31, 2025, a 24.5% increase, compared to $1.47 for the year ended December 31, 2024.
At December 31, 2025, total assets were $4.2 billion, an increase of $215.8 million, or 5.4%, from December 31, 2024. The increase in total assets was primarily due to a $261.1 million, or 8.6%, increase in gross loans held for investment ("HFI") to $3.3 billion at December 31, 2025, and mostly funded by an increase of $266.6 million, or 8.6%, in total deposits to $3.4 billion at December 31, 2025. The increase in total deposits was primarily the result of an increase of $303.1 million in interest-bearing deposits, including an increase of $293.3 million in interest-bearing non-maturity deposits and $78.2 million in wholesale time deposits. Wholesale time deposits were raised to repay and refinance maturing FHLB advances, which decreased $70.0 million during 2025. The gross loan to deposit ratio was 99.0% at December 31, 2025, compared to 99.4% at December 31, 2024.
The allowance for loan losses ("ALL") was $43.9 million at December 31, 2025, reflecting a decrease of $3.8 million from $47.7 million at December 31, 2024. During 2025, the provision for loan losses totaled $10.6 million compared to $9.8 million for 2024. The increase in the 2025 provision for loan losses was due to loan growth and the level of net charge-offs. The ALL as a percentage of loans HFI outstanding was 1.32% and 1.56% as of December 31, 2025 and December 31, 2024.
Shareholders’ equity increased $15.5 million, or 3.1%, to $523.4 million as of December 31, 2025, from $507.9 million at December 31, 2024. The increase during 2025 was primarily due to net income of $31.9 million, lower unrealized losses on available for sale ("AFS") securities, net of taxes, of $6.9 million, and equity compensation activity of $1.9 million, partially offset by common stock repurchases of $14.0 million and common stock cash dividends paid of $11.3 million. As a result, book value per share increased 7.1% to $30.69 from $28.66 and tangible book value per share increased 7.8% to $26.42 from $24.51. See Non-GAAP Financial Measures for a reconciliation of these measures to their most comparable GAAP measures.
Our capital ratios under the Basel III capital framework regulatory standards remain well capitalized. As of December 31, 2025, Bancorp’s Tier 1 leverage capital ratio was 11.60%, common equity Tier 1 ratio was 17.49%, Tier 1 risk-based capital ratio totaled 18.06%, and total risk-based capital ratio was 23.83%. As of December 31, 2024, Bancorp’s Tier 1 leverage capital ratio was 11.92%, common equity Tier 1 ratio was 17.94%, Tier 1 risk-based capital ratio totaled 18.52%, and total risk-based capital ratio was 24.49%.
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ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
Year Ended December 31,
(dollars in thousands, except per share data)
Share Data
Earnings per common share(2)
Performance Ratios
Return on average shareholders’ equity 6.21 % 5.21 % 8.48 %
Return on average tangible common equity (1) 7.24 % 6.09 % 9.97 %
Tangible common equity to tangible assets (1) 10.90 % 11.08 % 11.06 %
Management's Discussion and Analysis of Financial Condition and Results of Operations generally includes tables with 3-year financial performance, accompanied by narrative for the years ended December 31, 2025 and 2024. For further discussion of financial results for the years ended December 31, 2024 and 2023, please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 17, 2025.
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2025 to December 31, 2024
Net Interest Income/Average Balance Sheet
In 2025, we generated fully-taxable equivalent net interest income of $112.4 million, an increase of $12.9 million, or 13.0%, from $99.5 million in 2024. This increase was due to an $8.5 million decrease in interest expense and a $4.5 million increase in interest income. The increase in interest income was mostly due to higher interest and fee income on total loans of $9.3 million and securities of $2.7 million, partially offset by lower interest income on cash balances of $7.6 million. The increase in loan interest income was mostly due to a higher average total loan balance of $157.3 million, while the average loan yield remained relatively unchanged. The decrease in interest income from cash balances was attributed to a decrease in the overnight Fed Funds rate and the impact of lower average cash balances as excess liquidity was deployed to the loans and securities portfolios. The decrease in interest expense was mostly due to a 64 basis point decrease in total average interest-bearing deposit costs, partially offset by the impact of higher average interest-bearing deposits of $134.8 million in 2025 compared to 2024. The average overnight Federal Funds Rate was 4.21% for the year ended December 31, 2025, compared to 5.15% for the year ended December 31, 2024.
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Our net interest margin ("NIM") was 2.95% for the year ended December 31, 2025, an increase of 25 basis points from 2.70% for the year ended December 31, 2024. The increase was due to a 38 basis point decrease in the overall cost of funds, partially offset by an 8 basis point decrease in the yield on average interest-earning assets. The yield on average interest-earning assets decreased to 5.80% for the year ended December 31, 2025, compared to the prior year due mainly to a 92 basis point decrease in the yield on average cash and cash equivalents to 4.61% and an 18 basis point decrease in the yield on our securities portfolio as short term market rates decreased, partially offset by the impact of the change in the mix of interest-earning assets. Average total loan balances increased $157.3 million year over year and average loans represented 84% of average interest-earning assets during 2025 compared to 83% during 2024. We maintained the overall loan yield at 6.06% for the year ended December 31, 2025, compared to the prior year.
The overall cost of funds decreased to 3.11% for the year ended December 31, 2025, from 3.49% for the year ended December 31, 2024, due to a lower average cost of interest-bearing deposits in response to lower average market interest rates. The overall funding mix for December 31, 2025, remained relatively unchanged from the prior year with a ratio of average noninterest-bearing deposits to average total funding sources of 15%.
Interest Income. Total fully taxable equivalent interest income was $221.2 million in 2025 compared to $216.8 million in 2024. The $4.5 million, or 2.1%, increase was driven by a 3.6% increase in average earnings assets offset by an 8 basis point decrease in the overall yield of such assets as average short-term market rates decreased 94 basis points year over year.
Interest and fees on total loans was $193.8 million in 2025 compared to $184.6 million in 2024. The $9.3 million, or 5.0%, increase was due to loan growth in 2025 as average loans increased $157.3 million, or 5.2%, year over year and the loan yield was relatively unchanged at 6.06% and 6.07% for 2025 and 2024.
Tax equivalent interest income from our securities portfolio increased $2.7 million, or 19.0%, to $17.2 million in 2025. The increase was primarily due to the impact of a $79.7 million, or 24.2%, increase in the average balance of securities, partially offset by an 18 basis point decrease in the tax equivalent yield due to decreases in market interest rates.
Interest income on our cash and cash equivalents decreased $7.6 million, or 46.0%, to $8.9 million in 2025. The decrease was primarily due to a $104.7 million decrease in the average balance of cash and cash equivalents combined with a 92 basis point decrease in the yield. The decrease in average cash balances was offset by increases in average loan and securities balances as excess liquidity was deployed into these higher yielding assets.
Interest Expense. Interest expense on total interest-bearing liabilities decreased $8.5 million, or 7.2%, to $108.8 million in 2025 primarily due to a 47 basis point decrease in the average rate on these total interest-bearing liabilities, while the average balance of total interest-bearing liabilities increased $135.4 million to fund loan growth.
Our average cost of total deposits was 3.04% for 2025 compared to 3.54% for 2024. The decrease was due to a 64 basis point decrease in the average rate paid on interest-bearing deposits due to decreases in market interest rates and competition for such deposits.
Interest expense on interest-bearing deposits decreased to $97.1 million in 2025 compared to $108.4 million in 2024. The $11.3 million, or 10.4%, decrease was primarily due to a 64 basis point decrease in the average rate paid on average interest-bearing deposits, partially offset by a $134.8 million increase in the average balance of interest-bearing deposits. Average noninterest-bearing deposits totaled $529.7 million, and represented 17% of total average deposits in 2025 compared to $531.5 million, or 17% of total average deposits, in 2024.
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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 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 on 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, 2024, and 2023. 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 by affecting changes in the mix of interest-earning assets and interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to the level of interest-earning assets, and through the growth and maturity of earning assets. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity Management and Item 7A. Quantitative and Qualitative Disclosures About Market Risk included herein.
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 principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of premium amortization, discount accretion and amortization of net deferred loan origination costs accounted for as yield adjustments.
Year Ended December 31,
Average Interest Yield / Average Interest Yield / Average Interest Yield /
Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate
Interest-earning assets: (dollars in thousands)
Securities:
Interest-bearing liabilities:
Noninterest-bearing liabilities:
(1) Includes income and average balances for interest-earning time deposits.
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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 by 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.
Change due to: Change due to:
Volume Yield/Rate Interest Variance Volume Yield/Rate Interest Variance
Interest-earning assets: (dollars in thousands)
Securities:
Interest-bearing liabilities
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Provision for Credit Losses
The provision for credit losses totaled $10.4 million for the year ended December 31, 2025, compared to a $9.9 million provision for credit losses for the year ended December 31, 2024. The 2025 provision for credit losses reflected a provision for loan losses of $10.6 million and a negative provision for unfunded commitments of $245,000. The 2024 provision for credit losses reflected a provision for loan losses of $9.8 million and a provision for unfunded commitments of $89,000. The 2025 provision for loan losses was due to loan growth of 8.6% in 2025 and the resolution of certain nonperforming assets resulting in charge-offs during the year. The 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. Net charge-offs totaled $14.4 million, or 0.45% of average loans, for the year ended December 31, 2025, compared to $3.9 million, or 0.13% of average loans, for the year ended December 31, 2024.
Noninterest Income
The following table presents the major components of noninterest income for the years indicated:
Noninterest income: (dollars in thousands)
Noninterest income increased $1.5 million to $16.9 million for 2025, compared to $15.3 million for 2024. The increase was mainly due to a $2.8 million increase in other income, offset by lower gain on OREO of $1.0 million and lower gain on sale of loans of $430,000. The increase in other income included the receipt of our Employee Retention Credit ("ERC") refund of $5.2 million (pre-tax) with no similar income in 2024, offset by lower recoveries of fully charged-off loans of $2.5 million. The recoveries of fully charged-off loans primarily relate to a relationship from a prior whole bank acquisition, and totaled $365,000 in 2025 and $2.9 million in 2024. The gain on sale of loans detail is presented below.
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Loan servicing income, net of amortization. Loan servicing income, net of amortization, decreased by $16,000 to $2.3 million for 2025 compared to 2024. Loan servicing income, net of amortization, for SFR mortgage loans decreased due to a lower average balance of mortgage loans serviced for others in 2025 compared to 2024, while servicing income for SBA loans increased due to lower amortization of servicing assets due to lower prepayments in 2025. The following table presents information on loan servicing income for the years indicated:
Loan servicing income, net of amortization: (dollars in thousands)
As of December 31, 2025, we were servicing SFR mortgage loans for other financial institutions, FHLMC, and FNMA, and SBA loans where we have sold the guaranteed portion in the secondary market. The following table presents the total loans being serviced for others as of the dates indicated:
Loans serviced (dollars in thousands)
The decline in the respective servicing portfolios reflects the repayment of underlying loans, which exceeds the additions from loans being sold with servicing retained during 2025 and 2024.
Gain on sale of loans. Gains on sale of loans are comprised primarily of gains on sale of SFR mortgage loans and SBA loans. Gains on sale of loans totaled $1.2 million in 2025, compared to $1.6 million in 2024. The $430,000 decrease was primarily due to a decrease in the volume and margins of SBA loans sold in 2025 compared to 2024.
The following table presents information on loans sold and the net gain (loss) on the sale of such loans for the years indicated:
Loans sold: (dollars in thousands)
Gain (loss) on sale of loans:
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Noninterest Expense
The following table presents the major components of our noninterest expense for the years indicated:
Noninterest expense: (dollars in thousands)
Noninterest expense totaled $76.7 million in 2025, an increase of $7.5 million, from $69.2 million in 2024. The increase in noninterest expense was primarily due to increases in salaries and employee benefits expense of $3.7 million, legal and professional fees of $3.0 million, of which $1.2 million related to the ERC advisory costs, and data processing expenses of $1.0 million. The increase in salaries and employee benefits expense was due to the impact of raises, higher incentives due to higher production, higher health insurance premiums, and executive management transition costs. The efficiency ratio was 59.36% in 2025, compared to 60.30% in 2024.
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Income Tax Expense
Income tax expense was $10.2 million in 2025 compared to $9.0 million in 2024, an increase of $1.2 million, or 13.0%, due to higher pre-tax earnings, partially offset by a lower effective tax rate in 2025. The effective tax rate was 24.2% for 2025 and 25.3% for 2024. The decrease in the effective tax rate for 2025 compared to the prior year was due largely to a change in California tax law (Senate Bill 132), which changes the way banks and financial institutions apportion income for California tax purposes. Senate Bill 132, in addition to other state tax planning strategies, reduced our effective tax rate for 2025. Our effective tax rate for 2025 and 2024 also benefitted from the impact of purchased tax credits.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 2025, total assets were $4.2 billion, a $215.8 million, or 5.4%, increase compared to December 31, 2024. The increase was driven by a $261.1 million, or 8.6%, increase in loans held for investment, partially offset by a decrease of $45.4 million in cash and cash equivalents and investment securities of $14.0 million.
Cash and Cash Equivalents. Cash and cash equivalents decreased $45.4 million, or 17.6%, to $212.3 million as of December 31, 2025, as compared to $257.7 million at December 31, 2024. This decrease in cash and cash equivalents was comprised of $260.2 million used in net investing activities, $43.4 million provided by operating activities, and $171.4 million provided by financing activities. Net investing activities included loan disbursements, net of repayments, of $343.8 million, offset by proceeds from sales of loans originally classified as HFI of $57.3 million and a net decrease in AFS securities of $25.5 million. Net financing activities included deposit growth of $266.5 million offset by a net decrease in FHLB advances of $70.0 million.
Investment Securities. We manage our securities portfolio and cash to maintain adequate liquidity and to ensure the safety and preservation of invested principal, with a secondary focus on yield and returns. Specific goals of our investment portfolio include:
Our investment portfolio is comprised primarily of U.S. government agency securities, corporate note securities, mortgage-backed securities backed by government-sponsored entities and taxable and tax-exempt municipal securities.
Our investment policy is reviewed annually by our board of directors. Overall investment goals are established by our board of directors, Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and members of our Asset Liability Committee (“ALCO”) of our board of directors. Our board of directors has delegated the responsibility of monitoring our investment activities to our ALCO. Day-to-day activities pertaining to the securities portfolio are conducted under the supervision of our CEO and CFO. We actively monitor our investments on an ongoing basis to identify any material changes in the securities. We monitor our securities portfolio to ensure it has adequate credit support and consider the lowest credit rating for identification of potential credit impairment.
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The following table presents the book value of each category of securities and the percentage each category represents of total of securities as of the years indicated. The book value for debt securities classified as AFS are reflected at fair market value and the book value for securities classified as HTM are reflected at amortized cost.
Amount % of Total Amount % of Total Amount % of Total
Securities, available for sale, at fair value (dollars in thousands)
Mortgage-backed securities: commercial 4,977 1.2 % — 0.0 % — 0.0 %
Securities, held to maturity, at amortized cost
Municipal taxable securities $ — 0.0 % $ 500 0.1 % $ 501 0.2 %
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The tables below set forth investment debt securities AFS and HTM as of the dates indicated:
Amortized Unrealized Unrealized Fair
December 31, 2025 Cost Gains Losses Value
Available for sale (dollars in thousands)
Mortgage-backed securities: commercial 5,010 — (33 ) 4,977
Held to maturity
Municipal tax-exempt securities $ 4,184 $ — $ (81 ) $ 4,103
Available for sale (dollars in thousands)
Held to maturity
Municipal taxable securities $ 500 $ 1 $ — $ 501
The weighted-average life on the total investment portfolio at December 31, 2025, was 4.9 years compared to a weighted-average life of 5.0 years at December 31, 2024. The weighted-average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, weighted by the dollar amounts of the principal pay-downs.
Approximately 33.0% of the securities in the total investment portfolio at December 31, 2025, were issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of December 31, 2025, no U.S. government agency bonds are callable.
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The table below shows our investment securities’ fair value and weighted average yields by maturity in the following maturity groupings as of December 31, 2025. Weighted-average yields are calculations representing income within each maturity range based on the amortized cost of securities. The fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Fair Weighted Fair Weighted Fair Weighted Fair Weighted Fair Weighted
December 31, 2025 (dollars in thousands)
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The tables below show our investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2025, and December 31, 2024. The unrealized losses on these securities were primarily attributed to changes in interest rates. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. The issuers of these securities have not evidenced any cause for default on these securities. We have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be impaired under the current expected credit loss model. A summary of our analysis of these securities and the unrealized losses is described more fully in Item 8. Financial Statements and Supplementary Data - Note 3 — Investment Securities in the notes to the consolidated financial statements included in this Annual Report.
Less than Twelve Months Twelve Months or More Total
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
December 31, 2025 (dollars in thousands)
Mortgage-backed securities: commercial 4,977 (33 ) — — 4,977 (33 )
Municipal tax-exempt securities $ — $ — $ 3,663 $ (81 ) $ 3,663 $ (81 )
Total held to maturity $ — $ — $ 3,663 $ (81 ) $ 3,663 $ (81 )
Less than Twelve Months Twelve Months or More Total
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
December 31, 2024 (dollars in thousands)
Municipal tax-exempt securities $ — $ — $ 4,447 $ (244 ) $ 4,447 $ (244 )
We monitor our securities portfolio to ensure all of our investments have adequate credit support and we consider the lowest credit rating for identification of potential credit impairment. As of December 31, 2025 and 2024, we determined there was no credit impairment and accordingly there was no ACL on the HTM securities portfolio as of these dates. In addition, we did not have the current intent to sell securities with a fair value below amortized cost at December 31, 2025, and it is more likely than not that we will not be required to sell such securities prior to the recovery of their amortized cost basis. As of December 31, 2025, all of our investment securities in an unrealized loss position received an investment grade credit rating. The overall net unrealized losses in our securities portfolio were attributable to a combination of changes in interest rates and market conditions.
Loans
The loan portfolio is the largest category of our earning assets, which is almost entirely held for investment as of December 31, 2025. Loans HFI totaled $3.3 billion, an increase of $261.1 million, or 8.6%, as compared to $3.1 billion at December 31, 2024. Loans HFS totaled $2.1 million at December 31, 2025, compared to $11.3 million at December 31, 2024. The increase in loans HFI was primarily due to increases in SFR mortgage loans of $161.4 million, CRE loans of $101.6 million, C&I loans of $10.5 million, and SBA loans of $8.7 million, partially offset by decreases in C&D loans of $17.8 million and other loans of $3.3 million. The 2025 loan activity included $712.7 million in new originations and $135.9 million in advances on existing loans, offset by payoffs/paydowns of $499.6 million, loan sales of $74.0 million, and charge-offs of $14.7 million. SFR mortgage loans represent approximately 50.0% of our total loans as of December 31, 2025, compared to 48.9% as of the end of 2024.
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The following table presents the balance and associated percentage of each major category in our loan portfolio as of the dates indicated:
As of December 31,
$ % $ % $ % $ % $ %
Loans HFI:(1) (dollars in thousands)
(1) Net of premiums (discounts) on acquired loans and deferred (fees) and costs.
The following table presents the geographic locations of loans in our loan portfolio, by loan class, as of the date indicated:
$ $ $ $ $ $ $ %
Loans HFI: (dollars in thousands)
The majority of our loan portfolio is based on collateral or businesses in California and New York, which represent approximately 88.0% of our loan portfolio. Loans secured by collateral in other states represented approximately 12.0% of our portfolio and the majority of these loans are secured by real estate with a weighted average LTV of 55.7% at December 31, 2025.
SFR Loans.SFR mortgage loans HFI totaled $1.66 billion, or 50.0% of the loan portfolio, as of December 31, 2025, and increased $161.4 million, or 10.8%, during 2025 due to higher originations relative to payoffs, paydowns and sales. As of December 31, 2025, the weighted-average LTV of the portfolio was 54%, the weighted average FICO score was 763, and the average age was 3.5 years.
We originate qualified SFR mortgage loans and non-qualified, alternative documentation SFR mortgage loans through wholesale channels and retail channels, including our branch network, to accommodate the needs of the Asian-centric market. The qualified SFR mortgage loans are 15-year and 30-year conforming mortgages and may be sold directly to FNMA and FHLMC. We originate non-qualified SFR mortgage loans both to sell and hold for investment. In addition, our SFR mortgage lending unit originates mortgage warehouse lines of credit to certain correspondent banks. These loans are included in our C&I loans and totaled $2.8 million as of December 31, 2025. There were no such loans at December 31, 2024.
During 2025, we originated $413.7 million of SFR mortgage loans including $202.8 million through our retail channel and $210.9 million through our wholesale channels. These amounts included $6.2 million in FNMA loans, all of which were sold to FNMA. In addition, we also sold $51.9 million of SFR mortgage loans during 2025 to other third parties.
For SFR mortgage loans sold to FNMA, FHLMC and to other third parties such as investment funds or other banks, we provide limited representations and warranties and with a repurchase and premium refund for loans that become delinquent in the first 90-days or a premium refund if paid-off in the first 90-days with respect to all loans sold. In certain loan sales to other banks, loans are sold with no representations or warranties and provide a replacement feature for the first six months if any loans pay off early. As a condition of the sale for all loans, the buyer must have the loans audited for underwriting and compliance standards. There were $2.1 million and $11.3 million of SFR loans HFS at December 31, 2025 and 2024.
At December 31, 2025, SFR mortgage loans on nonaccrual status totaled $2.1 million. For additional discussion on nonperforming loans, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Analysis of Financial Condition – Problem Loans.
The following table presents the LTV ratios at origination for SFR mortgage loans by state as of the date indicated:
LTV Distribution
December 31, 2025 (dollars in thousands)
Commercial Real Estate Loans. CRE loans totaled $1.3 billion, or 39.3%, of the loan portfolio as of December 31, 2025, of which $154.7 million was secured by owner occupied properties, compared to $1.2 billion, or 39.3% of the loan portfolio as of December 31, 2024, of which $160.2 million was secured by owner occupied properties. The CRE portfolio had net growth of $101.6 million, or 8.5%, during 2025 due mostly to a net increase in multi-family residential loans.
CRE loans include owner occupied and non-owner occupied commercial real estate, multi-family residential and SFR loans originated for a business purpose. Except for the multi-family residential loan portfolio, the interest rate for the majority of these loans are Prime rate based and have a maturity of five years or less except for the SFR loans originated for a business purpose which may have a maturity of one year. The multi-family residential loans generally have interest rates based on the 5
-year treasury, 10-year maturity with a five year fixed rate period followed by a five year floating rate period, and have a declining prepayment penalty over the first five years.
The largest sub-set of CRE loans was the multi-family residential loan portfolio, which totaled
$745.3 million as of
December 31, 2025, and $605.5 million as of
December 31, 2024. Also included in CRE loans are SFR loans originated for a business purpose, which totaled
$40.6 million at
December 31, 2025, and $54.1 million at
December 31, 2024.
At
December 31, 2025, CRE loans on nonaccrual status totaled
$8.2 million. For additional discussion on nonperforming loans, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
—Analysis of Financial Condition –
Problem Loans.
The following table presents the LTV ratios at origination for CRE loans by property type as of the date indicated:
LTV Distribution
Non-owner occupied: (dollars in thousands)
Owner occupied:
The following table presents the LTV ratios at origination for CRE loans by states where the Company operates branches as of the date indicated:
LTV Distribution
Non-owner occupied (dollars in thousands)
Owner occupied
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Construction and Land Development Loans. C&D loans totaled $155.5 million, or 4.7% of the loan portfolio, at December 31, 2025. C&D loans decreased $17.8 million, or 10.3%, during 2025 due to decreases in land development loans and residential construction loans, offset by an increase in commercial construction loans. Our C&D loans are comprised of residential construction, commercial construction and land acquisition and development construction. Interest reserves are generally established on real estate construction loans. These loans are typically Prime rate based and have maturities of less than 18 months.
At December 31, 2025, C&D loans on nonaccrual status totaled $28.0 million. For additional discussion on nonperforming loans, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Analysis of Financial Condition – Problem Loans.
The following table shows the categories of our C&D portfolio as of the dates indicated:
As of December 31, 2025 As of December 31, 2024 Increase (Decrease)
$ Mix % $ Mix % $ %
(dollars in thousands)
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Commercial and Industrial Loans.C&I loans totaled
$140.1 million, or
4.2% of the loan portfolio, as of
December 31, 2025. C&I loans increased $10.5 million, or 8.1%, during
2025 due in part to an increase in commercial term loans of $9.1 million along with an increase in mortgage warehouse lines of credit of $2.8 million.
The interest rate on C&I loans are generally based on the Wall Street Journal Prime rate. We originate both variable rate and fixed rate C&I loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing. C&I loans include lines of credit with a maturity of one year or less, term loans with maturities of five years or less, shared national credits with maturities of five years or less, mortgage warehouse lines with a maturity of one year or less, bank subordinated debentures with a maturity of 10 years and international trade discounts with a maturity of three months or less. Substantially all of our C&I loans are collateralized by business assets or by real estate.
Our trade finance unit provides financial services and products to our customers, including trade financing needs for many of our commercial and industrial loan customers. This business unit provides international letters of credit, SWIFT, export advice, trade finance discounts and foreign exchange. We maintain a correspondent relationship with many of the largest banks in China, Taiwan, Vietnam, Hong Kong and Singapore to support the business needs of our customers. All of our international letters of credit, SWIFT, export advice and trade finance discounts are denominated in U.S. currency, and all foreign exchange is issued through a major bank that is also denominated in U.S. currency.
At December 31, 2025, C&I loans on nonaccrual status totaled $5.1 million, including a $4.7 million loan secured by a personal residence. For additional discussion on nonperforming loans, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Analysis of Financial Condition – Problem Loans.
SBA Loans.SBA loans totaled
$56.0 million, or
1.7% of the loan portfolio at
December 31, 2025, compared to
$47.3 million, or
1.5% of the loan portfolio at
December 31, 2024. SBA loans increased
$8.7 million, or
18.4%, due to $27.2 million in originations and $428,000 of advances, partially offset by sales of $10.8 million, payoffs and payments of $7.0 million, and transfers to OREO of $1.2 million. Our
2025 originations included $23.1 million of SBA 7A loans and $4.1 million of SBA 504 loans.
We are designated a Preferred Lender under the SBA Preferred Lender Program. We originate SBA loans through our branch staff, loan officers and through SBA brokers. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans secured by real estate can have any maturity up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable, equipment, and includes personal guarantees.
At December 31, 2025, our SBA portfolio included $10.9 million guaranteed by the SBA and $45.1 million which was unguaranteed. We monitor the unguaranteed portfolio by type of collateral. The unguaranteed portion included $38.3 million secured by real estate and $6.8 million secured by business assets. At December 31, 2025, of the unguaranteed portfolio, $20.3 million, or 45.0%, was secured by hotel/motels; $12.8 million, or 28.3%, by warehouses; $2.2 million, or 4.8%, by retail; $1.8 million, or 4.0%, by gas stations; and $8.0 million, or 17.9%, of other real estate types. At December 31, 2025, of the unguaranteed portfolio, $30.1 million, or 66.8%, was located in California; $3.2 million, or 7.1%, was located in Washington; $2.8 million, or 6.1%, was located in Oregon; $2.7 million, or 6.0%, was located in Texas; and $6.3 million, or 14.0%, was located in other states.
At December 31, 2025, SBA loans on nonaccrual status totaled $1.2 million. For additional discussion on nonperforming loans, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Analysis of Financial Condition - Problem Loans.
The table below presents the loan HFI portfolio by contractual maturities, based on the loan class and loan pricing characteristics (i.e. fixed versus floating) as of December 31, 2025. As is customary in the banking industry, loans that meet our underwriting criteria may be renewed by mutual agreement between the borrower and us. Because we are unable to estimate the extent to which our borrowers will renew their loans, the table is based on contractual maturities. Also, as a result, the data shown below should not be viewed as an indication of future cash flows.
SFR mortgage (dollars in thousands)
Commercial real estate
Construction & land development
Commercial & industrial
SBA
Other
Floating rate — — — — —
Loan Quality
We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentration for our loan portfolio. Our comprehensive methodology to monitor these credit quality standards includes a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.
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Analysis of the Allowance for Loan Losses.
The following table presents the ALL, its corresponding percentage of the loan class balance, and the percentage of loan balance to total loans HFI by loan class as of the dates indicated:
As of December 31,
Loan class: (dollars in thousands)
Allowance for Credit Losses - Loans
We account for credit losses on loans in accordance with ASC 326, which requires us to record an estimate of expected lifetime credit losses for loans at the time of origination. The ACL includes the ALL and the reserve for unfunded commitments ("RUC") and is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheets. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL for loans is performed by collectively evaluating loans with similar risk characteristics. We have elected to utilize a discounted cash flow approach for all segments except consumer loans and warehouse mortgage loans, for these a remaining life approach was elected.
Our discounted cash flow loss rate methodology incorporates a probability of default, loss given default and exposure at default to derive expected loss within the CECL model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. We use both internal and external data to determine qualitative factors within the CECL model including: lending policies, procedures, and strategies; changes in nature and volume of the portfolio; credit and lending personnel experience; changes in volume and trends in classified, delinquent, and nonaccrual loans; concentration risk; collateral values; regulatory and business environment; loan review results; and economic conditions.
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Management estimates the ACL balance required using past loan loss experience from peers with similar asset sizes and geographic locations to the Company. The nature and volume of the portfolio, information about specific borrower situations, changes in credit quality and estimated collateral values, economic conditions, and other factors are also considered. Our CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and a four-quarter reversion period. We use the Federal Open Market Committee forecasts for the national unemployment rate, while reverting to historical loss information.
Individual loans considered to be uncollectible are charged off against the ACL. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Loans deemed to be collateral-dependent are reviewed individually based on the estimated fair value of the collateral less selling costs. Collateral value is determined using appraisals and/or other market comparable information. Charge-offs are generally taken on loans when the loan balance is determined to be uncollectible. Recoveries on loans previously charged off are added to the ACL. Net charge-offs totaled $14.4 million, or 0.45% of average loans HFI, for the year ended December 31, 2025, and $3.9 million, or 0.13% of average loans HFI, for the year ended December 31, 2024.
As of December 31, 2025, the ACL totaled $44.4 million and was comprised of an ALL of $43.9 million and a RUC of $484,000 (included in “accrued interest and other liabilities”). This compares to the ACL of $48.5 million comprised of an ALL of $47.7 million and a RUC of $729,000 at December 31, 2024. The $4.1 million decrease in the ACL for 2025 was due to net charge-offs of $14.4 million offset by a $10.4 million provision for credit losses. The ALL as a percentage of loans HFI decreased to 1.32% at December 31, 2025, compared to 1.56% at December 31, 2024, due mainly to charge-offs of $6.8 million in 2025 which were included in specific reserves at December 31, 2024. Specific reserves totaled $286,000, or 0.01% of total loans HFI, at December 31, 2025, compared to $6.9 million, or 0.23% of total loans HFI, at December 31, 2024. The ALL as a percentage of nonperforming loans HFI was 98.3% at December 31, 2025, an increase from 68.3% at December 31, 2024.
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The following table provides an analysis of the ACL, provision for credit losses and net charge-offs for the periods indicated:
Year Ended December 31,
(dollars in thousands)
Charge-offs:
Single-family residential mortgages (1,403 ) — (93 ) — —
Construction & land development (8,175 ) (1,148 ) (140 ) — —
Commercial and industrial (88 ) (11 ) — (5 ) (500 )
Recoveries:
Commercial real estate — 61 80 — 61
Construction & land development 137 — — — —
Commercial and industrial 79 2 2 2 1
Reserve for off-balance sheet credit commitments
(Reversal of) reserve for unfunded commitments (245 ) 89 (516 ) (1,092 ) (180 )
Allowance for credit losses to total LHFI 1.34 % 1.59 % 1.40 % 1.27 % 1.16 %
Problem Loans. Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.
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In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a modified loan. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. Loans modified at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from modified loan disclosures in years subsequent to the modification if the loans are in compliance with their modified terms.
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis (carrying value) by a charge to the allowance for credit losses, if necessary, or a gain recognized through noninterest income, as appropriate. Once classified as OREO, it is subsequently carried at the lower of our carrying value of the property or its fair value. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as an OREO valuation allowance. Operating expenses and related income of such properties are included in other operating income and expenses. Gains on transfer of loans to OREO, and gains or losses on their disposition are included in gain (loss) on OREO.
Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest (of which there were none during the years indicated), and modified loans. The balances of nonperforming loans included in the table below are the net investment in these assets and do not include specific reserves included in the allowance for loan losses. The following table presents the net investment in nonperforming assets by loan class and certain nonperforming asset ratios as of the dates indicated.
As of December 31,
Accruing troubled debt restructured loans(1): (dollars in thousands)
Commercial real estate $ — $ — $ — $ 894 $ 1,328
Commercial and industrial — — — 306 410
Total accruing troubled debt restructured loans — — — 1,200 1,738
Nonaccrual loans:
Nonperforming loans HFI to total loans HFI 1.35 % 2.29 % 1.04 % 0.71 % 0.71 %
Nonperforming assets totaled $53.5 million, or 1.27% of total assets, at December 31, 2025, down from $81.0 million, or 2.03% of total assets, at December 31, 2024. The $27.6 million decrease in nonperforming assets was due to sales totaling $15.8 million, charge-offs of $10.5 million, payoffs or paydowns of $7.8 million, and reclassification of loans to performing loans of $6.0 million, partially offset by the addition of loans that migrated to nonperforming assets of $12.3 million during 2025. Nonperforming assets included three OREO properties totaling $8.8 million at December 31, 2025. Of this amount, $3.7 million represented SBA payables associated with formerly SBA guaranteed loans.
Our 30-89 day delinquent loans, excluding nonperforming loans, totaled $8.8 million, or 0.27% of total loans, at December 31, 2025, down from $22.1 million, or 0.72% of total loans, at December 31, 2024. The $13.3 million decrease was mostly due to $14.6 million in loans returning to current status, $2.9 million in SFR mortgage loans included in a bulk sale of underperforming SFR mortgage loans and $1.1 million in paydowns and payoffs. There were also $2.0 million of loans that were downgraded to nonperforming. These changes were partially offset by $7.5 million in new delinquent loans.
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We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2025 and 2024, while the loans were in nonaccrual status.
We utilize an asset risk classification system in compliance with guidelines established by the FDIC as part of our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable based on facts, conditions and values that currently exist. An asset classified as loss is not considered collectable and is of such little value that continuance as an asset is not warranted.
We use a risk grading system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 6, which are “special mention,” loans with a risk grade of 7, which are “substandard” loans that are generally not considered impaired and loans with a risk grade of 8, which are “doubtful” loans generally considered to be impaired. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Company’s senior management.
The following table presents the risk categories for total loans by class of loans HFI as of the dates indicated:
Special
As of December 31, 2025 Pass Mention Substandard Doubtful Total
Real Estate: (dollars in thousands)
Commercial:
Special
As of December 31, 2024 Pass Mention Substandard Doubtful Total
Real Estate: (dollars in thousands)
Commercial:
Special mention loans totaled $19.2 million, or 0.58% of total loans, at December 31, 2025, down from $65.3 million, or 2.14% of total loans, at December 31, 2024. The $46.1 million decrease was primarily due to upgrades of $45.9 million, downgrades to substandard-rated loans of $3.9 million, payoffs and paydowns of $7.9 million, and charge-offs of $1.3 million, partially offset by the downgrades to special mention of $12.9 million. As of December 31, 2025, all special mention loans were paying current.
Substandard loans HFI totaled $75.2 million at December 31, 2025, a decrease of $14.0 million from $89.1 million at December 31, 2024. In addition, there were $11.2 million of substandard loans HFS at December 31, 2024, that were subsequently sold in the first quarter of 2025. There were no substandard loans HFS at December 31, 2025. The $25.2 million decrease in substandard loans HFI and HFS was primarily due to payoffs and paydowns totaling $12.1 million, loans which migrated to OREO totaling $12.9 million, charge-offs of $11.7 million, loan sales of $7.6 million, and upgrades to pass-rated and internal refinance of $7.3 million, partially offset by downgrades to substandard loans totaling $26.4 million. Of the total substandard loans outstanding at December 31, 2025, there were $30.5 million, or 40% of such loans, on accrual status.
Goodwill and Other Intangible Assets. Goodwill was $71.5 million at December 31, 2025, and at December 31, 2024. We evaluate goodwill for impairment annually, or more frequently if events and circumstances lead management to believe the value of goodwill may be impaired. In accordance with ASC 350-20, “Goodwill,” impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value.