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 rate for each pool using both its own historical experience and the historical 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 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.”
