ITEM 1A. Risk Factors
An investment in our securities involves risks. You should carefully consider the risks and uncertainties described below, together with the other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the following risks, alone or in combination with other events or circumstances, could materially adversely affect our business, financial condition, results of operations, liquidity, capital, reputation, and the trading price of our common stock.
Risks Relating to Regulatory Oversight, Remediation and Strategic Repositioning
The Bank is subject to the Formal Agreement, and failure to satisfy its requirements could result in additional supervisory or enforcement actions, restrictions on our business, and other material adverse consequences.
On January 17, 2025, the Bank entered into the Formal Agreement. The OCC found unsafe or unsound practices and violations of law, rule, or regulation relating to, among other things, strategic planning, capital planning, BSA/AML risk management, payment activities oversight, credit administration, and concentration risk management. The Formal Agreement requires the Bank to implement extensive corrective actions relating to capital, liquidity, governance, strategic planning, BSA/AML, payments oversight, credit administration, concentration risk, and related reporting and controls.
Compliance with the Formal Agreement requires substantial management attention, Board oversight, personnel, systems, and expense. There can be no assurance that our remediation efforts will be completed on the timelines we expect, that they will be viewed by the OCC as satisfactory, or that the OCC will terminate the Formal Agreement within any particular period. If we fail to satisfy the requirements of the Formal Agreement, or if the OCC determines that our corrective actions are not sufficiently effective or sustainable, we could be subject to additional supervisory or enforcement actions, restrictions on growth or activities, limitations on dividends or other capital actions, objections to new products, services, or personnel changes, civil money penalties, receivership, or other adverse consequences. Any of these outcomes could materially adversely affect our business, financial condition, results of operations, reputation, and strategic flexibility.
The Bank is in “troubled condition” for regulatory purposes, which may subject us to heightened scrutiny, limit our flexibility, and adversely affect our business and growth prospects.
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The Formal Agreement provides that, as a result of the Agreement, the Bank is in “troubled condition,” a regulatory designation that applies, among other circumstances, when a national bank is subject to a formal written agreement requiring action to improve its financial condition, unless otherwise informed in writing by the OCC. The Formal Agreement also provides that the Bank is not an “eligible bank” for certain purposes unless otherwise informed in writing by the OCC. This status may increase supervisory scrutiny and may affect our ability to pursue acquisitions, branches, new business activities, new offices, product launches, strategic deviations, or other corporate actions on the timeline or in the manner we would otherwise prefer. It may also adversely affect counterparties’, customers’, investors’, and employees’ perceptions of the Bank and could make it more difficult or more expensive for us to attract deposits, retain or recruit key personnel, raise capital, obtain regulatory approvals, or pursue aspects of our strategic plan.
Our business is undergoing a substantial strategic repositioning and we may not successfully execute the transition to our revised business model.
During 2025, we substantially reconstituted our management team and Board, recapitalized the Company, and began repositioning the Bank around targeted client segments, including high net worth individuals, family offices, entrepreneurs, investors, business leaders and the businesses that serve them, digital payments and related institutional banking clients, and certain underbanked but creditworthy customers. The strategic plan contemplates narrowing certain legacy activities, reducing or eliminating certain non-core products, replacing portions of the legacy portfolio, and building enhanced risk management, reporting, and operating capabilities.
Our repositioning may not succeed, may take longer than expected, or may expose us to execution risk, operational disruption, client attrition, elevated expenses, and financial underperformance. We may not achieve the revenue mix, deposit mix, credit performance, operating efficiency, or risk-adjusted returns contemplated by management. If the repositioning is unsuccessful, our business, financial condition, and results of operations could be materially adversely affected.
Our remediation efforts are extensive and ongoing and they may not be effective, timely, or sustainable.
The Formal Agreement requires corrective action across a broad range of areas, including strategic planning, capital planning, BSA/AML, customer identification, program manager due diligence and monitoring, suspicious activity monitoring and look-back reviews, BSA/AML risk assessment, BSA staffing and training, payment activities oversight, credit administration, concentration risk management, and liquidity risk management.
These remediation efforts are complex and interdependent. They require timely design, implementation, documentation, testing, governance, and sustained effectiveness. Even if corrective actions are adopted, they may not operate as intended, may reveal additional gaps, may require costly redesign, or may be challenged by staffing turnover, data quality issues, vendor limitations, or business growth. If our remediation efforts are delayed, ineffective, or not sustained over time, we could remain subject to heightened supervisory concerns and additional restrictions or enforcement action.
We are subject to numerous laws and governmental regulations and to regular examinations by regulators of our business and compliance with laws and regulations, and our failure to comply with such laws and regulations or to adequately address any matters identified during our examinations could materially and adversely affect us.
Federal banking agencies regularly conduct comprehensive examinations of our business, including our compliance with applicable laws, regulations and policies. Examination reports and ratings (which often are not publicly available) and other aspects of this supervisory framework can materially impact the conduct, organic and acquisition growth and profitability of our business. Our regulators have extensive discretion in their supervisory and enforcement activities and have imposed and may in the future impose a variety of remedial actions if, as a result of an examination, they determined that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we or our management were in violation of any law, regulation or policy. Examples of those actions could include requiring affirmative actions to correct any conditions resulting from any asserted violation of law, issuing administrative orders that can be judicially enforced, enjoining unsafe or unsound practices, directing increases in our capital, assessing civil monetary penalties against our officers or directors, removing officers and directors and, if a conclusion was reached that the conditions cannot be , or there is an imminent risk of to depositors, our deposit insurance. Other actions, formal or informal, that may be imposed could restrict our growth, including regulatory to expand branches, relocate, add or subsidiaries and affiliates, expand into new financial activities or merge with or purchase other financial institutions. The timing of these examinations, including the timing of the resolution of any issues identified by our
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regulators in the examinations and the final determination by them with respect to the imposition of any remedial actions, conditions or limitations on our business operations, is generally not within our control. We also could suffer reputational harm in the event of any perceived or actual noncompliance with certain laws and regulations. If we become subject to such regulatory actions, we could be materially and adversely affected.
Regulations addressing consumer privacy and data use and security could increase our costs and impact our reputation.
We are subject to federal, state and local laws related to consumer privacy and data use and security, including information safeguard rules under the Gramm-Leach-Bliley Act. These rules require financial institutions to develop, implement, and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities, and the sensitivity of any customer information at issue. The United States has experienced a heightened legislative and regulatory focus on privacy and data security, including requirements as to consumer notification in the event of data breaches and certain types of security breaches. Additional regulations in these areas may increase compliance costs, which could negatively impact earnings. In addition, failure to comply with the privacy, data use and security laws and regulations to which we are subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties, reputational harm, loss of consumer confidence, and other consequences, any of which could have a material effect on our results of operations and business.
The Bank may be required to pay significantly higher FDIC premiums, special assessments, or taxes that could adversely affect its earnings.
Market developments have significantly impacted the insurance fund of the FDIC. As a result, the Bank may be required to pay higher premiums, or special assessments, that could adversely affect earnings. Our designation as a troubled institution operating under the Formal Agreement may also subject us to elevated FDIC and other regulatory fees. The amount of premiums the FDIC requires for the insurance coverage it provides is outside the Bank’s control. If there are additional banks or financial institution failures, the Bank may be required to pay higher FDIC premiums than are currently assessed. Increases in FDIC insurance premiums, including any future increases or required prepayments, may materially adversely affect the Bank’s results of operations.
Changing regulation of corporate governance and public disclosure.
Patriot is subject to laws, regulations, and standards relating to corporate governance and public disclosure, SEC rules and regulations, and NASDAQ rules. These laws, regulations, and standards are subject to varying interpretations, and as a result, their practical application may evolve over time as new guidance is provided by regulatory and governing bodies. Due to the evolving legal and regulatory environment, compliance may become more difficult and result in higher costs. The Company is committed to maintaining high standards of corporate governance and public disclosure. As a result, the Company’s efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. The Company’s reputation may be harmed, if it does not continue to comply with these laws, regulations and standards.
Litigation and regulatory actions, including enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.
Our business is subject to litigation and regulatory risks as a result of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial services industry generally. Legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, operational burdens, diminished income and damage to our reputation. Our involvement in any such matters, even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in , or proceedings as other and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could be material to our business, results of operations, financial condition and cash flows, depending on, among other factors, the level of our earnings for that period and could have a material effect on our business, financial condition or results of operations.
We depend on a new management team and Board, and our failure to have prudent change management including to retain, integrate, and effectively align new leadership could impair execution of our strategy and remediation efforts.
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In 2025, the Company replaced or added leadership in numerous key roles, including Chief Executive Officer, President, Chief Credit Officer, Chief Financial Officer, Chief Risk Officer, and leadership in operations, treasury management, BSA, legal, relationship management, accounting, finance, technology, and reporting. Our strategic and remediation efforts depend heavily on these leaders’ ability to work effectively together, establish sound controls, implement new policies and reporting, attract additional talent, and maintain constructive regulatory relationships.
Competition for experienced banking, risk, BSA/AML, payments, and technology personnel is significant. If we lose key executives or fail to recruit, integrate, incentivize, and retain qualified personnel, our remediation, growth, and risk management efforts could be delayed or impaired, and our financial condition and results of operations could be materially adversely affected.
Risks Relating to Institutional Banking, Digital Payments and BSA/AML
Our institutional banking and digital payments activities involve heightened operational, compliance, fraud, and BSA/AML risks.
A significant part of our revised strategy and non-interest income profile depends on institutional banking and digital payments activities, including sponsor-bank services, ACH and money movement, debit and credit card-related services, and products and services provided to and through program managers and other non-depository financial institutions. Institutional Banking is currently the largest driver of non-interest income and the Bank has increased annualized digital payments revenue since recapitalization.
These activities present elevated risks relative to traditional community banking, including fraud, sanctions, money laundering, transaction monitoring, third-party oversight, operational processing failures, consumer complaints, settlement and reconciliation issues, and reputational risk. The Formal Agreement specifically requires enhanced oversight of prepaid cards, ACH and wire activity, suspicious activity review, program manager due diligence, and BSA staffing and training. If we fail to identify, measure, monitor, and control these risks, we could face losses, customer attrition, litigation, regulatory criticism, enforcement action, and restrictions on our ability to grow or continue these activities.
Deficiencies in our BSA/AML, sanctions, customer identification, or suspicious activity monitoring programs could result in enforcement action, penalties, losses, and reputational damage.
Banking regulations require compliance with BSA/AML laws and regulations. The Bank was not in compliance with these regulations and therefore entered into the Formal Agreement with the OCC which requires a detailed BSA/AML action plan and corrective action relating to customer identification for reloadable prepaid cards, program manager due diligence and monitoring, suspicious activity monitoring and reporting, suspicious activity look-back, BSA/AML risk assessment, and BSA staffing and training. These requirements reflect supervisory findings that our BSA/AML framework required significant enhancement.
If our BSA/AML, sanctions, or fraud-monitoring controls are inadequate, if third-party program managers fail to perform as expected, if transaction monitoring rules or case management processes are ineffective, or if we fail to identify and report suspicious activity on a timely basis, we may be subject to additional enforcement actions, penalties, remediation costs, activity restrictions, customer losses, and significant reputational harm. The review or amendment of prior suspicious activity determinations could also create operational burden, increased expense, and heightened supervisory attention.
Our reliance on third-party program managers, fintech relationships, vendors, and other counterparties exposes us to significant third-party risk.
Our institutional banking, digital payments, treasury, and technology activities depend on third-party relationships, including program managers, processors, technology providers, monitoring vendors, and other counterparties. The Formal Agreement requires risk-based due diligence, ongoing monitoring, periodic reviews, and in some cases on-site visits and review of independent audit reports for program managers.
Third parties may fail to comply with law, contract, or our policies; may have inadequate controls; may experience financial distress, fraud, cyber incidents, operational failures, or business interruption; or may not provide us with timely and accurate data. Because regulators increasingly expect banks to manage third-party risk as if the activity were conducted internally, failures by our vendors or partners could expose us to losses, remediation costs, litigation, regulatory criticism, and reputational damage even where the immediate failure occurred outside the Bank.
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Digital Payments and Institutional Banking Deposits can be highly concentrated and have significant volatility which could result in heightened Liquidity Risks to the Bank.
Digital Payments and Digital Payments deposits can be highly concentrated with individual decision makers in control of large deposits. Additionally, many of these deposits are short term, unpredictable, or volatile by their nature and can be withdrawn on demand. These factors contribute to the Bank’s liquidity risk and if not managed appropriately can result in the liquidation of assets, the inability to hold long-term assets, and other adverse impacts up to and including insolvency.
Our reliance on Program Managers increases our exposure to risks from third party negligence or misconduct.
Our digital payments business relies on third party program managers to provide certain marketing, banking and treasury management services to our clients on behalf of the Bank. The Bank oversees the activities of its Program Managers, however errors, negligence, or malfeasance by the program managers can pose significant risks to the Bank and can subject the Bank to material liabilities, losses, and other risks such as violations of regulations and law.
Risks Relating to Credit, Concentrations and Legacy Assets
Our legacy portfolio, including criticized, classified, nonperforming, or non-core assets, may continue to adversely affect our results of operations, capital, and management attention.
The Bank historically held certain loan categories and purchased assets that were not strategic, including unsecured consumer loans, HELOCs, single-family residential loans, and securities, and the Bank is seeking to reduce, run off, sell, and replace certain legacy portfolios and concentration exposures. Legacy assets may continue to generate elevated credit costs, valuation adjustments, workout expenses, and management distraction, and their runoff or sale may occur on less favorable terms than we expect. We may also incur losses, lower yields, or liquidity constraints in connection with repositioning the portfolio.
Our commercial real estate and other secured lending activities expose us to concentration risk, collateral risk, and credit losses.
Commercial real estate has historically represented a significant portion of the Bank’s loan portfolio, and both management and the OCC have identified concentration risk management as an area requiring enhancement. Commercial real estate and relationship-based secured lending can involve larger balances, more complex underwriting, and repayment that depends on business cash flow, tenant performance, market values, and refinancing conditions. Deterioration in real estate values, occupancy, rents, debt-service coverage, sponsor liquidity, or capital market conditions could materially increase defaults and losses.
Our allowance for credit losses may prove insufficient, and changes in estimates, portfolio performance, or supervisory expectations could require additional provisions.
The determination of the allowance for credit losses requires management to make significant judgment regarding current conditions, reasonable and supportable forecasts, borrower performance, collateral values, and portfolio risk characteristics. Actual losses may differ materially from our estimates. During 2025, the Bank increased its reserve for loan losses relative to loan balances and continued resolving special assets. If economic conditions worsen, if credit migration exceeds our expectations, if collateral values decline, or if regulators require different classifications, methodologies, or assumptions, we may need to increase our provision for credit losses, which could materially adversely affect our earnings and capital.
Risks Relating to Capital, Liquidity and Balance Sheet Management
If we fail to maintain sufficient capital, we may be subject to restrictions, may be unable to execute our strategy, and may need to raise additional capital on unfavorable terms or at all.
The Formal Agreement requires the Bank to maintain minimum capital ratios of 10.0% common equity Tier 1, 10.0% Tier 1 capital, 11.5% total capital, and 9.0% leverage, and requires an internal capital planning process and OCC non-objection to the Bank’s capital plan. The Bank’s ability to maintain these levels depends on earnings, credit performance, balance sheet mix, asset growth, market values, and access to capital.
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Although the Company raised substantial capital in 2025, there can be no assurance that our capital levels will remain sufficient under stress, that our business plan will generate the expected earnings, or that we would be able to raise additional capital on acceptable terms if needed. Capital raises could be dilutive to existing shareholders, could involve burdensome terms, or could be unavailable during periods of market stress or heightened regulatory scrutiny.
Our liquidity could be adversely affected by deposit volatility, funding concentration, market disruption, deterioration in our regulatory or financial condition, or the characteristics of our deposit base.
Liquidity risk is a central risk for us, particularly as we reposition our business and manage deposit mix. We believe that prior liquidity planning did not adequately reflect the impact of rising rates on the liquidity of loans and securities, deposit concentrations including digital payments deposits, reduced Federal Home Loan Bank (“FHLB”) and Federal Reserve financing capacity from capital impairment, and risks to uninsured and other deposits. The Formal Agreement requires a revised liquidity risk management program emphasizing cash flow projections, diversified funding sources, a cushion of highly liquid assets, liquidity stress testing, and a contingency funding plan.
Our deposits may be more rate-sensitive, concentrated, or operationally volatile than traditional retail core deposits, particularly in institutional, digital payments, or large-balance relationship accounts. If depositors withdraw funds unexpectedly, if counterparties reduce funding availability, if collateral values decline, or if our access to brokered, reciprocal, FHLB, Federal Reserve, or other funding is constrained, our liquidity could be materially adversely affected.
Our deposit strategy may not produce the funding mix, stability, cost, or scale we expect.
Our revised strategy depends in part on growing relationship-based deposits from high-net-worth and business clients while also utilizing institutional and digital payments deposits. The Bank reduced deposit costs in 2025 and restructured its digital payments activities to improve pricing and depository services. There can be no assurance that these trends will continue. Competition for deposits remains intense, and our target clients may be highly rate-sensitive, operationally mobile, or able to move funds quickly. If we cannot attract or retain deposits at acceptable cost and stability, our net interest margin, liquidity, profitability, and growth could be adversely affected.
Changes in interest rates, asset-liability mismatches, and market values may adversely affect our net interest income, liquidity, capital, and financial condition.
Our earnings depend significantly on net interest income, which is affected by the level, slope, and volatility of interest rates, the timing of repricing, deposit betas, customer behavior, prepayments, and funding mix. The Bank previously failed to adequately evaluate and manage interest rate risk and certain fixed-rate securities and loans resulted in unrealized losses, extended durations, and liability sensitivity in a rising-rate environment.
Changes in rates may compress margins, reduce loan demand, increase deposit costs, impair borrowers’ repayment capacity, increase the market value sensitivity of securities and loans, reduce collateral values, and limit liquidity if assets must be sold at a loss. We may not be able to manage these risks successfully through balance sheet positioning, pricing, hedging, or other strategies.
Risks Relating to Operations, Technology and Competition
Our operating model depends on enhancements to infrastructure, data, reporting, and controls, and failures in those areas could impair decision-making, financial reporting, and risk management.
Our strategic plan emphasizes operational excellence and superior analytics and acknowledges prior deficiencies in change management, internal reporting, key performance indicators and key risk indicators (“KPIs/KRIs”), and risk measurement. The Bank is building or enhancing data, reporting, and governance capabilities, including those needed to support enterprise risk management, regulatory reporting, BSA/AML, payments monitoring, concentration management, and business line profitability.
These initiatives may be costly, delayed, or ineffective. Data quality problems, reporting gaps, model weaknesses, system integration failures, or control deficiencies could impair management’s ability to identify and manage risk, support accurate financial and regulatory reporting, or satisfy supervisory expectations.
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Management concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2025, and if we fail to remediate the underlying control deficiencies in a timely manner, our business, financial condition, results of operations, and access to capital could be adversely affected.
As described in Item 9A of this Annual Report on Form 10-K, management concluded that the Company’s disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2025. In connection with its evaluation, management identified deficiencies concentrated in documentation, evidential support, and consistent execution of controls, including information-technology general controls, financial-close and reconciliation controls, and controls over certain third-party and digital-payments activities.
Although the Company’s independent registered public accounting firm expressed an opinion that the Company’s consolidated financial statements as of and for the year ended December 31, 2025 are fairly presented in all material respects and in conformity with U.S. GAAP, management concluded that the control deficiencies it identified, when considered together, constituted a material weakness in the Company’s internal control over financial reporting as of December 31, 2025.
The existence of these control deficiencies and the related material weakness could adversely affect the Company’s ability to record, process, summarize, and report financial information accurately and on a timely basis, and could impair its ability to comply with applicable financial reporting and disclosure obligations. Remediation requires substantial management attention, cost, and resources, including enhancement of documentation, evidencing, monitoring, information-technology general controls, financial-close and reconciliation controls, and controls over certain third-party and digital-payments activities. There can be no assurance that these remediation efforts will be completed in a timely manner or that they will be effective. If the material weakness is not remediated, or if additional material weaknesses or significant deficiencies are identified, the Company could experience delays in financial reporting, increased costs, loss of investor confidence, regulatory , and other effects on its business, financial condition, results of operations, and access to capital.
The Company is subject to certain general affirmative debt covenants, which if it cannot comply, may result in default and actions taken against it by its debt holders.
On June 29, 2018, the Company entered into certain subordinated note purchase agreements with two institutional accredited investors and completed a private placement of $10 million of fixed-to-floating rate subordinated notes with the maturity date of September 30, 2028. Proceeds of $7.8 million were directly contributed to the Bank. The subordinated debt qualifies for Tier 2 Capital of the Company and the funds contributed to the Bank qualify as Tier 1 capital at the Bank.
The affirmative covenants contained in the subordinated notes agreements are of a general nature and not uncommon in such debt agreements. Management does not anticipate an inability to maintain its compliance with the affirmative covenants contained in the subordinated notes agreements as such compliance is inherent in the Bank’s continued operation and Patriot’s public company status, as well as management’s overall strategic plan.
The Bank is subject to environmental liability risk associated with its lending activities.
A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on, and take title to, properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties, which may make Patriot liable for remediation costs, as well as for personal injury and property damage. In addition, Patriot owns and operates certain properties that may be subject to similar environmental liability risks.
Environmental laws may require the Bank to incur substantial expense and may materially reduce the affected property's value, or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures requiring the performance of an environmental site assessment before loan approval or initiating any foreclosure action on real property, these assessments may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on Patriot’s financial condition and results of operations.
Negative public opinion regarding us could adversely affect our stock price, business, results of operations, and financial condition.
Reputational harm, including as a result of our actual or alleged conduct or public opinion of the financial services industry generally, could adversely affect our stock price, business, results of operations, and financial condition. Reputation risk, or the risk to our business, earnings, liquidity, capital, stability or viability from negative public opinion, is inherent in our business and
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is expected to increase as our size, profile and product offerings in the financial services industry grows. Negative publicity or reputational harm can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, illegal or unauthorized acts taken by third parties that supply products or services to us, the behavior of our team members, the customers with whom we have chosen to do business, the industries in which we operate, corporate initiatives and negative publicity for other financial institutions. Damage to our reputation could adversely impact our ability to attract new, or maintain existing, loan and deposit customers, team members and business relationships, and could result in the imposition of new regulatory requirements, operational restrictions, enhanced supervision and/or civil money . Further, public opinion can us to and regulatory action and and our efforts to raise capital or implement our growth strategy. The proliferation and increasing influence of social media websites and the use thereof by investors who may sell our public stock short, also may increase the risk that , or information may be posted or released publicly that could our reputation, affect our stock price or the public’s perception of our or viability, or have other consequences. Any to our reputation could have a material effect on our stock price, business, results of operations, and financial condition.
A cyberattack, fraud event, information security breach, payments disruption, or technology failure could affect us materially and adversely.
We rely extensively on information systems, online and mobile channels, payments systems, vendors, data processors, and communications networks. Our institutional banking and digital payments activities increase our exposure to cyber, fraud, payments, and operational threats. Like other financial institutions, we face risks from phishing, ransomware, credential compromise, vendor compromise, insider threats, account takeover, business email compromise, data theft, fraud rings, and service outages. Public company and bank peer filings continue to identify cybersecurity, employee misconduct, and operational breakdown as material risks.
A successful attack or system failure could disrupt operations, compromise customer data, result in financial losses, trigger remediation costs, regulatory scrutiny, litigation, and reputational damage, and materially adversely affect our business and financial condition.
The development and use of artificial intelligence presents risks and challenges that may adversely impact our business.
We or our third-party vendors, customers or counterparties may develop or incorporate artificial intelligence (“AI”) technology in certain business processes, services or products. The development and use of AI presents a number of risks and challenges, including concerns around safety and soundness, privacy and data-handling, fair access to financial services, fair treatment to customers, inaccuracy of results broadly known as “hallucinations” and compliance with applicable laws and regulations. The legal and regulatory environment relating to AI is uncertain and rapidly evolving, both in the U.S. and internationally, and includes regulatory schemes targeted specifically at AI as well as provisions in intellectual property, privacy, consumer protection, employment, and other laws applicable to the use of AI. These evolving laws and regulations could require changes in our implementation of AI technology and increase our compliance costs and the risks to us of non-compliance.
AI models, particularly generative or agentic AI models, may produce outputs or take action that is incorrect, that reflects biases included in the data on which they are trained, that results in the release of private, confidential, or proprietary information, that infringes on the intellectual property rights of others, or that is otherwise harmful. Further, we may rely on AI models developed by third parties, and, to that extent, would be dependent in part on the manner in which those third parties develop and train their models, including risks arising from the inclusion of any unauthorized material in the training data for their models and the effectiveness of the steps these third parties have taken to limit the risks associated with output of their models, matters over which we may have limited visibility. Any of these risks could expose us to liability or adverse legal or regulatory consequences and harm our reputation and the public perception of our business or the effectiveness of our security measures.
We face intense competition in our markets and in our target client segments, and we may not be able to compete effectively.
We compete with money-center banks, regional and community banks, private banks, specialty finance companies, fintechs, and other non-bank providers. Our strategy specifically targets client segments that may also be targeted by larger institutions with broader capabilities, stronger brands, lower cost of funds, greater lending capacity, more advanced technology, or wider product offerings. We recognize that the Bank is attempting to differentiate itself in client segments that larger institutions and specialty providers also serve. If we cannot compete effectively on service, convenience, pricing, expertise, technology, or risk-adjusted product offerings, our growth and profitability could suffer.
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The Company is subject to risks associated with taxation.
The amount of income taxes the Company is required to pay on its earnings is based on federal and state legislation and regulations. the Company provides for current and deferred taxes in its financial statements, based on the results of operations, business activity, legal structure, interpretation of tax statutes, assessment of risk of adjustment upon audit, and application of financial accounting standards. The Company may take tax return filing positions for which the final determination of tax is uncertain, and tax authorities could assess additional taxes, penalties, or interest that may adversely affect the Company’s results of operations, financial condition, or cash flows.
The Company also has significant federal and state net operating loss carryforwards, the utilization of which may be limited by Section 382 of the Internal Revenue Code and similar state law provisions. The Company’s existing Section 382 analysis does not yet reflect the effect, if any, of ownership changes or additional limitations that may have resulted from the Private Placement or the registered direct offerings completed during 2025. As a result, the amount and future availability of the Company’s net operating loss carryforwards could be reduced once updated analyses are completed.
In addition, although the Company maintained a full valuation allowance against its deferred tax assets at December 31, 2025, there can be no assurance regarding the timing or amount of any future reduction in that valuation allowance, or whether future changes in tax law, taxable income projections, ownership changes, or tax audit outcomes may adversely affect the Company’s effective tax rate, tax expense, net income, or capital.
Risks Relating to the Company and its Common Stock
The Holding Company depends on dividends and other distributions from the Bank, which are restricted and may be further limited by regulation and supervisory actions.
The Holding Company is a separate legal entity from the Bank and relies primarily on dividends and other distributions from the Bank to fund holding company expenses, debt service, and any shareholder distributions. The Formal Agreement requires prior written non-objection before the Bank may declare or pay dividends or make capital distributions, and the Bank may do so only if it remains in compliance with its capital plan and applicable law. Regulatory restrictions, earnings limitations, capital requirements, or supervisory objections could limit the Bank’s ability to distribute funds to the Holding Company, which could adversely affect the Holding Company’s liquidity and ability to meet its obligations.
Our common stock price may be volatile, and shareholders may experience dilution or other adverse effects from future capital actions or market perceptions of our business and regulatory status.
The market price of our common stock may fluctuate significantly due to our operating results, regulatory developments, remediation progress, capital actions, perceptions of our strategic execution, broader bank-sector conditions, or general market volatility. Banks subject to heightened regulatory scrutiny or undergoing strategic restructuring may experience greater share price volatility. If we issue additional equity, convertible securities, preferred stock, or other capital instruments in the future, existing shareholders may experience dilution or the market may react adversely to such issuances.
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Risks Relating to General Economic and Market Conditions
We may be adversely affected by national financial markets and economic conditions, as well as local conditions.
Our business and results of operations are affected by the financial markets and general economic conditions in the United States, including factors such as the level and volatility of interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, investor confidence and the strength of the U.S. economy. The deterioration of any of these conditions can adversely affect our securities and loan portfolios, our level of charge-offs and provision for credit losses, our capital levels, liquidity and our results of operations.
Geopolitical conflicts and military tensions, including the ongoing conflict between Russia and Ukraine and hostilities involving Iran and the Middle East, may contribute to volatility in energy prices, inflation, financial markets, cybersecurity threats, and broader macroeconomic conditions, any of which could adversely affect our borrowers, deposit base, liquidity, capital, and results of operations.
In addition, we are affected by the economic conditions within our Connecticut and New York trade areas. Unlike larger banks that are more geographically diversified, the Bank has a total of eight branch offices comprised of seven branch offices located in Fairfield and New Haven Counties, Connecticut and one branch office located in Westchester County, New York. Therefore, any decline in the economy of the Fairfield or New Haven counties of Connecticut or the New York metropolitan area could have an adverse impact on us.
Our loans, the ability of borrowers to repay these loans, and the value of collateral securing these loans are impacted by economic conditions. Our financial results, the credit quality of our existing loan portfolio, and the ability to generate new loans with acceptable yield and credit characteristics may be adversely affected by changes in prevailing economic conditions, including declines in real estate values, changes in interest rates, adverse employment conditions and the monetary and fiscal policies of the federal government.
Natural disasters, acts of war or terrorism, the impact of health epidemics and other adverse external events could detrimentally affect our financial condition and results of operations.
Natural disasters (including severe weather events of increasing strength and frequency due to climate change), acts of war or terrorism, health epidemics, geopolitical conflicts, and other adverse external events could have a significant negative impact on our ability to conduct business or upon third parties that provide services for us or our customers. Although we do not believe we have material direct exposure to the ongoing conflict between Russia and Ukraine or hostilities involving Iran and the Middle East, such events may adversely affect us indirectly through volatility in financial markets, energy and commodity prices, inflation, cyber threats, vendor or payment-system disruption, changes in customer behavior, deterioration in borrower credit quality, instability in our deposit base, or in collateral values. Any such effects could result in revenue, higher expenses, reduced liquidity, or other effects on our financial condition and results of operations.
Risks related to environmental and other global matters
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes and other issues. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-focused companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
