Patriot National Bancorp Inc: Form 10-Q for the period ended Jun 30, 2026

"Safe Harbor" Statement Under Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains statements that relate to future events and expectations and, as such, constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements, other than purely historical information, including estimates, projections, statements relating to our strategies, outlook, business and financial prospects, business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements are not guarantees of future performance. Although Patriot believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, these expectations may not be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and changes in circumstances, many of which are beyond Patriot’s control.

For a discussion of certain factors that could cause actual results to differ materially from those anticipated in this report, refer to the disclosures in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q, and Item 1A, “Risk Factors,” in the Company’s most recent Annual Report on Form 10-K. Patriot undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

Critical Accounting Policies

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Actual results could differ from those estimates. Management has identified the allowance for credit losses and the realizability of deferred tax assets as among the Company’s most critical accounting estimates because they are important to the portrayal of the Company’s financial condition and results of operations and require management to make subjective and complex judgments about matters that are inherently uncertain. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 and Note 14, Income Taxes, for additional information.

SUMMARY OF RESULTS

The Company continued to execute its strategic plan during the six months ended June 30, 2026, with a focus on balance sheet growth, capital optimization, and risk management. Significant regulatory milestones were achieved during and shortly after the quarter. On June 30, 2026, when the OCC formally terminated its Formal Agreement with the Bank, resulting in the Bank's reclassification from "adequately capitalized" to "well capitalized" under applicable regulatory standards. On July 7, 2026, the OCC also notified the Bank that it no longer considered the Bank to be in “troubled condition” for purposes of applicable law and regulation.

For the three months ended June 30, 2026, the Company reported net income of $0.1 million, or $0.00 per basic and diluted share, compared to a net loss of $5.0 million, or $(0.06) per share, for the same period in 2025. For the six months ended June 30, 2026, the Company reported a net loss of $1.6 million, or $(0.01) per share, compared to a net loss of $7.8 million, or $(0.17) per share, for the same period in 2025. The improvement reflects higher net interest income and increased non-interest income, partially offset by higher operating expenses.

FINANCIAL CONDITION

Total assets increased to $1.32 billion at June 30, 2026, from $1.09 billion at December 31, 2025, primarily driven by loan origination and purchase activity and continued growth of the investment securities portfolio.

Cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash decreased from $207.1 million at December 31, 2025 to $121.5 million at June 30, 2026. The decrease was driven primarily by a strategic reallocation of liquidity into higher yielding asset classes, consistent with the Company’s strategic objectives. For further details, refer to the Consolidated Statements of Cash Flows.

Investment securities

Total investments increased by $15.7 million, or 7.0%, to $240.3 million at June 30, 2026, compared to $224.7 million at December 31, 2025. The investment portfolio continues to be composed primarily of U.S. Government agency and mortgage‑backed securities. The net increase was driven principally by $51.0 million in purchases of available‑for‑sale securities during 2026, reflecting the Company’s ongoing deployment of liquidity into investment securities as part of its balance sheet repositioning strategy. These purchases were partially offset by $29.1 million in sales proceeds, $3.9 million in principal paydowns, and a $4.1 million increase in unrealized losses.

At June 30, 2026, securities of $132.7 million were pledged to the FHLB or FRB at June 30, 2026, compared to $15.1 million at December 31, 2025. Of the June 30, 2026 amount, approximately $98.1 million was pledged to the FHLB to support available borrowing capacity, with no FHLB borrowings outstanding at quarter-end. Approximately $34.6 million was pledged to the FRB in connection with requirements applicable to the Bank while it was considered to be in troubled condition; no FRB borrowings were outstanding at June 30, 2026.

Loans held for investment

Loans receivable, net, increased to $877.4 million at June 30, 2026 from $585.7 million at December 31, 2025, an increase of approximately $291.7 million or approximately 50%. The increase reflects new loan originations under the Bank's targeted lending initiatives, as well as continued purchases of residential and commercial real estate loans.

The following table provides the composition of the Company’s loan held for investment portfolio as of June 30, 2026 and December 31, 2025:

(In thousands)

Commercial real estate remained the largest loan category as of June 30, 2026, comprising 55.0% of total gross loans, compared to 58.4% at December 31, 2025. Residential real estate loans increased to 22.7% of total gross loans from 13.4% at year‑end, driven primarily by loan purchases completed during the first quarter of 2026. SBA loans held for investment are included within the commercial real estate and commercial and industrial loan categories. As of June 30, 2026 and December 31, 2025, SBA loans classified as commercial real estate totaled $10.4 million. SBA loans included in the commercial and industrial loan category totaled $7.6 million at June 30, 2026, compared to $8.7 million at December 31, 2025.

As of June 30, 2026, the Company’s net loan‑to‑deposit ratio increased to 73.1% from 60.6% at December 31, 2025, while the net loan‑to‑total assets ratio increased to 66.6% from 53.8% over the period. These increases are consistent with the Company’s balance sheet repositioning strategy.

Commercial Real Estate Loans ("CRE")

The following table provides the composition of the commercial real estate loan portfolio as of June 30, 2026 and December 31, 2025:

(In thousands)

The following table provides the commercial real estate loan portfolio by geographic concentrations as of June 30, 2026 and December 31, 2025:

(In thousands)

(1) Other Market consists of loans in all other states, of which California is $143.6 million as of June 30, 2026. No others are greater than 5% of the total as of the periods ending June 30,2026 and December 31, 2025.

Commercial real estate and commercial and industrial loans represented approximately 76.4% of total gross loans at June 30, 2026. Accordingly, the Company’s credit performance remains significantly influenced by borrower operating performance, collateral values, and economic conditions in the markets and customer segments served by the Bank. For purposes of internal and regulatory CRE concentration monitoring, including under OCC Bulletin 2006-46, owner-occupied CRE loans are excluded from CRE totals and classified as commercial and industrial loans, although owner-occupied CRE loans are included in the CRE portfolio presentation above.

As of June 30, 2026, the Bank’s CRE concentration was 289% of Tier 1 capital plus allowance for credit loss, below the Bank’s concentration policy limit of 350%. Exceeding this threshold would not, by itself, indicate unsafe or unsound banking practices; however, it subjects the Bank to heightened supervisory expectations for portfolio management, risk assessment, and capital planning. Management maintains portfolio management procedures, underwriting standards, and stress testing practices consistent with these regulatory expectations.

Allowance for Credit Losses ("ACL") on Loans

The Company estimates its ACL under the CECL methodology in ASC 326. The allowance for credit losses was $8.5 million at June 30, 2026, compared to $6.8 million at December 31, 2025. Based on management’s evaluation of the loan portfolio at June 30, 2026, management believed the ACL of $8.5 million, or 0.96% of gross loans, was appropriate to absorb expected credit losses in the loan portfolio as of that date. The increase from December 31, 2025 reflected, in part, the initial allowance recorded on loans purchased during the first quarter of 2026 under ASU 2025-08.

Effective January 1, 2026, the Company adopted ASU 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans, on a prospective basis. The adoption did not impact the Company’s opening retained earnings. For loans purchased during the first quarter of 2026, the Company recorded an initial allowance for credit losses of $925 thousand as an adjustment to the amortized cost basis, consistent with the new standard.

The following table summarizes activity in the ACL:

(In thousands)

For the three months ended June 30, 2026, net charge-offs decreased $0.7 million to $0.1 net recovery, compared to $(0.5) million and 0.08% for the three months ended June 30, 2025.

For the six months ended June 30,2026, net charge-offs decreased $2.2 million to $0.3 million net recovery, from $(1.9) million as of June 30, 2025, Net charge-offs to average loans improved to a nominal net recovery for the six months ended June 30, 2026 from 0.55% for the period ended June 30, 2025. The decrease in net charge-offs in 2026 was primarily due to reductions and repositioning of the portfolio completed in 2025.

Average loans increased by approximately $180 million to $837.3 million for the three months ended June 30, 2026 from $657.7 million for the three months ended June 30, 2025. For the six-month period, the average loan balance increased $99.4 million, from $684.0 million in 2025 to $783.4 million in 2026. The increase reflects new loan originations under the Bank's targeted lending initiatives, as well as continued purchases of residential and commercial real estate loans.

Non-accrual loans

Non-accrual loans were $25.0 million as of June 30, 2026, compared to $24.2 million as of June 30, 2025. The ACL-to-non-accrual loans ratio was 33.8% as of June 30, 2026, compared to 32.15% as of June 30, 2025. The Company continues to actively manage and monitor credit risk, particularly in commercial real estate and consumer loan portfolios.

The following table presents non-accrual loans as of the dates indicated:

(In thousands)

Non-accrual loans increased $0.6 million, to $25.0 million at June 30, 2026 from $24.4 million at December 31, 2025. At June 30, 2026, non-accrual loans were comprised of 105 loans, compared to 151 loans at December 31, 2025. At June 30, 2026, 40 loans were individually evaluated and a specific reserve of $2.7 million was established, compared to 9 individually evaluated loans and a specific reserve of $2.1 million at December 31, 2025. The increase in loan count and specific reserves on individually evaluated loans reflects continued enhanced loan-level analysis on certain credits within the portfolio, which resulted in refined reserve estimates for those loans. Individually evaluated loans are measured based on collateral value or discounted expected cash flows, as applicable.

Nonperforming assets to total assets improved to 1.90% at June 30, 2026 from 2.24% at December 31, 2025. Nonperforming loans to total loans, net decreased to 2.85% from 4.16%, primarily due to total loans increasing during 2026.

Loans held for sale

Loans held for sale totaled $23.7 million at June 30, 2026, compared to $24.5 million at December 31, 2025. These balances primarily consist of credit card receivables originated for certain digital payments customers and sold shortly after origination to third parties. During the second quarter of 2026, certain credit card receivables that had been expected to be sold remained on the Company’s balance sheet after the anticipated sale was not completed. The Company recorded a valuation allowance of approximately $5.5 million on these receivables during the quarter to reflect their estimated fair value. The Company also recognized approximately $5.3 million of other income during the quarter related to contractual indemnification rights associated with the same program manager relationship.

Deferred Taxes

The Company reported a net deferred tax asset of approximately $731 thousand at June 30, 2026, compared with a net deferred tax liability of $783 thousand at December 31, 2025. During the second quarter of 2026, management concluded that a portion of the Company’s deferred tax assets met the more-likely-than-not realization threshold and released approximately $1.2 million of the related valuation allowance, resulting in a corresponding discrete income tax benefit. The Company continues to maintain a substantial valuation allowance against its remaining deferred tax assets.

Management will continue to evaluate the realizability of its deferred tax assets based on all available positive and negative evidence. Changes in operating results, expected taxable income, strategic actions, applicable tax-law limitations or other relevant factors could result in additional changes to the valuation allowance and affect future income tax expense or benefit. See Note 14, Income Taxes, for additional information.

Deposits

The following table is a summary of the Company’s deposits at the dates shown:

(In thousands)

Total deposits increased to $1.2 billion, with further reductions in brokered deposits. Brokered deposits decreased $22.8 million to $31.9 million at June 30, 2026 from $54.7 million at December 31, 2025. These changes reflect the Company’s ongoing efforts to manage liquidity, reduce certain deposit concentrations, and support its broader balance sheet repositioning.

Borrowings

Total borrowings were $16.5 million at June 30, 2026, compared to $16.4 million at December 31, 2025, relatively unchanged. Subordinated debt and junior subordinated debt remained substantially stable at $8.3 million and $8.2 million, respectively. No FHLB, FRB, or correspondent bank advances were outstanding at June 30, 2026. The Bank maintained standby letters of credit issued by the FHLB for the benefit of Mastercard in connection with card settlement requirements of $70.5 million at June 30, 2026 and $55.0 million at December 31, 2025, which reduced available FHLB borrowing capacity.

Shareholders’ Equity

Total shareholders' equity decreased to $88.9 million at June 30, 2026 from $94.7 million at December 31, 2025, a decrease of $5.8 million. The decrease was primarily driven by a $4.3 million increase in accumulated other comprehensive loss, reflecting higher unrealized losses on available-for-sale securities, and a year-to-date net loss of $1.6 million.

Average Balances

The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three months ended June 30, 2026 and 2025:

(In thousands)

51

Average Balances

The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the six months ended June 30, 2026 and 2025:

(In thousands)

52

The following table presents the change in interest-earning assets and interest-bearing liabilities by major category and the related change in the interest income earned and interest expense incurred thereon attributable to the change in transactional volume in the financial instruments and the rates of interest applicable thereto, comparing the three and six months ended June 30, 2026 and 2025.

(In thousands)

Results of Operations

For the three months ended June 30, 2026, the Company reported net income of $0.1 million, or $0.00 per basic and diluted share, compared to a net loss of $5.0 million, or $(0.06) per share, for the same period in 2025. For the six months ended June 30, 2026, the Company reported a net loss of $1.6 million, or $(0.01) per share, compared to a net loss of $7.8 million, or $(0.17) per share, for the same period in 2025. The improvement reflects higher net interest income and increased non-interest income, partially offset by higher operating expenses.

Net interest income

Net interest income for the three months ended June 30, 2026 was $9.0 million, compared to $4.2 million for the same period in 2025, an increase of $4.8 million, or approximately 114%. For the six months ended June 30, 2026, net interest income was $16.0 million, compared to $8.1 million for the six months ended June 30, 2025. The increase reflects significant growth in the loan portfolio, a higher-yielding investment securities portfolio, and relatively stable funding costs.

Interest and fees on loans increased $3.1 million for the quarter and $3.2 million year-to-date, driven by substantial loan portfolio growth since year-end 2025.

Interest on investment securities increased $2.5 million for the quarter and $4.8 million year-to-date, reflecting the Company's strategic reallocation of liquidity from cash to investment securities.

Total interest expense increased $152 thousand for the quarter and decreased $794 thousand year-to-date, as the elimination of senior note interest expense following the March 2025 debt conversion partially offset volume-driven increases in deposit interest costs.

Net interest margin of 3.03% for the three months ended June 30, 2026, compared to 1.85% for the three months ended June 30, 2025. For the six months ended June 30, 2026 and 2025, net interest margin was 2.75% and 1.74%, respectively.

Provision (Credit) for credit losses

The Company recorded $590 thousand in provision for credit losses for the three months ended June 30, 2026, compared to $1.5 million for the same period in 2025. For the six months ended June 30, 2026 and 2025, provision for credit losses was $409 thousand and $2.3 million, respectively. The lower provision in 2026 reflects a broadly improving credit quality profile in the loan portfolio following actions taken during 2025 to address higher-risk legacy assets, including increased provisioning and loan sales, partially offset by growth in new originations. As noted above, the initial ACL of $925 thousand on purchased loans was recorded under ASU 2025-08 as an adjustment to amortized cost rather than through provision expense.

Non-interest income

Non-interest income for the three months ended June 30, 2026 was $3.1 million, compared to $2.0 million for the same period in 2025, an increase of $1.1 million. For the six months ended June 30, 2026, non-interest income was $6.3 million, compared to $4.8 million for the prior-year period.

The primary driver was Digital Payments income, which increased $0.4 million to $2.6 million for the quarter and $1.5 million to $5.3 million year-to-date. The increase primarily reflected higher transaction volumes from certain existing program managers, partially offset by the Bank’s risk-based reduction of activity with other program manager relationships. This growth was partially offset by a decline in deposit fees and service charges and lower loan-related fee income compared to the prior year.

Non-interest expense

Non-interest expense for the three months ended June 30, 2026 was $12.8 million, compared to $9.7 million for the same period in 2025, an increase of $3.1 million. For the six months ended June 30, 2026, non-interest expense was $25.1 million, compared to $18.5 million for the prior-year period. Salaries and benefits increased $1.1 million for the quarter and $3.4 million year-to-date, reflecting investments in new leadership and management talent as well as higher equity-based compensation expense. A significant portion of the equity-based compensation relates to awards with relatively short vesting periods, which resulted in elevated expense recognition during the period.

Professional and outside services increased $1.3 million for the quarter and $1.8 million year-to-date, driven largely by legal, compliance, advisory and other remediation-related costs associated with the Bank’s former Formal Agreement with the OCC. Occupancy and equipment increased $0.4 million for the quarter and $0.5 million year-to-date, reflecting the opening of a new Beverly Hills, California office in the first quarter of 2026.

Income Taxes

For the three months ended June 30, 2026, the Company recorded an income tax benefit of $1.5 million, compared to a benefit of $49 thousand for the three months ended June 30, 2025. The 2026 benefit reflects the partial release of the valuation allowance on deferred tax assets, which resulted in the recognition of a $3.3 million deferred tax asset. For the six months ended June 30, 2026, the income tax benefit was $1.5 million, compared to $48 thousand for the same period in 2025.

LIQUIDITY AND CAPITAL RESOURCES

The Company monitors liquidity using, among other measures, on-hand liquidity to total liabilities, and total liquidity to total liabilities. On-hand liquidity is comprised of interest-bearing cash and cash equivalents and unpledged available-for-sale securities. Total liquidity includes on-hand liquidity plus unused borrowing capacity and other available contingent funding sources, including brokered deposit capacity subject to internal limits. The Company also monitors other metrics to manage liquidity and concentration risk in its funding base.

The Company's on-hand liquidity and total liquidity ratios as of June 30, 2026 and December 31, 2025, are as follows:

(In thousands)

On-hand liquidity declined by $171.6 million during the six months ended June 30, 2026, as the Company redeployed excess cash into higher-yielding earning assets, including loan originations and acquisitions, resulting in net loan growth of $291.6 million. The Company also enhanced its contingent liquidity position by increasing the amount of available for sale securities pledged to the FHLB, which increased available borrowing capacity to $158.6 million at June 30, 2026 from $76.0 million at December 31, 2025. On-hand liquidity to total liabilities decreased to 18.06% from 39.62%, and total liquidity to total liabilities declined to 40.90% from 53.40%, primarily reflecting the deployment of liquidity into earning assets, and increased available borrowing capacity.

Liquidity represents the Company's ability to meet its financial obligations as they come due, including deposit withdrawals, funding commitments, debt service, and other operating needs. Management believes the Company's liquidity position at June 30, 2026 was sufficient to meet expected funding needs and reasonably anticipated deposit fluctuations.

Net cash used in operating activities for the six months ended June 30, 2026 was $8.5 million, compared to $4.9 million used in the same period of 2025. The increase in cash used reflects higher net originations of loans held for sale, net of proceeds, as well as increases in accrued interest receivable and other assets and a reduction in accrued expenses and other liabilities, which together resulted in net cash outflows from working capital of $8.1 million during the period. These outflows were partially offset by a lower net loss and higher share-based compensation of $3.3 million compared to $1.3 million in the prior-year period.

Net cash used in investing activities was $310.3 million for the six months ended June 30, 2026, compared to $121.5 million provided by investing activities in the prior-year period. The primary driver of the period-over-period change was $291.6 million in net loan originations and purchases, primarily in residential and commercial real estate, as well as net purchases of available for sale securities of $18.0 million.

Net cash provided by financing activities was $233.3 million for the six months ended June 30, 2026, compared to $76.3 million used in the prior-year period. Total deposits increased by $235.2 million, reflecting growth in core deposits and deposit activity associated with the Company’s digital payments business. Deposits served as the primary funding source for the Company's asset growth during the period.

Cash, cash equivalents and restricted cash decreased $85.6 million during the six months ended June 30, 2026, compared to an increase of $40.4 million during the same period in 2025. The decrease primarily reflects the Company's strategic deployment of liquidity into higher-yielding earning assets, including loans and investment securities, while funding balance sheet growth through deposit growth and increased borrowing capacity.

REGULATORY CAPITAL REQUIREMENTS

As of June 30, 2026, the Bank’s regulatory capital ratios exceeded the minimum levels required for classification as “well capitalized” under applicable federal banking regulations. On June 30, 2026, the OCC terminated the Formal Agreement with the Bank, and the Bank is no longer subject to the higher minimum capital ratios previously established thereunder. At June 30, 2026, the Bank’s total risk-based capital ratio was 14.15%, its Tier 1 risk-based capital ratio was 13.22%, its common equity Tier 1 capital ratio was 13.22%, and its Tier 1 leverage ratio was 9.60%. See Note 11 to the consolidated financial statements for additional information regarding the Company’s and the Bank’s regulatory capital amounts and ratios.

Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk is primarily limited to interest rate risk, which is the risk that changes in interest rates may adversely affect net interest income, capital, and the economic value of assets and liabilities.

The Bank seeks to manage interest rate risk while maintaining appropriate earnings performance and liquidity. Interest rate risk arises from differences in the timing of the repricing or maturity of assets and liabilities, the effect of embedded options, and changes in funding mix. In managing this risk, the Bank considers asset and liability structure, loan and investment repricing characteristics, deposit behavior, and wholesale funding sources.

Interest rate risk is monitored by Management’s Asset and Liability Committee, which consists of senior management personnel. At the Board level, interest rate risk and related balance sheet exposures are reviewed through the Enterprise Risk Committee, which receives periodic reporting on interest rate risk, liquidity, and investment activities.

Management evaluates interest rate risk using net interest income simulation and net portfolio value analysis, each of which is prepared on a quarterly basis. These models estimate the effect of instantaneous changes in interest rates under a range of rate scenarios. The analyses incorporate assumptions regarding asset and liability repricing, prepayments, deposit behavior, and changes in spreads between market rates. Because these analyses are based on assumptions and estimates, actual results may differ materially from those reflected in the model outputs.

The tables below present estimated changes in net portfolio value and net interest income under selected instantaneous interest rate shock scenarios at June 30, 2026 and December 31, 2025.

(In thousands)

(In thousands)

These measures are analytical tools used by management to assess interest rate risk exposure at a point in time and should not be viewed as forecasts. The results are subject to limitations, including the use of assumptions regarding balance sheet composition, pricing behavior, and customer response to changes in interest rates.

Impact of Inflation and Changing Prices

The Company’s financial statements have been prepared in terms of historical dollars, without considering changes in relative purchasing power of money over time due to inflation. Because virtually all of the assets and liabilities of a financial institution are monetary in nature, interest rates generally have a more significant effect on the Bank’s performance than the effect of general inflation. However, inflation may affect customer repayment capacity, funding costs, operating expenses, and the value of loan collateral, including real estate, and therefore could affect the Company’s results of operations in future periods.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2026, the Company carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2026 because the Company had not yet completed the testing and evaluation necessary to conclude that the material weakness in internal control over financial reporting previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 had been remediated.

Internal Control Remediation Activities

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, management concluded that a material weakness existed in the Company’s internal control over financial reporting related to deficiencies 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.

During the six months ended June 30, 2026, management continued to implement remediation measures designed to address the material weakness, including formalizing additional documentation protocols, enhancing evidence retention and monitoring, refining financial close and reconciliation review procedures, continuing implementation of information technology general control enhancements, and further clarifying control responsibilities and oversight. Many of these remediation measures remain in process, and the Company will not consider the material weakness remediated until the applicable remediated controls have operated effectively for a sufficient period of time and management has completed testing sufficient to conclude that the material weakness has been remediated.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2026, the Company continued to implement remediation measures related to the previously disclosed material weakness, including enhancements to documentation, evidencing, monitoring, financial close and reconciliation procedures, information technology general controls, and controls over certain third party and digital payments activities. These remediation activities resulted in changes to the Company’s internal control over financial reporting during the quarter. Other than such remediation measures, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2026 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Except as set forth below, there have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2026.

Our reliance on third-party vendors, program managers, fintech service providers, and other counterparties exposes us to significant third-party risk.

Our institutional banking, digital payments, treasury, compliance, regulatory reporting, audit, and technology activities depend on third-party relationships, including program managers, processors, technology providers, compliance and monitoring vendors, professional service providers, and other counterparties. Banking regulators expect banks to maintain risk-based due diligence, ongoing monitoring, periodic reviews, and appropriate oversight of significant third-party relationships.

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.

From time to time, we receive reports from vendors, regulators, or other third parties concerning cybersecurity, privacy, or other data incidents that may involve Bank or customer information maintained by third parties. We investigate and evaluate such matters to determine their nature and scope and any appropriate response. Such incidents could require significant and costly notification, remediation, investigation, or other response measures and could result in regulatory inquiries, litigation, or other liabilities. Although we may have contractual indemnification rights against responsible third parties and insurance coverage for certain losses, such rights and coverage may be insufficient, subject to limitations or exclusions, or exceed the financial resources of the responsible party or applicable policy limits. Any such incident could materially adversely affect our business, financial condition, and results of operations.