BYFC Broadway Financial Corp \de\ - 10-K

ITEM 1A. RISK FACTORS

We are exposed to a variety of risks, some of which are inherent to the financial services industry and others of which are more specific to our businesses. The discussion below addresses material factors, of which we are currently aware, that could have a material and adverse effect on our businesses, results of operations, and financial condition. The disclosures below reflect our beliefs and opinions as to the factors, events, or contingencies that could materially and adversely affect us in the future. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors, events, or contingencies have occurred in the past or their likelihood of occurring in the future. These risk factors and other forward-looking statements that relate to future events, expectations, trends and operating periods involve certain factors that are subject to change, and important risks and uncertainties that could cause actual results or outcomes to differ materially. These risks and uncertainties should not be considered a complete discussion of all the risks and uncertainties that we might face. Although the risks are organized by headings and each risk is discussed separately, many are interrelated.

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Risks Relating to Our Business

The macroeconomic environment could pose significant challenges for the Company and could adversely affect our financial condition and results of operations.

Inflation poses risk to the economy overall and could indirectly pose 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. Rising 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 commercial customers, increasing costs. All of these inflationary risks for our commercial customer base can be financially detrimental, leading to increased likelihood that the customer may default on a loan.

For example, sustained inflationary pressure led the Federal Reserve to raise interest rates seven times in 2022, and four times in 2023, which increased our interest rate risk. Analysts have been monitoring the level of uninsured deposits in banks due to the liquidity risk associated with high levels of uninsured deposits. To the extent such conditions exist or worsen, we could experience adverse effects on our business, financial condition, and results of operations.

Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including hostilities between Russia and Ukraine and the conflict in the Middle East, terrorism, or other geopolitical events.

Our future success will depend on our ability to compete effectively in the highly competitive financial services industry in the greater Washington, D.C. and Los Angeles metropolitan areas.

We face strong competition in the Washington, D.C. metropolitan area and the Southern California Market. We compete with many different types of financial institutions, including commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, insurance companies, and money market funds, as well as other local and community, super-regional, national, and international financial institutions that operate offices in our primary market areas and elsewhere. Our future growth and success will depend on our ability to compete effectively in this highly competitive financial services environment. Many of our competitors in the greater Washington, D.C. and Los Angeles metropolitan areas are well-established, larger financial institutions that have greater name recognition and market presence that benefit them in attracting business. Failure to compete effectively and to attract new or to retain existing clients may have an adverse effect on our financial condition, results of operations, assets, or business.

A downturn in the real estate market could seriously impair our loan portfolio and operating results.

Most of our loan portfolio consists of loans secured by various types of real estate located in Southern California and in Washington, D.C., and surrounding areas. If economic factors cause real estate values in the markets we serve to decline, higher vacancies to occur, or the deterioration of other factors, then the financial condition of the Bank’s borrowers could be harmed, and the collateral for loans will provide less security. In addition, a decline in real estate values in the regions served could result in the Bank experiencing increases in loan delinquencies and defaults, which result in increases in the amounts of nonperforming assets and which would likely cause the Bank to suffer losses.

Our allowance for credit losses may not be adequate to cover actual loan losses.

Our provision for credit losses is based on estimates of expected lifetime credit losses for loans at the time of origination which may not cover actual future credit losses. Management utilizes a variety of inputs in the calculation of its estimate, including historical losses based on peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, and internal loan processes. We use historical loss data provided by our third-party service provider in the calculation of our ACL which may not approximate our own historical loss data. Our ability to accurately forecast and react to future losses may be impaired by significant uncertainties which could result in loan losses and other exposures that could exceed our allowance. Furthermore, if the models, estimates and assumptions we use to establish our ACL or the judgments we make in extending credit to our borrowers prove inaccurate in predicting future events, the result may also be losses in excess of our ACL. As economic conditions change, we may have to increase our ACL, which could adversely affect our results of operations, earnings, and financial condition.

Changes in interest rates affect profitability.

Changes in prevailing interest rates adversely affect our business. We derive income mainly from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the wider the spread, the more we will earn. When market rates of interest change, the interest the Bank receives on assets and the interest paid on liabilities will fluctuate. In addition, the timing and rate of change in the interest that the Bank earns on assets do not necessarily match the timing and rate of change in the interest that it must pay on deposits and other interest-bearing liabilities, even though most of the loans have adjustable-rate features. This causes increases or decreases in the spread and can greatly affect income. When the interest rates paid on deposits and borrowings increase faster than the interest rates earned on loans and securities, the Bank’s spread decreases which has a negative impact on profitability. Also, the carrying value of our available-for-sale investment portfolio will continue to decrease due to increases in interest rates. In addition, interest rate fluctuations can affect how much money the Bank may be able to lend and its ability to attract and retain customer deposits, which are an important source of funds for making and holding loans.

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Changes in governmental regulation may impair operations or restrict growth.

We are subject to substantial governmental supervision and regulation, which are intended primarily for the protection of depositors rather than our stockholders. Statutes and regulations affecting our business may be changed at any time, and the interpretation of existing statutes and regulations by examining authorities may also change. Within the last several years, Congress and the federal bank regulatory authorities have made significant changes to these statutes and regulations. There can be no assurance that such changes to the statutes and regulations or in their interpretation will not adversely affect our business. Moreover, the Bank operates as a Community Development Financial Institution (CDFI) and as a result, we face a complex and evolving regulatory and political landscape, and changes in laws, regulations, initiatives, or regulatory policies could adversely affect our business, financial condition, and results of operations. We are also subject to changes in other federal and state laws, including changes in tax laws, which could materially affect the banking industry. If we fail to comply with federal bank regulations, our regulators may limit our activities or growth, assess civil money penalties against us or place the Bank into conservatorship or receivership. Bank regulations can hinder our ability to compete with financial services companies that are not regulated or are less regulated.

Negative public opinion regarding us or the failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business.

Our reputation within the communities we serve is critical to our success. We believe we have built strong personal and professional relationships with our customers and are an active member of the communities we serve. If our reputation is negatively affected, including as a result of actions of our employees or otherwise, we may be less successful in attracting new customers or talent or may lose existing customers, and our business, financial condition and earnings could be adversely affected.

We may not be successful in retaining key employees.

Our success will depend in part on its ability to retain the talents and dedication of key employees. If key employees unexpectedly terminate their employment, our business activities may be adversely affected and management’s attention may be diverted from successfully integrating operating our business to hiring suitable replacements, which may cause our business to suffer. In addition, we may not be able to identify or recruit suitable replacements in a timely manner, if at all, for any key employees who leave the Company.

General Risk Factors

Ineffective internal control over financial reporting could affect our ability to record, process, and report financial information accurately, impair our ability to prepare financial statements, negatively affect investor confidence, and cause reputational harm.

Effective internal controls are necessary for the Company to provide reliable and accurate financial reporting and financial statements for external purposes in accordance with generally accepted accounting principles. A failure to maintain effective internal control over financial reporting could lead to violations, unintentional or otherwise, of laws and regulations. As disclosed in the Company’s Form 8-K filed on October 15, 2025, the Company’s management, with oversight of the Audit Committee of the Board of Directors (the “Audit Committee”) of Broadway Financial Corporation, the holding company of City First Bank, National Association, concluded that the Company’s audited consolidated financial statements for the fiscal years ended December 31, 2024 and 2023, and the unaudited interim consolidated financial statements for the quarters ended March 31, 2024, June 30, 2024, September 30, 2024, and March 31, 2025 (collectively, the “Affected Financials”), each as previously filed with the Securities and Exchange Commission (“SEC”), should no longer be relied upon because of an error related to certain loan participation agreements and should therefore be restated. In addition, as a result of the foregoing determination, related press releases, stockholder communications, investor presentations and other communications describing relevant portions of the Affected Financials should no longer be relied upon. In connection with the Affected Financials, the Company’s management identified material weaknesses in the Company’s internal control over financial reporting as of the dates the Affected Financials were originally filed.

If the additional controls and procedures that we have implemented to remediate the material weaknesses prove to be insufficient or we identify other control deficiencies that individually or together constitute significant deficiencies or material weaknesses, the Company’s ability to record, process, and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected. Litigation, government investigations, or regulatory enforcement actions arising out of any such failure or alleged failure could subject us to civil and criminal penalties that could materially and adversely affect our reputation, financial condition, and operating results. Similarly, the control deficiency, remediation efforts, and any related litigation, government investigations, or regulatory enforcement actions will require management attention and resources and cause us to incur unanticipated costs and could negatively affect investor confidence in our financial statements, cause us reputational harm, and raise other risks to our operations.

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Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock, which would negatively impact the market price and liquidity of our common stock and our ability to access the capital markets.

If we fail to satisfy the continued listing requirements of Nasdaq, such as the $1.00 minimum closing bid price or timely periodic financial reporting requirements, Nasdaq may take steps to delist the Company’s securities. For example, on August 21, 2025, we received a Staff Delisting Determination letter (the “Staff Determination”) from Nasdaq that it had initiated the delisting process with respect to the Company’s securities. Following the filing of the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2025 and September 30, 2025, we received a letter from Nasdaq on February 17, 2026, stating that the Company had regained compliance with Nasdaq continued listing requirements and the matter was closed. Any delisting of the Company’s securities, or threat of such delisting, would have a negative effect on the price of our common stock, impair the ability to sell or purchase our common stock when persons wish to do so, and any delisting materially adversely affect our ability to raise capital or pursue financing or other transactions on acceptable terms, or at all. Delisting from the Nasdaq Capital Market could also have other negative results, including the potential loss of institutional investor interest and fewer business development opportunities. In the event of a delisting, we would attempt to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.

The market price of our common stock is volatile. Stockholders may not be able to resell shares of our common stock at times or at prices they find attractive.

The trading price of our common stock has historically and will likely in the future fluctuate significantly as a result of a number of factors, including the following:

actual or anticipated changes in our operating results and financial condition;

actions by our stockholders, including sales of common stock by substantial stockholders and/or directors and executive officers, or perceptions that such actions may occur;

the limited number of shares of our common stock that are held by the general public, commonly called the “public float,” and our small market capitalization;

failure to meet stockholder or market expectations regarding loan and deposit volume, revenue, asset quality or earnings;

failure to meet Nasdaq listing requirements, including failure to satisfy the $1.00 minimum closing bid price or timely financial reporting requirements;

speculation in the press or the investment community relating to the Company or the financial services industry generally;

fluctuations in the stock price and operating results of our competitors;

proposed or adopted regulatory changes or developments;

investigations, proceedings, or litigation that involve or affect us;

the performance of the national, California and Washington, D.C. economies and the real estate markets in Southern California and Washington, D.C.;

general market conditions and, in particular, developments related to market conditions for the financial services industry;

additions or departures of key personnel;

changes in financial estimates or publication of research reports and recommendations by financial analysts with respect to our common stock or those of other financial institutions;

actions taken by bank regulatory authorities, including required additions to our loan loss reserves or the issuance of cease and desist orders, based on adverse evaluations of our loans and other assets, operating results, or management practices and procedures or other aspects of our business; and

the loss of our CDFI certification could potentially limit our grant income awards.

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We have not paid cash dividends on our common stock since 2010 and we may not pay any cash dividends on our common stock for the foreseeable future.

We have not declared or paid cash dividends on our common stock since June 2010, initially due, in part, to regulatory restrictions and the operating losses we have previously experienced. We have not determined to pay cash dividends on our common stock at any time in the near future.

Stock sales by us or other dilution of our equity may adversely affect the market price of our common stock.

The issuance of additional shares of our common stock, or securities that are convertible into our common stock, may be determined to be necessary or advisable at times when our stock price is below book value, which could be substantially dilutive to existing holders of our common stock. The market value of our common stock could also decline as a result of sales by us of a large number of shares of our common stock or any future class or series of stock or the perception that such sales could occur.

Anti-takeover provisions of our certificate of incorporation and bylaws, federal and state law and our stockholder rights plan may limit the ability of another party to acquire the Company, which could depress our stock price.

Various provisions of our certificate of incorporation and bylaws and certain other actions that we have taken could delay or prevent a third-party from acquiring control of the Company even if such a transaction might be considered beneficial by our stockholders. These include, among others, our classified board of directors, the fact that directors may only be removed for cause, advance notice requirements for stockholder nominations of director candidates or presenting proposals at our annual stockholder meetings, super-majority stockholder voting requirements for amendments to our certificate of incorporation and bylaws, and for certain business combination transactions, and the authorization to issue “blank check” preferred stock by action of our board of directors, without obtaining stockholder approval. In addition, we approved a stockholder rights plan in September 2019, the purpose of which was to protect our stockholders against the possibility of attempts to acquire control of or influence over the Company through open market or privately negotiated purchases of our common stock without payment of a fair price to all of our stockholders or through other tactics that do not provide fair treatment to all stockholders. These provisions and the stockholder rights plan could be used by our board of directors to prevent a merger or acquisition that would be attractive to stockholders and could limit the price investors would be willing to pay in the future for our common stock.

Our common stock is not insured and stockholders could lose the value of their entire investment.

An investment in shares of our common stock is not a deposit and is not insured against loss or guaranteed by the Federal Deposit Insurance Corporation (the “FDIC”) or any other government agency or authority.

If we were to lose CDFI certification at the Bank level or fail to obtain CDFI certification at the holding company level, our ability to obtain certain grants and awards received in the past may be adversely affected.

The Bank is currently certified as a CDFI by the United States Department of the Treasury and is undergoing its periodic recertification, and CDFI certification reinforces the Bank’s primary purpose of serving low income and underserved communities and enhances eligibility for certain grants and awards.  The Bank has received over $6.3 million in grants and awards from the CDFI Fund over the last five years, which has been reinvested in the communities we serve; however, the Bank’s mission driven banking model is not dependent on such grant funding. The Company’s application for CDFI certification is pending, and there can be no assurance that such certification will be approved in a timely manner, if at all. As a holding company, the Company’s operations are conducted solely through the Bank, and holding company certification is related to corporate level requirements rather than separate operating activities. A loss of CDFI certification at the Bank level, a failure of the Bank to successfully recertify, or a failure of the Company to obtain CDFI certification could  have a material adverse effect on our financial condition, results of operations, or business, including potential noncompliance with a shareholder agreement that requires holding company CDFI certification, loss of associated equity capital, default under one or more historical grant or award agreements, adverse impacts to certain depositor or strategic relationships, and the reduction, termination, or clawback of related grant or award funding.

Systems failures, interruptions and cybersecurity breaches in our information technology and telecommunications systems and of third-party service providers could have a material adverse effect on us.

Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and the systems of its third-party service providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity, or such third-party systems fail or experience interruptions. If significant, sustained, or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

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Our information technology systems and of our third-party service providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We likely will expend additional resources to protect against the threat of such cybersecurity incident, or to alleviate problems caused by such cybersecurity incident. However, there can be no assurance that these measures will be sufficient in safeguarding against any such threats. Security breaches and viruses potentially exposing sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, as well as personally identifiable information about our customers and employees, could expose us to claims, regulatory scrutiny, litigation costs and other possible liabilities and reputational harm. Further, there can be no assurance that our insurance coverage will be sufficient to cover any losses that may result from a cybersecurity incident or breach of our systems.

The financial services industry is undergoing rapid technological change, and we may not have the resources to effectively implement new technology or may experience operational challenges when implementing new technology.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to reduce costs while increasing customer service and convenience. Our future success will depend, at least in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as create additional efficiencies in our operations as we continue to grow and expand our products and service offerings. We may experience operational challenges as we implement these new technology enhancements or products, which could result in us not fully realizing the anticipated benefits from such new technology or incurring significant costs to remedy any such challenges in a timely manner.

Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products compared to those that we are able to provide, which may put us at a competitive disadvantage. Accordingly, we may lose customers seeking new technology-driven products and services to the extent we are unable to provide such products and services.

The markets in which we operate are susceptible to natural disasters, including earthquakes, fires, drought, flooding, extreme heat, and other severe weather or catastrophic events, any of which could result in a disruption of our operations and increases in loan losses.

A significant portion of our business is generated from markets that have been, and will continue to be, susceptible to damage by earthquakes, fires, drought, major seasonal flooding, and other severe weather or catastrophic events. In addition, natural disasters and other adverse external events can disrupt our operations, cause widespread property damage, and severely depress the local economies in which we operate. The value of real estate or other collateral that secures our loans could be materially and adversely affected by a disaster, resulting in decreased revenue and loan losses that could have a material adverse effect on our business, financial condition or results of operations. If the economies in our primary markets experience an overall decline as a result of a natural disaster, severe weather, or other catastrophic event, demand for loans and our other products and services could be reduced. In addition, the rates of delinquencies, foreclosures, bankruptcies, and loan losses may increase substantially, as uninsured property losses or sustained job interruption or loss may materially impair the ability of borrowers to repay their loans.

Risks Relating to the Company Being a Public Benefit Corporation

We cannot provide any assurance that we will achieve our public benefit purposes.

As a public benefit corporation, we are required to seek to produce a public benefit or benefits and to operate in a responsible and sustainable manner, balancing our stockholders’ pecuniary interests, the best interests of those materially affected by our conduct, and the public benefit or benefits identified by our certificate of incorporation. There is no assurance that we will achieve our public benefit purposes or that the expected positive impact from being a public benefit corporation will be realized, which could have a material adverse effect on our reputation, which in turn may have a material adverse effect on our financial condition, results of operations, assets, or business. As a public benefit corporation, we are required to report publicly at least biennially on the overall public benefit performance and on the assessment of our success in achieving our specific public benefit purpose. If we are not timely in providing this report or are unable to provide this report, or if the report is not viewed favorably by parties doing business with us or who are regulators or others reviewing its credentials, our reputation and status as a public benefit corporation may be harmed.

As a Delaware public benefit corporation, our focus on specific public benefit purposes and producing a positive effect for society can negatively impact our financial performance.

Unlike traditional corporations, which have a fiduciary duty to focus primarily on maximizing stockholder value, directors of the Company (as a public benefit corporation) have a fiduciary duty to consider not only our stockholders’ interests, but also the Company’s specific public benefit purposes and the interests of other stakeholder constituencies and to balance those interests in making business decisions. As a result, actions we take that we believe to be in the best interests of those stakeholders and to help achieve our specific benefit purposes do not always fully align with our stockholder’s pecuniary interests. While we intend our status as a public benefit corporation to provide an overall net benefit to the Company, our customers, employees, community, and stockholders, this could result in actions or decisions that may not maximize the income generated from our business. In addition, our pursuit of longer-term or non-pecuniary benefits may not materialize within the timeframe we expect or at all. Accordingly, our corporate form as a public benefit corporation and compliance with the related obligations can have an adverse effect on our financial condition, results of operations, assets or business.

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Furthermore, as a public benefit corporation, we may be less attractive as a takeover target than a traditional company would be and, therefore, our stockholders’ ability to realize their investment through an acquisition may be reduced. Public benefit corporations may also not be attractive targets for activists or hedge fund investors because directors are required to balance our stockholders’ pecuniary interests, the best interests of those materially affected by our Company’s conduct, and the public benefit or benefits identified by the Company’s certificate of incorporation, and stockholders committed to the public benefit can bring a suit to enforce this balancing requirement. Further, because the board of directors of a public benefit corporation considers additional constituencies rather than just maximizing stockholder value, Delaware public benefit corporation law could make it easier for a board to reject a hostile bid, even if the takeover would provide the greatest short-term financial gain to stockholders.

As a Delaware public benefit corporation, the Company’s directors have a fiduciary duty to consider not only our stockholders’ interests, but also the specific public benefit purposes we have committed to promote and the interests of other stakeholder constituencies. If a conflict between such interests arises, there is no guarantee such conflict would be resolved in favor of the interests of our stockholders.

While directors of traditional corporations are required to make decisions they believe to be in the best interests of their stockholders, directors of a public benefit corporation have a fiduciary duty to consider not only the stockholders’ interests, but also the company’s specific public benefit purposes and the interests of other stakeholder constituencies. Under Delaware law, directors are shielded from liability for breach of their fiduciary duties if they make informed and disinterested decisions that serve a rational purpose. Unlike traditional corporations which must focus exclusively on stockholder value, as a public benefit corporation, our directors are not merely permitted, but obligated, to consider, in addition to the interests of stockholders, the Company’s specific public benefit purposes and the interests of other stakeholder constituencies in making business decisions. In the event of a conflict between the interests of our stockholders and the specific public benefit purposes, we have a commitment to consider the interests of other stakeholder constituencies, and therefore, our directors are obligated to balance those interests, and are deemed to have satisfied their fiduciary duties as long as their decisions are informed and disinterested and are not decisions that no person of ordinary, sound judgment would approve. As a result, there is no certainty that a conflict would be resolved in favor of our stockholders, which could have a material adverse effect on our financial condition, results of operations, assets or business.

As a Delaware public benefit corporation, we may be subject to increased derivative litigation concerning our duty to balance stockholder and public benefit interests, the occurrence of which may have an adverse impact on its financial condition and results of operations.

Stockholders of a Delaware public benefit corporation (if they, individually or collectively, own at least two percent of the company’s outstanding shares or, in the case of a corporation with shares listed on a national securities exchange, the lesser of such percentage or shares with a market value of at least $2 million as of the date the action is filed) are entitled to file a lawsuit (individual, derivative, or any other type of action) claiming the directors failed to balance stockholder and public benefit interests. This potential claim does not exist for traditional corporations. Therefore, we are subject to the possibility of increased derivative litigation, which would require the attention of our management, and, as a result, may adversely impact management’s ability to effectively execute our strategy. Additionally, such derivative litigation may be costly, which may have an adverse impact on our financial condition, results of operations, assets, or business.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and other factors that have affected our reported results of operations and financial condition or may affect our future results or financial condition. The following discussion should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Overview

Total assets increased by $10.7 million to $1.3 billion at December 31, 2025, compared to $1.3 billion at December 31, 2024, reflecting an increase in securities available-for-sale of $53.0 million, primarily due to purchases, an increase in bank owned life insurance of $20.3 million, due to purchases, and an increase in loans held for investment, net of $16.6 million, primarily due to loan purchases. These increases were partially offset by a decrease in cash and cash equivalents of $50.9 million, primarily due to repayments of borrowings, a $25.9 million goodwill impairment charge recorded in the third quarter of 2025, and a decrease in FHLB stock of $5.2 million.

Total liabilities increased by $32.9 million to $1.1 billion at December 31, 2025 from $1.0 billion at December 31, 2024. The increase in total liabilities during 2025 resulted primarily from an increase in deposits of $172.2 million and a $14.2 million increase in securities sold under agreements to repurchase, partially offset by a $154.9 million decrease in borrowings.

For the year ended December 31, 2025, the Company reported consolidated net loss attributable to common stockholders of $27.8 million after preferred dividends of $3.0 million and goodwill impairment of $25.9 million, compared to net income attributable to common stockholders of $362 thousand for the year ended December 31, 2024 after preferred dividends of $1.6 million. Loss per diluted common share was ($3.23) for the year ended December 31, 2025, compared to $0.04 of earnings per diluted common share for the year ended December 31, 2024. Consolidated net income before preferred dividends and goodwill impairment was $1.1 million, or $0.12 per diluted share, for the year ended December 31, 2025, compared to consolidated net income of $1.9 million, or $0.22 per diluted share, for the year ended December 31, 2024. Diluted loss per common share for the year ended December 31, 2025 reflects preferred dividends of ($0.35) per diluted common share and goodwill impairment of ($3.01) per diluted common share. “Net income before preferred dividends and goodwill impairment” and “Earnings per common share – diluted before preferred dividends and goodwill impairment” are considered to be non-GAAP measures. See “Use of Non-GAAP Financial Measures” section of this Form 10-K for a reconciliation of these amounts to the associated GAAP financial measure.

The $28.2 million decrease in consolidated net income attributable to common stockholders during the year ended December 31, 2025, compared to the year ended December 31, 2024, primarily resulted from the goodwill impairment of $25.9 million and an increase in preferred dividends of $1.4 million.

The following table summarizes the return on average assets, the return on average equity and the average equity to average assets ratios for the periods indicated:

For the Years Ended December 31,

Return on average assets

Return on average equity

Average equity to average assets

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Comparison of Operating Results for the Years Ended December 31, 2025 and 2024

General

Our most significant source of income is net interest income, which is the difference between our interest income and our interest expense. Generally, interest income is generated from our loans and investments (interest earning assets) and interest expense is incurred from deposits and borrowings (interest-bearing liabilities). Typically, our results of operations are also affected by our provision for credit losses, non-interest income generated from service charges and fees on loan and deposit accounts, non-interest expenses, and income taxes.

Net Interest Income

For the year ended December 31, 2025, net interest income before provision for credit losses increased by $1.4 million, or 4.3%, to $33.1 million, compared to $31.8 million for the year ended December 31, 2024. The increase resulted from lower interest expense of $4.0 million, partially offset by a decrease in interest income of $2.7 million.

Interest income and fees on loans receivable increased by $2.5 million during the year ended December 31, 2025, compared to the year ended December 31, 2024. This increase was primarily due to a $28.7 million increase in the average balance of loans receivable which increased interest income by $1.5 million. In addition, the average loan yield increased from 5.15% for the year ended December 31, 2024, to 5.26% for the year ended December 31, 2025, which increased interest income by $1.0 million.

Interest income on securities decreased by $622 thousand to $6.4 million for the year ended December 31, 2025, compared to $7.0 million for the year ended December 31, 2024. The decrease in interest income on securities primarily resulted from a decrease of $55.2 million in the average balance of securities, which decreased interest income by $2.4 million. This decrease was partially offset by an increase of 41 basis points in the average interest yield earned on investment securities during 2025, which increased interest income by $1.7 million.

Other interest income decreased by $4.5 million in 2025, compared to the same period in 2024, primarily due to a decrease of $72.8 million in the average balance of interest-earnings deposits, which decreased interest income by $3.3 million during the year ended December 31, 2025, compared to the year ended December 31, 2024, as well as a 96 basis points decrease in the average interest yield earned on interest-earnings deposits, which decreased other income by $837 thousand.

Interest expense on deposits increased by $6.7 million during the year ended December 31, 2025, compared to the year ended December 31, 2024, primarily due to a $128.9 million increase in the average balance of deposits, which increased interest expense by $4.1 million, as well as an increase of 53 basis points in the average cost of deposits. The average cost of deposits increased to 2.77% for 2025, compared to 2.24% for 2024, which increased interest expense by $2.7 million.

Interest expense on borrowings decreased by $10.8 million to $8.2 million during the year ended December 31, 2025, compared to $19.0 million during the year ended December 31, 2024. The decrease was primarily due to a $108.9 million decrease in the average  outstanding balance of borrowings, which decreased interest expense by $4.9 million, and a decrease in the average balance of outstanding Bank Fund Term Program borrowings of $92.3 million.

The net interest margin increased to 2.64% for the year ended December 31, 2025 from 2.34% for the year ended December 31, 2024, due to an increase in the average yield earned on average interest-earning assets from 4.70% for the year ended December 31, 2024 to 4.88% for the year ended December 31, 2025. In addition, the average cost of funds decreased from 3.23% for the year ended December 31, 2024 to 3.07% for the year ended December 31, 2025.

Analysis of Net Interest Income

Net interest income is the difference between income on interest earning assets and the expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following table sets forth average balances, average yields and costs, and certain other information for the years indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred loan fees, deferred origination costs, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans that are on non-accrual status; however, the balance of these loans is included in the total average balance, which has the effect of reducing average loan yields.

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For the Years Ended December 31,

(Dollars in thousands)

Average

Balance

Interest

Average

Yield/

Cost

Average

Balance

Interest

Average

Yield/

Cost

Average

Balance

Interest

Average

Yield/

Cost

Assets

Interest-earning assets:

Interest-earning deposits

Securities

Loans receivable, net (1)

FRB and FHLB stock

Total interest-earning assets

Non-interest-earning assets

Total assets

Liabilities and Equity

Interest-bearing liabilities:

Money market deposits

Savings deposits

Interest checking and other demand deposits

Certificate accounts

Total deposits

Borrowings

BTFP borrowing

Securities sold under agreements to repurchase

Total borrowings

Total interest-bearing liabilities

Non-interest-bearing liabilities

Equity

Total liabilities and equity

Net interest rate spread (2)

Net interest rate margin (3)

Ratio of interest-earning assets to interest-bearing liabilities

Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs, loan premiums and loans receivable held for sale.

Net interest rate spread represents the difference between the yield on average interest‑earning assets and the cost of average interest‑bearing liabilities.

Net interest rate margin represents net interest income as a percentage of average interest‑earning assets.

Changes in our net interest income are a function of changes in both rates and volumes of interest earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in our interest income and expense for the years indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the total change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

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Year Ended December 31, 2025

Compared to

Year Ended December 31, 2024

Year Ended December 31, 2024

Compared to

Year Ended December 31, 2023

Increase (Decrease) in Net

Interest Income

Increase (Decrease) in Net

Interest Income

Due to

Volume

Due to

Rate

Total

Due to

Volume

Due to

Rate

Total

(In thousands)

Interest‑earning assets:

Interest‑earning deposits

Securities

Loans receivable, net

FRB and FHLB stock

Total interest‑earning assets

Interest‑bearing liabilities:

Money market deposits

Savings deposits

Interest checking and other demand deposits

Certificate accounts

Total deposits

Borrowings

BTFP borrowing

Securities sold under agreements to repurchase

Total borrowings

Total interest‑bearing liabilities

Change in net interest income

Provision for Credit Losses

During the year ended December 31, 2025, we recorded a provision for credit losses of $2.2 million, compared to a provision for credit losses of $660 thousand during the same period in 2024.  During the year ended December 31, 2025, we recorded loan charge-offs of $1.2 million. No loan charge-offs were recorded during the year ended December 31, 2024. We also recorded a recovery of provision for off-balance sheet loan commitments of $53 thousand and $91 thousand for the years ended December 31, 2025 and 2024, respectively. See “Allowance for Credit Losses” for additional information.

Non‑Interest Income

For the year ended December 31, 2025, non-interest income totaled $1.8 million, compared to $1.6 million for the year-ended December 31, 2024.

Non‑Interest Expense

Non-interest expenses totaled $57.2 million for the year ended December 31, 2025, compared to $29.9 million for the year ended December 31, 2024.  This $27.3 million increase was primarily due to the $25.9 million goodwill impairment and a $1.3 million increase in compensation and benefits expense.

Income Taxes

Income tax expense or benefit is computed by applying the statutory federal income tax rate of 21%. State and local taxes are recorded at the State of California tax rate and Washington, D.C. tax rate, according to the state apportionment calculation as the Bank’s operations are conducted in both California and the Washington, D.C. area. The Company recorded an income tax expense of $338 thousand for the year ended December 31, 2025, representing an effective tax rate of (1.4)%, compared to an income tax expense of $815 thousand for the year ended December 31, 2024, representing an effective tax rate of 29.4%.  The effective tax rate for each year differs from the 21% federal statutory rate due to the impact of state and local taxes as well as various permanent tax differences, vesting of stock-based compensation and other discrete items.

Our deferred tax assets totaled $6.7 million at December 31, 2025 and $8.9 million at December 31, 2024. See Note 1 “Summary of Significant Accounting Policies” and Note 14 “Income Taxes” of the Notes to Consolidated Financial Statements for a further discussion of income taxes and a reconciliation of income tax at the federal statutory tax rate to the actual income tax expense.

Comparison of Financial Condition at December 31, 2025 and 2024

Securities Available-For-Sale

As of December 31, 2025, we had $256.8 million of investment securities classified as available-for-sale, compared to $203.9 million at December 31, 2024. The increase during 2025 was primarily due to purchases of investment securities.

Loans Receivable Held for Investment

Loans receivable held for investment, net of the allowance for credit losses, totaled $1.0 billion at December 31, 2025, compared to $1.0 billion at December 31, 2024. The increase of $16.6 million in loans receivable held for investment during 2025 was primarily due to originations of $45.6 million in new loans. The Bank also purchased $78.0 of loans during the year ended December 31, 2025, which included $59.1 million of other commercial loans and $18.9 million of SBA loans. Loan repayments during 2025 totaled $36.6 million.

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During 2024, the Bank originated $160.9 million in new loans, $80.9 million of which were multi-family loans, $50.8 million of which were commercial real estate loans, $19.4 million of which were other commercial loans, $8.9 million of which were construction loans, and $800 thousand of which were SBA loans. Loan repayments during 2024 totaled $72.4 million.

Allowance for Credit Losses

The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination or acquisition. 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 statements of financial condition. 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 is performed by collectively evaluating loans with similar risk characteristics. The Company measures the ACL for each of its loan segments using the WARM method. The weighted average remaining life, including the effect of estimated prepayments, is calculated for each loan pool on a quarterly basis. The Company then estimates a loss rate for each pool using both its own historical loss experience and the historical losses of a group of peer institutions during the period from 2004 through the most recent quarter.

Our ACL was $9.4 million or 0.92% of our gross loans receivable held for investment at December 31, 2025 compared to $8.4 million, or 0.83% of our gross loans receivable held for investment at December 31, 2024. The increase was primarily due to an increase in specific reserves on collateral dependent loans.

Our non-performing loans (“NPLs”) consist of delinquent loans that are 90 days or more past due and non-accrual loans. At December 31, 2025, non-performing loans totaled $11.2 million compared to $264 thousand at December 31, 2024. The Bank did not have any REO at December 31, 2025 or 2024. During the years ended December 31, 2025 and 2024, loans of $3.1 million and $5.9 million, respectively, were modified in response to a borrower’s financial difficulty.

We believe the ACL is adequate to cover expected losses in the loan portfolio as of December 31, 2025, but because of uncertainty regarding the future value of the loan portfolio, there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the FDIC periodically review the ACL as an integral part of their examination process. These agencies may require an increase in the ACL based on their judgments of the information available to them at the time of their examinations.

See Note 1 “Summary of Significant Accounting Policies” to the Company’s Consolidated Financial Statements for further discussion.

Office Properties and Equipment, Net

Net office properties and equipment decreased by $167 thousand to $8.7 million at December 31, 2025 from $8.9 million as of December 31, 2024. Depreciation expense was $410 thousand and $424 thousand for the years ended December 31, 2025 and 2024, respectively.

Goodwill and Core Deposit Intangible

As a result of the Merger, the Company recorded $25.9 million of goodwill. Goodwill acquired in a business combination is considered to have an indefinite useful life and is not amortized, but is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that impairment may exist. The Company engaged a third-party valuation specialist to perform its annual goodwill impairment test as of September 30, 2025. Based on the quantitative assessment, the fair value of the reporting unit was less than its carrying amount, resulting in a full impairment of goodwill. On October 15, 2025, management, with oversight from the Audit Committee of the Board of Directors, concluded that the Company’s goodwill was fully impaired. Accordingly, the Company recorded a non-cash goodwill impairment charge of $25.9 million for the quarter ended September 30, 2025.

The Company recorded $3.3 million of core deposit intangible asset as a result of the Merger. The core deposit intangible asset is amortized on an accelerated basis reflecting the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. The estimated life of the core deposit intangible is approximately 10 years. During the year ended December 31, 2025, the Company recorded $315 thousand of amortization expense related to the core deposit intangible asset.

The following table outlines the estimated amortization expense related to the core deposit intangible asset during the next five fiscal years and thereafter:

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(In thousands)

Thereafter

Deposits

Deposits at December 31, 2025 were $917.6 million compared to $745.4 million at December 31, 2024. The increase in deposits of $172.2 million was primarily caused by increases in money market deposits and certificates of deposit.

Five customer relationships accounted for approximately 28% of our deposit balances at December 31, 2025. We expect to maintain these relationships with these customers for the foreseeable future.

As of December 31, 2025 and 2024, approximately $413.5 million and $268.8 million of our total deposits were not insured by FDIC insurance.

Borrowings

Total borrowings at December 31, 2025 consisted of advances to the Bank from the FHLB of $72.0 million and repurchase agreements of $80.8 million, compared to advances from the FHLB of $195.5 million, repurchase agreements of $66.6, and secured borrowings of $31.4 million at December 31, 2024.

Balances of outstanding FHLB advances decreased to $72.0 million at December 31, 2025, from $195.5 million at December 31, 2024, primarily due to repayments of FHLB advances of $1.1 billion, partially offset by $955.8 million in advances from the FHLB. The weighted average rate on FHLB advances was 3.79% at December 31, 2025, compared to 4.03% at December 31, 2024.

The Bank enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Bank may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Bank to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Bank’s consolidated statements of financial condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. As of December 31, 2025, securities sold under agreements to repurchase totaled $80.8 million at an average rate of 3.66%. These agreements mature on a daily basis. The fair value of securities pledged totaled $83.7 million as of December 31, 2025. As of December 31, 2024, securities sold under agreements to repurchase totaled $66.6 million at an average rate of 3.62%.

One customer relationship accounted for 91% of our balance of securities sold under agreements to repurchase. We expect to maintain this relationship for the foreseeable future.

Equity

Equity was $262.8 million, or 19.6% of the Company’s total assets, at December 31, 2025, compared to $285.0 million, or 21.4% of the Company’s total assets, at December 31, 2024.

Use of Non-GAAP Financial Measures

Management uses non-GAAP measures because they provide information to investors about the underlying operational performance and trends of the Company. These disclosures should not be considered in isolation or as a substitute for results determined in accordance with GAAP and are not necessarily comparable to non-GAAP performance measures which may be presented by other bank holding companies. Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures. The tables below reconcile the GAAP financial measures to the associated non-GAAP financial measures.

The Company’s book value per common share was $12.28 at December 31, 2025, and its tangible book value per common share was $12.12 at December 31, 2025. Tangible book value per common share is a non-GAAP measurement that excludes goodwill and the net unamortized core deposit intangible asset, which were both originally recorded in connection with the CFBanc merger. The Company uses this non-GAAP financial measure to provide supplemental information regarding the Company’s financial condition and operational performance. A reconciliation between common book value and tangible book value per common share is shown as follows:

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Common

Equity Capital

Shares

Outstanding

Per Share

Amount

December 31, 2025

(Dollars in thousands)

Common book value

Less:

Goodwill

Net unamortized core deposit intangible

Tangible book value

Common

Equity Capital

Shares

Outstanding

Per Share

Amount

December 31, 2024

(Dollars in thousands)

Common book value

Less:

Goodwill

Net unamortized core deposit intangible

Tangible book value

The Company calculates net income before preferred dividends and goodwill impairment by adding preferred stock dividends and goodwill impairment to net (loss) income available to common shareholders.  Earnings per common share - diluted before preferred dividends and goodwill impairment is calculated by dividing net income before preferred dividends and goodwill impairment by the weighted average common shares outstanding for diluted earnings per common share. The Company considers this information important to shareholders because it illustrates net income and earnings per common share - diluted excluding the impact of preferred dividends and goodwill impairment.

For the Year Ended December 31,

(Dollars in thousands)

Net (loss) income available to common shareholders

Add: Preferred stock dividends - ECIP

Add: Goodwill impairment

Net income before preferred dividends and goodwill impairment

Weighted average common shares outstanding for diluted earnings per common share

Earnings per common share - diluted before preferred dividends and goodwill impairment

Capital Resources

Our principal subsidiary, City First, must comply with capital standards established by the OCC in the conduct of its business. Failure to comply with such capital requirements may result in significant limitations on its business or other sanctions. As a “small bank holding company,” we are not subject to consolidated capital requirements under the new Basel III capital rules. The current regulatory capital requirements and possible consequences of failure to maintain compliance are described in Part I, Item 1 “Business‑Regulation” and in Note 16 “Regulatory Matters” of the Notes to Consolidated Financial Statements.

Liquidity

The objective of liquidity management is to ensure that we have the continuing ability to fund operations and meet our obligations on a timely and cost-effective basis. The Bank’s sources of funds include deposits, advances from the FHLB, other borrowings, proceeds from the sale of loans and investment securities, and payments of principal and interest on loans and investment securities. The Bank is currently approved by the FHLB of Atlanta to borrow up to 25% of total assets to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. At December 31, 2025, the Bank had $243.3 million of credit available. In addition, the Bank had additional lines of credit of $10.0 million with other financial institutions as of that date.

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The Bank has a significant concentration of deposits with five long‑time customers that accounted for approximately 28% of its deposits as of December 31, 2025. In addition, the Bank has a significant concentration of short-term borrowings from one customer that accounted for 91% of out the outstanding balance of securities sold under agreements to repurchase as of December 31, 2025. The Bank expects to maintain these relationships with the customers for the foreseeable future.

As of December 31, 2025, approximately $413.5 million of our total deposits (including deposits from affiliates) were not insured by FDIC insurance, which represented 41% of total deposits.

The Bank’s primary uses of funds include withdrawals of and interest payments on deposits, originations of loans, purchases of investment securities, and the payment of operating expenses. Also, when the Bank has more funds than required for reserve requirements or short‑term liquidity needs, the Bank invests excess cash with the Federal Reserve Bank or other financial institutions. The Bank’s liquid assets at December 31, 2025 consisted of $10.5 million in cash and cash equivalents and $161.1 million in securities available‑for‑sale that were not pledged, compared to $61.4 million in cash and cash equivalents and $17.6 million in securities available‑for‑sale that were not pledged at December 31, 2024. We believe that the Bank has sufficient liquidity to support growth over the foreseeable future.

The Company’s liquidity, separate from the Bank, is based primarily on the proceeds from financing transactions, such as the preferred stock sold to the U.S. Treasury in 2022 and the private placements completed in December 2016 and April 2021, and dividends received from the Bank in 2024 and 2025.

The Company recorded consolidated net cash inflows from operating activities of $230 thousand and $1.4 million during the years ended December 31, 2025 and 2024, respectively. Net cash inflows from operating activities during 2025 were primarily attributable to the addback of the goodwill impairment of $25.9 million, which more than offset the net loss of $24.8 million. Net cash inflows from operating activities during 2024 were primarily attributable to net income of $2.0 million, a $1.4 million decrease in other assets and a $641 thousand net change in deferred loan origination costs, partially offset by a $3.1 million net decrease in accrued expenses and other liabilities.

The Company recorded consolidated net cash outflows from investing activities of $79.4 million and inflows from investing activities of $28.3 million during the years ended December 31, 2025 and 2024, respectively. Net cash outflows from investing activities during 2025 were primarily attributable to $150.5 million of purchases of available-for-sale securities, $20.0 million of bank owned life insurance purchases, and $19.0 million of net loan originations, partially offset by $105.1 million of principal payments and maturities of available-for-sale securities.  Net cash inflows from investing activities during 2024 were primarily attributable to $117.1 of principal payments and maturities on available-for-sale securities, partially offset by  $89.2 million of net loan originations.

The Company recorded consolidated net cash inflows from financing activities of $28.3 million and outflows from financing activities of $73.5 million during the years ended December 31, 2025 and 2024, respectively. Net cash inflows from financing activities during 2025 were primarily attributable to $955.8 million of proceeds from FHLB advances and a $172.2 million increase in deposits, partially offset by $1.1 billion of FHLB repayments and $31.4 million of repayments of other borrowings. Net cash outflows from financing activities during 2024 were primarily attributable to $352.8 million of FHLB repayments, $100.0 million of BTFP repayments, and $14.0 million notes payable repayments, partially offset by $339.0 million of proceeds from FHLB advances and a $62.8 million net increase in deposits.

We believe that the Company’s existing cash, cash equivalents and marketable securities will be sufficient to meet our liquidity requirements and capital expenditure needs over at least the next 12 months.

Off‑Balance‑Sheet Arrangements and Contractual Obligations

We are party to financial instruments with off‑balance‑sheet risk in the normal course of our business, primarily in order to meet the financing needs of our customers. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments and lease commitments as described below.

Lending commitments include commitments to originate loans and to fund lines of credit. Commitments to extend credit are agreements to lend to a customer if there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate creditworthiness on a case‑by‑case basis. Our maximum exposure to credit risk is represented by the contractual amount of the instruments.

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In addition to our lending commitments, we have contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non‑cancellable operating leases on buildings and land used for office space and banking purposes. The following table details our contractual obligations at December 31, 2025.

Less Than

One Year

More Than

One Year to

Three Years

More Than

Three Years to

Five Years

More Than

Five Years

Total

(Dollars in thousands)

Certificates of deposit

FHLB advances

Commitments to originate loans

Commitments to fund construction loans

Commitments to fund unused lines of credit

Operating lease obligations

Total contractual obligations

Impact of Inflation and Changing Prices

Our consolidated financial statements, including accompanying notes, have been prepared in accordance with GAAP which require the measurement of financial position and operating results primarily in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in increased costs of our operations. Unlike industrial companies, nearly all our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

As a result, the Bank’s performance is influenced by general macroeconomic conditions, both domestic and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies. The Federal Reserve implements national monetary policies (such as seeking to curb inflation and combat recession) by its open-market operations in U.S. government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by varying the discount rate applicable to borrowings by banks from the Federal Reserve Banks. The actions of the Federal Reserve in these areas can influence the growth of loans, investments, and deposits, and also affect interest rates charged on loans and deposits. The nature and impact of any future changes in monetary policies cannot be predicted.

Critical Accounting Estimates

Critical accounting estimates are those that involve a significant level of estimation uncertainty, and which have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. This discussion highlights those accounting estimates that management considers critical. All accounting policies are important, however, and therefore you are encouraged to review each of the policies included in Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements to gain a better understanding of how our financial performance is measured and reported. Management has identified the Company’s critical accounting estimates as follows:

Allowance for Credit Losses

In originating loans, we recognize that losses may be experienced on loans and that the risk of loss may vary as a result of many factors, including the type of loan being made, the creditworthiness of the borrower, general economic conditions and, in the case of a secured loan, the quality of the collateral for the loan. The Company accounts for the ACL on loans in accordance with ASC 326, which requires the Company to recognize estimates for lifetime losses on loans and off-balance sheet loan commitments at the time of origination or acquisition. The recognition of losses at origination or acquisition represents the Company’s best estimate of the lifetime expected credit loss associated with a loan, given the facts and circumstances associated with the particular loan, and involves the use of significant management judgment and estimates, which are subject to change based on management’s on-going assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The Company uses the weighted-average remaining maturity (“WARM”) method when determining estimates for the ACL for each of its portfolio segments. The weighted average remaining life, including the effect of estimated prepayments, is calculated for each loan pool on a quarterly basis. The Company then estimates a loss rate for each pool using both its own historical loss experience and the historical losses of a group of peer institutions during the period from 2004 through the most recent quarter.

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The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Qualitative adjustments may include, but are not limited to, factors such as: (i) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices; (ii) changes in international, national, regional, and local conditions; (iii) changes in the nature and volume of the portfolio and terms of loans; (iv) changes in the experience, depth, and ability of lending management; (v) changes in the volume and severity of past due loans and other similar conditions; (vi) changes in the quality of the organization’s loan review system; (vii) changes in the value of underlying collateral for collateral dependent loans; (viii) the existence and effect of any concentrations of credit and changes in the levels of such concentrations; and (ix) the effect of other external factors (i.e., competition, legal and regulatory requirements) on the level of estimated credit losses. These qualitative factors incorporate the concept of reasonable and supportable forecasts, as required by ASC 326.

The Company has a credit portfolio review process designed to detect problem loans. Problem loans are typically those of a substandard or worse internal risk grade, and may consist of loans on nonaccrual status, loans that have recently been modified in response to a borrower’s deteriorating financial condition, loans where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans, and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. Such loans may, in the opinion of management, be deemed to no longer possess risk characteristics similar to other loans in the loan portfolio, because the specific attributes and risks associated with the loan have likely become unique as the credit quality of the loan deteriorates. As such, these loans may require individual evaluation to determine an appropriate ACL for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent. Collateral dependent loans are loans where the repayment of the loan is expected to come from the operation of and/or eventual liquidation of the underlying collateral. The ACL for collateral dependent loans is determined using estimates of the fair value of the underlying collateral, less estimated selling costs.

The estimation of the appropriate level of the ACL requires significant judgment by management. Although management uses the best information available to make these estimations, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may extend beyond the Company’s control. Changes in management’s estimates of forecasted net losses could materially change the level of the ACL. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and credit review process. Such agencies may require the Company to recognize additions to the ACL based on judgments different from those of management.

Goodwill

The excess of consideration paid over fair value of net assets acquired for acquisitions is recorded as goodwill. Goodwill is not amortized but is tested at least annually for impairment or more frequently if events occur or circumstances change that indicate impairment may exist. A goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying value. An impairment charge is recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value. A weighted average of both the market and income approaches is used in valuing the reporting unit’s fair value. Weightings are assigned to the approaches regarding fair value and the sensitivity of other weighting scenarios is considered. The market approach incorporates comparable public company information, valuation multiples and consideration of a market control premium along with data related to comparable observed purchase transactions in the financial services industry. The income approach consists of discounting projected future cash flows, which are derived from internal forecasts and economic expectations for the reporting unit. The significant inputs and assumptions for the income approach include a discount rate and projected earnings of the Company in future years for which there is inherent uncertainty. The sensitivity of a range of reasonable discount rates based on the current economic environment is considered.

The Company engaged a third-party valuation specialist to perform its annual goodwill impairment test as of September 30, 2025. Based on the quantitative assessment, the fair value of the reporting unit was less than its carrying amount, resulting in a full impairment of goodwill. On October 15, 2025, management, with oversight from the Audit Committee of the Board of Directors, concluded that the Company’s goodwill was fully impaired. Accordingly, the Company recorded a non-cash goodwill impairment charge of $25.9 million for the quarter ended September 30, 2025. See Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for further information.

The Company’s accounting policies and discussion of recent accounting pronouncements is included in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”