Hanmi Financial Corp: Form 10-Q for the period ended Jun 30, 2026

The following is management’s discussion and analysis of our results of operations and financial condition as of and for the three and six months ended June 30, 2026. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2025 (the “2025 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended June 30, 2026 (this “Report”).

Forward-Looking Statements

Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward–looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial condition and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, plans and objectives of management for future operations, developments regarding our capital and strategic plans and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, financial condition, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following:

• a failure to maintain adequate levels of capital and liquidity to support our operations;
• general economic and business conditions internationally, nationally and in those areas in which we operate, including any potential recessionary conditions;
• volatility and deterioration in the credit and equity markets;
• changes in investor sentiment or consumer spending, borrowing and savings habits;
• availability of capital from private and government sources;
• demographic changes;
• competition for loans and deposits and failure to attract or retain loans and deposits;
• inflation and fluctuations in interest rates that reduce our margins and yields, the fair value of financial instruments, the level of loan originations or prepayments on loans we have made and make, the level of loan sales and the cost we pay to retain and attract deposits and secure other types of funding;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• the current or anticipated impact of military conflict, terrorism or other geopolitical events;
• the effect of potential future supervisory action against us or Hanmi Bank and our ability to address any issues raised in our regulatory exams;
• risks of natural disasters;
• legal proceedings and litigation brought against us;
• risks associated with cybersecurity threats, data breaches, ransomware attacks, or other failures in our operational or security systems and infrastructure, including the risks arising from our dependence on third-party service providers and vendors;
• the failure to maintain current technologies;
• risks associated with Small Business Administration loans;
• failure to attract, develop, or retain key employees;
• our ability to access cost-effective funding;
• the imposition of tariffs or other domestic or international governmental policies, trade restrictions, and any retaliatory measures impacting our borrowers and the broader economy;
• the impact of a potential federal government shutdown, which may impact on our ability to effect sales of Small Business Administration loans, debt ceiling impasses or fiscal uncertainty;
• changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio;
• fluctuations in real estate values;
• changes in accounting policies and practices;
• changes in governmental regulation, including, but not limited to, any increase in FDIC insurance premiums and changes in the monetary policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System;
• the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank’s retained earnings, net income, prior distributions made, and certain other financial tests;
• strategic transactions we may enter into, including the costs associated with the evaluation of any strategic opportunities and the overall effects of any acquisitions or dispositions we may make;
• the adequacy of and changes in the economic assumptions and methodology for computing our allowance for credit losses;
• our credit quality and the effect of credit quality on our credit losses expense and allowance for credit losses;
• changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements;
• our ability to control expenses;
• the inability of third-party service providers to perform their obligations to us; and
• the ability of the Company to withstand disruptions that may be caused by any failure of the operational systems of third parties.

For additional information concerning risks we face, see “Part II, Item 1A. Risk Factors” in this Report and “Item 1A. Risk Factors” in Part I of the 2025 Annual Report on Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to the consolidated financial statements in the 2025 Annual Report on Form 10-K. We had no significant changes in what constituted our accounting policies since the filing of the 2025 Annual Report on Form 10-K.

Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in the 2025 Annual Report on Form 10-K. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors.

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest derived from assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans are affected principally by changes to market interest rates, the demand for loans, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve.

The following table shows the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin on a taxable-equivalent basis for the periods indicated. All average balances are daily average balances.

(dollars in thousands)

(1) Loans include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans are included in the average loans balance.

(2) Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

(3) Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.

(4) Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5) Represents net interest income as a percentage of average interest-earning assets.

The average balance of interest-earning assets increased $162.0 million, or 2.2%, to $7.63 billion for the three months ended June 30, 2026, from $7.47 billion for the three months ended June 30, 2025, primarily due to growth in the average balance of commercial and industrial loans. The average balance of interest-bearing liabilities increased $114.1 million, or 2.4%, to $4.93 billion for the three months ended June 30, 2026, compared with $4.82 billion for the three months ended June 30, 2025, primarily due to a higher average balance of time deposits.

Net interest margin, on a taxable equivalent basis, increased 29 basis points to 3.36% for the three months ended June 30, 2026, from 3.07% for the same period in 2025. This increase was primarily due to a decline in the cost of interest-bearing liabilities of 47 basis points to 3.21% for the three months ended June 30, 2026, from 3.68% for the same period in 2025, due to the decline in interest rates.

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. Simultaneous volume and rate effects have been allocated proportionally to the respective volume and rate variances based on their absolute dollar amounts.

(in thousands)

(1) Loans include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans are included in the average loans balance.

(2) Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

Net interest income for the three months ended June 30, 2026 and 2025 was $63.9 million and $57.1 million, respectively, reflecting an increase of $6.8 million, or 11.8%. This increase was primarily due to a $5.9 million effect from a decrease in interest rates on liabilities and a $2.4 million effect from an increase in the average balance of loans, partially offset by a $1.2 million effect from an increase in the average balance of interest-bearing liabilities.

The $5.9 million impact from the decrease in interest rates on liabilities was primarily driven by money market and savings accounts and time deposits, which increased net interest income by $3.4 million and $2.5 million, respectively, for the three months ended June 30, 2026, compared with the same period in 2025. The $2.4 million volume-driven increase in interest income on loans was primarily due to a higher average balance of commercial and industrial loans, partially offset by a decline in the average balance of equipment financing agreements. The $1.2 million offsetting increase in interest expense was primarily due to the $2.1 million impact of a higher average balance of time deposits, partially offset by a lower average balance of money market and savings accounts and borrowings.

The following table shows the average balance of assets, liabilities and stockholders’ equity; the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin on a taxable-equivalent basis for the periods indicated. All average balances are daily average balances.

(dollars in thousands)

(1) Loans include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans are included in the average loans balance.

(2) Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

(3) Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.

(4) Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5) Represents net interest income as a percentage of average interest-earning assets.

The average balance of interest-earning assets increased $161.2 million, or 2.2%, to $7.59 billion for the six months ended June 30, 2026, from $7.43 billion for the six months ended June 30, 2025, primarily due to growth in the average balance of commercial and industrial loans. The average balance of interest-bearing liabilities increased $101.4 million, or 2.1%, to $4.90 billion for the six months ended June 30, 2026, compared with $4.79 billion for the six months ended June 30, 2025, primarily due to a higher average balance of time deposits.

Net interest margin, on a taxable equivalent basis, increased 32 basis points to 3.37% for the six months ended June 30, 2026, from 3.05% for the same period in 2025. This increase was primarily due to a decline in the cost of interest-bearing liabilities of 49 basis points to 3.23% for the six months ended June 30, 2026, from 3.72% for the same period in 2025, due to the decline in interest rates.

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. Simultaneous volume and rate effects have been allocated proportionally to the respective volume and rate variances based on their absolute dollar amounts.

(in thousands)

(1) Loans include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans are included in the average loans balance.

(2) Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

Net interest income for the six months ended June 30, 2026 and 2025 was $127.1 million and $112.2 million, respectively, reflecting an increase of $14.9 million, or 13.2%. This increase was primarily due to an $11.9 million effect from a decrease in interest rates on liabilities and a $5.4 million effect from an increase in the average balance of loans, partially offset by a $2.0 million impact from an increase in the average balance of interest-bearing liabilities.

The $11.9 million effect from the decrease in interest rates on liabilities was primarily driven by money market and savings accounts and time deposits, which increased net interest income by $6.9 million and $4.8 million, respectively, for the six months ended June 30, 2026, compared with the same period in 2025. The $5.4 million volume-driven increase in interest income on loans was primarily due to a higher average balance of commercial and industrial loans, partially offset by a decline in the average balance of equipment financing agreements. The $2.0 million offsetting increase in interest expense was primarily due to a $4.0 million impact of a higher average balance of time deposits, partially offset by a lower average balance of borrowings.

Credit Loss Expense

For the second quarter of 2026, the Company recorded $1.2 million of credit loss expense, comprising a $1.3 million provision for loan losses and a $0.1 million recovery for off-balance sheet items. For the same period in 2025, the Company recorded $7.6 million of credit loss expense, comprising a $7.5 million provision for loan losses and a $0.1 million provision for off-balance sheet items. The $6.2 million decrease in the provision for loan losses was primarily due to lower net charge-offs. Net charge-offs for the three months ended June 30, 2026 were $1.3 million, $10.1 million lower than the $11.4 million recognized for the three months ended June 30, 2025. Charge-offs for the three months ended June 30, 2025 included an $8.6 million charge-off of a syndicated commercial real estate office loan.

For the six months ended June 30, 2026, the Company recorded $4.1 million of credit loss expense, comprising a $4.4 million provision for loan losses and a $0.3 million recovery for off-balance sheet items. For the same period in 2025, the Company recorded $10.4 million of credit loss expense, comprising a $9.9 million provision for loan losses and a $0.5 million provision for off-balance sheet items. The $5.5 million decrease in the provision for loan losses was primarily due to lower net charge-offs. Charge-offs for the six months ended June 30, 2025 included the previously mentioned $8.6 million charge-off.

See also “Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items” for further details.

Noninterest Income

The following table sets forth the various components of noninterest income for the periods indicated:

(dollars in thousands)

For the three months ended June 30, 2026, noninterest income was $8.3 million, an increase of $0.2 million compared with noninterest income of $8.1 million for the three months ended June 30, 2025. The increase was due to a $0.4 million increase in gain on the sale of residential mortgage loans, a $0.4 million increase in trade finance and other service charges and fees due to a higher balance of outstanding letters of credit, and a $0.2 million increase in loan servicing income because of a decline in prepayments. Partially offsetting these increases to noninterest income was a $0.8 million decline in gain on sales of SBA loans, due to a lower volume of loans sold.

During the three months ended June 30, 2026, the Company sold $20.9 million of SBA loans, recognizing a net gain of $1.3 million and trade premiums of 7.88%, compared with $35.4 million of SBA loans sold for a net gain of $2.2 million and trade premiums of 7.61% for the three months ended June 30, 2025. The Company sold $30.6 million of residential mortgage loans for a net gain of $0.4 million and trade premiums of 2.00% for the three months ended June 30, 2026. There were no residential loan sales for the three months ended June 30, 2025.

(dollars in thousands)

For the six months ended June 30, 2026, noninterest income was $16.9 million, an increase of $1.1 million compared with noninterest income of $15.8 million for the six months ended June 30, 2025. The increase was due to a $0.7 million increase in gain on the sale of residential mortgage loans due to a higher volume of loans sold, a $0.5 million increase in trade finance and other service charges and fees, a $0.4 million increase in bank-owned life insurance income due to higher death benefit proceeds, and a $0.3 million increase in loan servicing income because of lower prepayments. Partially offsetting these increases to noninterest income was a $0.7 million decline in gain on sales of SBA loans due to a lower volume of loans sold.

During the six months ended June 30, 2026, the Company sold $53.5 million of SBA loans, recognizing a net gain of $3.4 million and trade premiums of 7.89%, compared with $67.6 million of SBA loans sold for a net gain of $4.2 million and trade premiums of 7.71% for the six months ended June 30, 2025. The Company sold $62.3 million of residential mortgage loans for a net gain of $0.8 million and trade premiums of 2.25% for the six months ended June 30, 2026, compared with $10.0 million of residential mortgage loans sold for a net gain of $0.2 million and trade premiums of 2.50% for the six months ended June 30, 2025.

Noninterest Expense

The following table sets forth the components of noninterest expense for the periods indicated:

(dollars in thousands)

For the three months ended June 30, 2026, noninterest expense was $39.0 million, an increase of $2.7 million, or 7.4%, compared with $36.3 million for the same period in 2025. The increase was mainly attributed to a $0.8 million increase in data processing expense, a $0.7 million increase in salaries and employee benefits, a $0.5 million increase in all other operating expenses, and a $0.5 million increase in other-real-estate-owned expense.

The increase in data processing expense was primarily due to higher license and maintenance costs due to higher transaction volumes and increased vendor pricing. The increase in salaries and employee benefits was primarily due higher wages paid as a result of annual merit increases. The increase in all other operating expenses was primarily due to the resolution of an administrative matter. The increase in OREO expense was due to the absence of the 2025 second-quarter gain on the sale of an OREO property.

(dollars in thousands)

For the six months ended June 30, 2026, noninterest expense was $77.4 million, an increase of $6.1 million, or 8.5%, compared with $71.3 million for the same period in 2025. The increase was mainly attributed to a $1.7 million increase in salaries and employee benefits, a $1.6 million increase in professional fees, a $1.4 million increase in data processing expense, and a $1.2 million increase in all other operating expenses.

The increase in salaries and employee benefits was due primarily to higher employee wages due to annual merit increases, which resulted in higher payroll taxes and higher 401(k) expense. The increase in professional fees was due to higher legal and consulting fees. The increase in data processing expense was due to higher license and maintenance expense, as well as higher transaction volumes. The increase in all other operating expenses was primarily due to the resolution of administrative matters, as well as higher loan-related expense due to the payment of delinquent property taxes on a nonaccrual loan.

Income Tax Expense

Income tax expense was $8.5 million and $6.1 million, representing effective income tax rates of 26.5% and 28.8% for the three months ended June 30, 2026 and 2025, respectively. Income tax expense for the six months ended June 30, 2026 and 2025 was $16.4 million and $13.6 million, respectively, representing effective tax rates of 26.3% and 29.3%, respectively. The lower effective tax rate for the three and six months ended June 30, 2026 reflects the tax benefit arising from the first-quarter vesting of performance stock units, as well as a favorable change in the State of California's apportionment calculation.

Financial Condition

Securities

As of June 30, 2026, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities, tax-exempt municipal bonds and U.S. Treasury securities. Most of these securities carry fixed interest rates. Other than holdings of U.S. government agency and sponsored agency obligations, there were no securities of any one issuer exceeding 10% of stockholders’ equity as of June 30, 2026 or December 31, 2025.

Securities increased $16.0 million to $896.6 million at June 30, 2026 from $880.6 million at December 31, 2025, mainly attributed to $169.1 million in purchases (primarily U.S. Treasury securities), partially offset by $147.8 million in maturities and principal paydown.

The following table summarizes the contractual or expected maturity schedule for securities, at amortized cost, and their cost-weighted average yield, as of June 30, 2026:

(dollars in thousands)

Loans

As of June 30, 2026 and December 31, 2025, loans (excluding loans held for sale), net of deferred loan fees and costs, discounts and the allowance for credit losses, were $6.46 billion and $6.49 billion, respectively. For the six months ended June 30, 2026, there was $749.8 million in new loan production, offset by $474.8 million in loan sales and payoffs, and amortization and other reductions of $303.1 million. Loan production consisted of commercial real estate loans of $301.5 million, residential mortgage loans of $79.1 million, commercial and industrial loans of $223.9 million, equipment financing agreements of $67.5 million and SBA loans of $77.8 million.

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses as of June 30, 2026. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.

(in thousands)

53

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with fixed or predetermined interest rates, as of June 30, 2026.

(in thousands)

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with floating or variable interest rates (including floating, adjustable and hybrids), as of June 30, 2026.

(in thousands)

Industry

As of June 30, 2026, the loan portfolio included the following concentrations of loan types to borrowers in industries that represented greater than 10.0% of loans outstanding:

(in millions)

54

Loan Quality Indicators

Criticized Loans

Activity in criticized loans was as follows for the periods indicated:

(in thousands)

(in thousands)

Special mention loans were $68.2 million and $71.1 million at June 30, 2026 and December 31, 2025, respectively. The $2.9 million decrease in the six months ended June 30, 2026 included the upgrade of $1.4 million of loans to the pass category and $1.0 million of paydowns and payoffs.

Classified loans were $45.7 million and $25.9 million at June 30, 2026 and December 31, 2025, respectively. The $19.8 million increase for the six months ended June 30, 2026 resulted from additions of $38.2 million and reductions of $18.4 million. Additions included the downgrade of a $21.2 million commercial real estate loan in the retail industry, which had been downgraded from the pass category to special mention during the 2026 first quarter, and further downgraded to classified during the 2026 second quarter. Additions also included the downgrade of a $5.0 million commercial real estate loan in the hospitality industry, which was modified during the first quarter of 2026 to allow for temporary interest-only payments, as well as the downgrade of a $3.1 million commercial real estate loan secured by an industrial property and $3.8 million of equipment finance agreements.

Reductions of $18.4 million included a $9.7 million payment on a commercial real estate office loan that had a balance of $10.2 million at December 31, 2025, as well as the sale of a $3.2 million commercial real estate loan and $3.4 million of charge-offs.

Nonperforming Assets

Loans 30 to 89 days past due and still accruing were $32.8 million at June 30, 2026, compared with $19.9 million at December 31, 2025. The increase of $12.9 million includes a $21.1 million commercial real estate loan that became delinquent during the three months ended June 30, 2026, partially offset by $9.9 million of loans that became current during the six months ended June 30, 2026. There were no loans 90 or more days past due and still accruing at June 30, 2026 or December 31, 2025.

Nonperforming loans consist of nonaccrual loans and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and OREO. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest become current and full repayment is expected, which generally occurs after sustained payment of six months. Interest income is recognized on the accrual basis for loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means.

Except for nonaccrual loans, management is not aware of any other loans as of June 30, 2026 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in a loan being designated as nonperforming at some future date.

Activity in nonperforming loans was as follows for the periods indicated:

(in thousands)

56

(in thousands)

Nonperforming loans were $9.9 million and $18.1 million as of June 30, 2026 and December 31, 2025, respectively, representing a decrease of $8.2 million, or 45.2%. The decrease was primarily due to a $9.7 million payment received during the three months ended March 31, 2026 on a commercial real estate office loan that was designated as nonaccrual during the first quarter of 2025. As of June 30, 2026 and December 31, 2025, 1.2% and 1.3% of equipment financing agreements were on nonaccrual status, respectively. At June 30, 2026 and December 31, 2025, there were no loans 90 days or more past due and still accruing interest.

The $9.9 million of nonperforming loans as of June 30, 2026 had specific allowances of $2.6 million, compared with $18.1 million of nonperforming loans with specific allowances of $3.4 million as of December 31, 2025.

Nonperforming assets were $9.9 million at June 30, 2026, or 0.12% of total assets, compared to $20.1 million, or 0.26% of total assets, at December 31, 2025. Excluded from nonperforming assets is repossessed personal property associated with equipment finance agreements of $0.3 million and $0.6 million at June 30, 2026 and December 31, 2025, respectively.

Individually Evaluated Loans

The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools. Individually evaluated loans are measured for expected credit losses based on the present value of expected cash flows discounted at the effective interest rate, the observable market price, or the fair value of collateral.

Individually evaluated loans were $9.9 million and $18.1 million as of June 30, 2026 and December 31, 2025, respectively, representing a decrease of $8.2 million, or 45.3%. Specific allowances associated with individually evaluated loans decreased $0.8 million to $2.6 million as of June 30, 2026, compared with $3.4 million as of December 31, 2025.

Loan Modifications to Borrowers Experiencing Financial Difficulty

A borrower is experiencing financial difficulties when there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Company may modify loans to borrowers experiencing financial difficulties by providing principal forgiveness, a term extension, an other-than-insignificant payment delay, or an interest rate reduction.

The following table presents loan modifications made to borrowers experiencing financial difficulty by type of modification, with related amortized cost balances, respective percentage shares of the total class of loans, and the related financial effect, as of the period indicated:

(in thousands)

The modified loan above was current at June 30, 2026. The Company has not committed to lend any additional amounts to the borrower included in the table above as of June 30, 2026. During the six months ended June 30, 2026 and 2025, there were no payment defaults on loans modified within the preceding 12 months.

No loans were modified to borrowers experiencing financial difficulty during the three months ended June 30, 2026 or during the six months ended June 30, 2025.

Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items

The Company’s estimate of the allowance for credit losses at June 30, 2026 and December 31, 2025 reflected losses expected over the remaining contractual life of assets based on historical, current, and forward-looking information. The contractual life does not consider extensions, renewals or modifications.

Our allowance for credit losses incorporate a variety of risk considerations, both quantitative and qualitative, that management believes is appropriate to absorb lifetime credit losses at each reporting date. Quantitative factors include the general economic forecast in our markets, risk ratings, delinquency trends, collateral values, changes in nonperforming, criticized and classified loans, and other factors.

We use qualitative factors to adjust the allowance calculation for risks not considered by the quantitative calculations. Qualitative factors considered in our methodologies include concentrations of credit, changes in lending management and staff, and quality of the loan review system.

The Company reviews baseline and alternative economic scenarios from Moody’s (previously known as Moody’s Analytics, a subsidiary of Moody’s Corporation) for consideration in the quantitative portion of our analysis of the allowance for credit losses. Moody’s publishes a baseline forecast that represents the estimate of the most likely path for the United States economy through the current business cycle (50% probability that economic conditions will be worse and 50% probability that economic conditions will be better) as well as alternative scenarios to examine how different types of shocks will affect the future performance of the United States economy.

The Company utilizes a midpoint approach of multiple forward-looking scenarios to incorporate losses from a baseline, upside (stronger near-term growth) and downside (slower near-term growth) economy. As a result, the upside and downside scenarios each receive a weight of 30%, and the baseline receives a weight of 40%.

Certain quantitative and qualitative factors used to estimate credit losses and establish an allowance for credit losses are subject to uncertainty. The adequacy of our allowance for credit losses is sensitive to changes in current and forecasted economic conditions that may affect the ability of borrowers to make contractual payments as well as the value of the collateral securing such payments.

Although management believes it uses the best information available to establish the allowance for credit losses, future adjustments to the allowance for credit losses may be necessary and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

In addition, because future events affecting borrowers and collateral cannot be predicted without uncertainty, the existing allowance for credit losses may not be adequate or increases may be necessary should the quality of any loans deteriorate as a result of the factors discussed. Any material increase in the allowance for credit losses would adversely impact the Company’s financial condition and results of operations.

The following table reflects our allocation of the allowance for credit losses by loan category as well as the amount of loans in each loan category, including related percentages, as of the dates indicated:

(dollars in thousands)

58

The following table sets forth certain ratios related to our allowance for credit losses at the dates presented:

(dollars in thousands)

The allowance for credit losses was $70.5 million and $69.9 million at June 30, 2026 and December 31, 2025, respectively. The allowance attributed to individually evaluated loans was $2.6 million and $3.4 million as of June 30, 2026 and December 31, 2025, respectively. The allowance attributed to collectively evaluated loans was $67.9 million and $66.5 million as of June 30, 2026 and December 31, 2025, respectively.

As of June 30, 2026 and December 31, 2025, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.0 million and $2.3 million, respectively. The Bank closely monitors each borrower’s repayment capabilities while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality, prevailing economic conditions and economic forecasts, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of June 30, 2026.

The following table presents a summary of gross charge-offs and recoveries for the loan portfolio:

(in thousands)

For the three months ended June 30, 2026, gross charge-offs decreased $10.5 million from the same period in 2025. Gross recoveries for the three months ended June 30, 2026 decreased $0.4 million from the same period in 2025. Gross charge-offs for the three months ended June 30, 2026 and 2025 included $1.6 million and $2.9 million of equipment finance agreement charge-offs, respectively. Gross charge-offs for the three months ended June 30, 2025 also included an $8.6 million charge-off of a commercial real estate loan designated as nonaccrual in the first quarter of 2025. Gross recoveries for the three months ended June 30, 2026 and 2025 included $0.6 million of recoveries on equipment finance agreements for both periods.

For the six months ended June 30, 2026, gross charge-offs decreased $10.5 million from the same period in 2025. Gross recoveries for the six months ended June 30, 2026 decreased $1.1 million from the same period in 2025. Gross charge-offs for the six months ended June 30, 2026 and 2025 included $4.5 million and $5.7 million of equipment finance agreement charge-offs, respectively. Gross charge-offs for the six months ended June 30, 2025 also included the previously mentioned $8.6 million charge-off of a commercial real estate loan. Gross recoveries for the six months ended June 30, 2026 and 2025 included $1.0 million and $1.4 million of recoveries on equipment financing agreements, respectively.

The following table presents a summary of net (charge-offs) recoveries by loan category:

(dollars in thousands)

(1) Annualized

Net loan charge-offs were $1.3 million, or 0.08% of average loans, and $11.4 million, or 0.36% of average loans, for the three months ended June 30, 2026 and 2025, respectively. Net loan charge-offs were $3.9 million, or 0.12% of average loans, and $13.3 million, or 0.43% of average loans, for the six months ended June 30, 2026 and 2025, respectively.

Deposits

The following table shows the composition of deposits by type as of the dates indicated:

(dollars in thousands)

(1) Includes State of California time deposits of $90.0 million at June 30, 2026 and December 31, 2025.

(2) Includes State of California time deposits of $90.0 million and $60.0 million at June 30, 2026 and December 31, 2025, respectively.

(3) Includes brokered deposits of $86.9 million and $88.5 million at June 30, 2026 and December 31, 2025, respectively.

Total deposits were $6.96 billion and $6.68 billion as of June 30, 2026 and December 31, 2025, respectively, representing an increase of $277.7 million, or 4.2%. While all deposit types increased, deposit growth was primarily driven by a $151.1 million increase in time deposits and a $120.2 million increase in noninterest-bearing demand deposits. At June 30, 2026, the loan-to-deposit ratio was 94.0% compared to 98.3% at December 31, 2025.

As of June 30, 2026 and December 31, 2025, the aggregate amount of uninsured deposit accounts (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $3.12 billion and $2.92 billion, respectively. For time deposits, the aggregate amount exceeding the insurance limit was $919.1 million and $750.8 million, respectively. Other uninsured deposits, such as demand and money market and savings deposits, were $2.20 billion and $2.17 billion, respectively. At June 30, 2026 and December 31, 2025, $1.47 billion and $1.34 billion of total uninsured deposits, respectively, were in accounts with balances of $5.0 million or more.

The Bank’s wholesale funds historically consisted of FHLB advances, brokered deposits, and State of California time deposits. As of June 30, 2026, the Bank had no outstanding FHLB advances, compared with $150.0 million of FHLB advances as of December 31, 2025.

Borrowings and Subordinated Debentures

Borrowings mostly take the form of FHLB advances. At June 30, 2026, there were no outstanding FHLB advances. At December 31, 2025, FHLB advances were $150.0 million, all of which were term advances. Funds from deposit growth not used to fund loan production were used to pay off borrowings. The weighted-average interest rate of all FHLB advances at December 31, 2025 was 4.02%. There were no FHLB advances outstanding at any month-end date during the six months ended June 30, 2026. The maximum amount of FHLB advances outstanding at any month-end date during the six months ended June 30, 2025 was $150.0 million. There were no contractual maturities of FHLB advances greater than twelve months at December 31, 2025.

Subordinated debentures were $130.8 million and $130.5 million as of June 30, 2026 and December 31, 2025, respectively. Subordinated debentures included fixed-to-floating subordinated notes of $108.8 million and $108.7 million as of June 30, 2026 and December 31, 2025, respectively, and junior subordinated deferrable interest debentures of $21.9 million and $21.7 million as of June 30, 2026 and December 31, 2025, respectively. On July 30, 2026, the Company issued $55.0 million of 6.50% Fixed-to-Floating Subordinated Notes with a maturity date of July 31, 2036 and provided notice to the trustee of its intent to redeem all of $110.0 million of existing subordinated debentures. See “Note 8 – Borrowings and Subordinated Debentures” and “Note 17 - Subsequent Events” for more details.

Stockholders’ Equity

Stockholders’ equity was $812.7 million and $796.4 million as of June 30, 2026 and December 31, 2025, respectively. The $16.3 million increase included net income of $46.1 million and share-based compensation of $1.6 million, partially offset by $16.9 million of dividends paid, $9.6 million in share repurchases, a $3.3 million increase in unrealized after-tax losses on securities available for sale, and $1.5 million in shares purchased to satisfy employees’ tax liabilities for the vesting of stock compensation. The Company repurchased 345,707 shares of common stock during the six months ended June 30, 2026, at an average share price of $27.90. At June 30, 2026, 1,991,495 shares remain under the Company’s share repurchase program.

Interest Rate Risk Management

The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.

The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of June 30, 2026. The Company compares this stress simulation to policy limits, which specify the maximum tolerance level for net interest income exposure over 1- to 12-month and 13- to 24- month horizons, given the basis point adjustment in interest rates reflected below.

(dollars in thousands)

(dollars in thousands)

The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions, including the timing and magnitude of interest rate changes, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows.

The key assumptions, based upon loans, securities and deposits, are as follows:

While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.

Capital Resources and Liquidity

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate capital levels, the Board regularly assesses projected sources and uses of capital, expected loan growth, anticipated strategic actions (such as stock repurchases and dividends), and projected capital thresholds under adverse and severely adverse economic conditions. In addition, the Board considers the Company’s access to capital from financial markets through the issuance of additional debt and securities, including common stock or notes, to meet its capital needs.

The Company’s ability to pay dividends to stockholders depends in part upon dividends it receives from the Bank. California law restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to stockholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the Department of Financial Protection and Innovation (“DFPI”), in an amount not exceeding the greater of: (1) retained earnings of the Bank; (2) net income of the Bank for its last fiscal year; or (3) the net income of the Bank for its current fiscal year. The Company paid dividends of $16.9 million ($0.56 per share) for the six months ended June 30, 2026 and $32.6 million ($1.08 per share) for the year 2025. As of July 1, 2026, the Bank had the ability to pay dividends of approximately $44.4 million, after giving effect to the $0.28 dividend declared on July 23, 2026, for the third quarter of 2026, without the prior approval of the Commissioner of the DFPI.

At June 30, 2026, the Bank’s total risk-based capital ratio of 14.48%, Tier 1 risk-based capital ratio of 13.40%, common equity Tier 1 capital ratio of 13.40% and Tier 1 leverage capital ratio of 11.71% placed the Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with a total risk-based capital ratio equal to or greater than 10.00%, Tier 1 risk-based capital ratio equal to or greater than 8.00%, common equity Tier 1 capital ratios equal to or greater than 6.50%, and Tier 1 leverage capital ratio equal to or greater than 5.00%.

At June 30, 2026, the Company’s total risk-based capital ratio was 15.29%, Tier 1 risk-based capital ratio was 12.61%, common equity Tier 1 capital ratio was 12.28% and Tier 1 leverage capital ratio was 10.94%.

For a discussion of the applicable capital adequacy framework, see "Regulation and Supervision - Capital Adequacy Requirements" in our 2025 Annual Report on Form 10-K.

Liquidity

For a discussion of liquidity for the Company, see Note 14 - Liquidity, included in the notes to unaudited consolidated financial statements in this Report, and Note 22 – Liquidity in our 2025 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the notes to unaudited consolidated financial statements in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our 2025 Annual Report on Form 10-K.

For quantitative and qualitative disclosures regarding market risks, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” in this Report.

Evaluation of Disclosure Controls and Procedures

Management is responsible for the disclosure controls and procedures of the Company. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2026.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended June 30, 2026 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

There have been no material changes in risk factors applicable to the Company from those described in “Risk Factors” in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2025.