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Note 2 - Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2025
Notes to Financial Statements |
Significant Accounting Policies [Text Block] |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated. The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Reclassifications Certain reclassifications have been made to prior years’ balances to conform to the classifications used in 2024. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents. Segment Information An operating segment is generally defined as a component of business for which discrete financial information is available and whose operating results are regularly reviewed by the chief operating decision maker. As a community-oriented financial institution, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers. The chief operating decision maker makes operating decisions and assesses performance based on an ongoing review of the Company’s community banking activities, which constitutes the Company’s only operating segment for financial reporting purposes. The Company’s single reportable segment is determined by the Chief Financial Officer, who is the designated chief operating decision maker, based upon information provided about the Company’s products and services offered, primarily banking operations. The segment is also distinguished by the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business such as branches and departments, which are then aggregated if operating performance, products/services, and customers are similar. The chief operating decision maker will evaluate the financial performance of the Company’s business components by evaluating revenue streams, significant expenses, and budget to actual results in assessing the Company’s segment and in the determination of allocating resources. The chief operating decision maker uses revenue streams to evaluate product pricing and significant expenses to assess performance and evaluate return on assets. The chief operating decision maker uses consolidated net income to benchmark the Company against its competitors. The benchmarking analysis coupled with monitoring of budget to actual results are used in assessing performance and in establishing compensation. Loans, investments, and deposits provide the revenues in the banking operation. Interest expense, provisions for credit losses, and payroll provide the significant expenses in the banking operation. The consolidated expense information is the same as is reported on the income statement as consolidated net income. The measure of segment assets is reported on the balance sheet as total consolidated assets. All operations are domestic. Business Combination and Fair Value Measurements The Company completed its acquisition of Cornerstone on July 1, 2025. The transaction was accounted for under the acquisition method in accordance with Accounting Standards Codification 805, Business Combinations (ASC 805), and the identifiable assets acquired, and liabilities assumed were recorded at their estimated fair values. Acquisition-related costs, including legal, accounting, and other professional fees, totaled approximately $1.9 million and were expensed as incurred in accordance with ASC 805. Fair Value Methodologies:
| ● | Loans: Fair value was estimated using a discounted cash flow model that considered credit quality, interest rate environment, and expected prepayments. Credit mark adjustments were applied to reflect estimated losses.
| ● | Investment Securities: Valued based on quoted market prices or observable inputs such as yield curves and credit spreads.
| ● | Premises and Equipment: Based on third-party appraisals and market comparables.
| ● | Core Deposit Intangible: Determined using a discounted cash flow model based on expected deposit retention and cost differentials relative to market rates.
| ● | Time Deposits and Borrowings: Measured using present value techniques based on current market rates for similar instruments.
| ● | Goodwill: Arises from synergies expected from the acquisition and is not amortizable for tax purposes.
Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for credit losses, loan servicing rights, deferred tax assets, and fair values of financial instruments are particularly subject to change. Cash and Cash Equivalents For the purpose of the statement of cash flows, cash and due from banks and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold for one day periods. Net cash flows are reported for customer loans and deposit transactions and repurchase agreements. Investment Securities Investments are classified into one of the following categories:
| ● | Available-for-sale securities reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders' equity.
| ● | Held-to-maturity securities, which management has the positive intent and ability to hold, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums. As of December 31, 2025 and 2024 the Company did not have any investment securities classified as held-to-maturity.
| ● | Trading securities are bought and held principally for the purpose of selling in the near term and changes in the value of these securities are recorded through earnings. As of December 31, 2025 and 2024 the Company did not have any investment securities classified as trading.
Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. The Company evaluates available for sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the allowance for credit losses and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is recognized in earnings with a corresponding adjustment to the security's amortized cost basis. In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers' financial condition, among other factors. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. No security credit losses were recognized during the years ended December 31, 2025, 2024 or 2023. Federal Home Loan Bank Stock As a member of the Federal Home Loan Bank (FHLB) System, the Bank is required to maintain an investment in the capital stock of the FHLB. The investment is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. At December 31, 2025 and December 31, 2024, the Company held $8,084,000 and $6,234,000, respectively of FHLB stock. On the consolidated balance sheet, FHLB stock is included in accrued interest receivable and other assets. Federal Reserve Bank Stock The Bank is a member of its regional Federal Reserve Bank (FRB). FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. At December 31, 2025 and December 31, 2024, the Company held $3,565,000 and $1,380,000, respectively of FRB stock. On the consolidated balance sheet, FRB stock is included in accrued interest receivable and other assets. Loans Held for Sale, Loan Sales and Servicing Included in the loan portfolio are loans which are 75% to 90% guaranteed by the Small Business Administration (SBA), US Department of Agriculture Rural Business Cooperative Service (RBS) and Farm Services Agency (FSA). In some cases, the guaranteed portion of these loans may be sold to a third party, with the Bank retaining the unguaranteed portion. The Company can receive a premium in excess of the adjusted carrying value of the loan at the time of sale. There were no loans held for sale on December 31, 2025 and 2024. Loans held for sale are recorded at the lower of cost or fair value and therefore may be reported at fair value on a non-recurring basis. The fair values for loans held for sale are based on either observable transactions of similar instruments or formally committed loan sale prices. SBA Government guaranteed loans with unpaid balances of $83,668,000 and $95,332,000 were being serviced for others at December 31, 2025 and 2024, respectively. The Company accounts for the transfer and servicing of financial assets based on the fair value of financial and servicing assets it controls and liabilities it has assumed, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are recorded at fair value and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with non-interest income on the statement of income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. The Company's investment in the loan is allocated between the retained portion of the loan and the sold portion of the loan based on their fair values on the date the loan is sold. The gain on the sold portion of the loan is recognized as income at the time of sale. The carrying value of the retained portion of the loan is discounted based on the estimated value of a comparable non-guaranteed loan. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost which is the principal balance outstanding, net of purchase premiums or discounts, deferred loan fees and costs. Loans, if any, that are transferred from loans held for sale are carried at the lower of principal balance or market value at the date of transfer, adjusted for accretion of discounts. Interest is accrued daily based upon outstanding loan balances. However, when, in the opinion of management, the future collectability of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest accrued but unpaid is charged against income. Payments received are applied to reduce principal to the extent necessary to ensure collection. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment unless well secured and in the process of collection. Past due status is based on the contractual terms of the loan. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to earned but unpaid interest and then to principal. A nonaccrual loan is returned to accruing status when the borrower has cured the delinquency, has made at least six consecutive months of timely contractual payments, and management determines, based on an evaluation of the borrower’s financial condition and other relevant factors, that the collection of remaining principal and interest is reasonably assured. Consistent with the guidance in ASC 326‑20‑30‑5a, the Company has elected the practical expedient to exclude accrued interest receivable from the amortized cost basis of loans when estimating expected credit losses. Accrued interest receivable on loans is recorded separately in “Accrued interest receivable and other assets” on the Consolidated Balance Sheets. The Company writes off uncollectible accrued interest receivable by reversing interest income when amounts are 90 days past due or earlier if collection is deemed doubtful. Because accrued interest receivable is excluded from the amortized cost basis of loans, no allowance for credit losses is recorded on accrued interest receivable. Loan balances are charged off when management concludes that amounts are uncollectible, which generally occurs upon confirmation of loss, bankruptcy, significant deterioration in the borrower’s financial condition, or when the borrower is 120 days or more past due, depending on asset type. Loan origination fees, commitment fees, direct loan origination costs and purchased premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans. Allowance for Credit Losses To estimate the Allowance for Credit Loss (ACL), the Company elected to use the Discounted Cash Flow (DCF) methodology. This method uses loan level repayment terms to determine expected cash flows which are then discounted by various assumptions such as prepayment or curtailment rates, Probability of Default and Loss Given Default rates. The ACL is measured on the loan’s amortized cost over the remaining contractual lives of the loan portfolios, adjusted for industry average prepayment and curtailment rates. The Company established a 12-month term for forecasting economic conditions followed by a 24-month straight line reversion to historical average conditions as its basis for the probability of loan default. The probability of default rate is determined by reviewing loans with similar risk characteristics that are combined to form loan pools which are statistically correlated with historical credit losses, defaults and various economic metrics, including California Unemployment rates, California Housing Prices and California Gross Domestic Product. Pool balances that are determined to have probable default are then adjusted for expected loss given default. The Company selected the Frye Jacobs Index as its basis for Loss Given Default. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and annual back-testing of model performance to actual realized results. At December 31, 2025, the Company utilized a reasonable and supportable forecast period of four quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, and other risk factors that might influence its loss estimation process. Management believes that the allowance for credit losses at December 31, 2025, appropriately reflected expected credit losses inherent in the loan portfolio at that date. In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company's policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans evaluated collectively and as such, all nonaccrual loans, in excess of $100,000, are individually evaluated for reserves. As of December 31, 2025, and 2024, the Bank's nonaccrual loans comprised the entire population of loans individually evaluated. The Company's policy is that nonaccrual loans, in excess of $100,000, also represent the subset of loans where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if the nonaccrual loans should be categorized as collateral dependent. Nonaccrual loans with a balance less than or equal to $100,000 are evaluated collectively and consist primarily of automobile loans. The ACL includes expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment. The funding rate represents management's estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. The ACL on unfunded loan commitment is included in Other Liabilities while any related provision expense is included in the provision for credit loss expense. The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into three major categories, defined as follows: Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans. For other loans, which are primarily consumer loans and automobile loans the Company evaluates credit quality based on the aging status of the loan and by monitoring factors such as recent payment performance, borrower credit scores, and the frequency of extensions or payment deferrals. The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss: Commercial – Commercial loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Agricultural – Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of the Company and borrowers: commodity prices and weather conditions. Real Estate – Residential and Home Equity Lines of Credit – The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating. Real Estate – Commercial – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations. Real Estate – Construction and Land Development – Construction and land development loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and timelines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects. Automobile – An automobile loan portfolio is usually comprised of a large number of smaller loans scheduled to be amortized over a specific period. Most automobile loans are made directly for consumer purchases, but business vehicles may also be included. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating. Other – Other loans primarily consist of consumer loans and are similar in nature to automobile loans. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's primary regulators, the FRB and the Department of Financial Protection and Innovation (DFPI), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations. Purchased Credit Deteriorated (PCD) Loans PCD loans are loans acquired at a discount that is due, in part, to credit quality deterioration since origination which may be determined through observation of missed payments, downgrade in risk rating, deterioration of a borrower's financial trends or other observable factors including subjectivity utilized by management. PCD loans are initially recorded at fair value, by taking the sum of the present value of expected future cash flows and an allowance for credit losses, at acquisition. The allowance for credit losses for PCD loans is recorded through a gross-up of reserves on the consolidated balance sheets, while the allowance for acquired non-PCD loans is recorded through the provision for credit losses on the consolidated statements of income, consistent with originated loans. Subsequent to acquisition, the allowance for credit losses for PCD loans will generally follow the same forward-looking estimation, provision, and charge-off process as non-PCD acquired and originated loans. As part of the acquisition of Cornerstone on July 1, 2025, the Company acquired PCD loans. At acquisition, the Company recorded PCD loans at their purchase price and simultaneously established an allowance for credit losses based on expected credit losses over the life of the loans. A reconciliation of the purchase price of the PCD loans to the par value of these loans follows: Reconciliation of Purchase Price to Par Value (in thousands):
Par value of Acquired PCD Loans |  | $ | 34,115 |
Less Credit Mark (ACL) |  |  | (315 | )
Less: Interest Mark (Non-Credit Discount) |  |  | (3,609 | )
Fair Value (Purchase Price) |  | $ | 30,191 |
The fair value of PCD loans acquired in the Cornerstone acquisition was determined using a discounted cash flow (DCF) model. Key inputs and assumptions included:
| ● | Expected cash flows based on contractual terms adjusted for estimated prepayments and defaults
| ● | Discount rates reflecting current market rates for similar loans, adjusted for credit risk
| ● | Loss expectations derived from historical performance and forward-looking economic forecasts
| ● | Segmentation by loan type (e.g., commercial, consumer, real estate) to reflect differing risk profiles
The resulting fair value represents the present value of expected future cash flows, net of credit losses, and includes a gross-up for the allowance for credit losses under ASC 326. Non-PCD Loans As part of the acquisition of Cornerstone, the Company acquired a portfolio of loan receivables that did not exhibit credit deterioration at the acquisition date (non-PCD loans). In accordance with ASC 805 and ASC 326, these loans were initially recorded at fair value. An allowance for credit losses related to the non-PCD loans was recognized separately from the purchase price allocation, resulting in a charge to credit loss expense on the acquisition date. This treatment reflects the expected credit losses on the acquired loans and is consistent with the CECL model. The total fair value of non-PCD loans acquired was $432 million, the gross contractual amounts receivable is $579 million, and our best estimate of the contractual cash flows not expected to be collected is $6.7 million. Other Real Estate Owned Other real estate owned relates to real estate acquired in full or partial settlement of loan obligations. On December 31, 2025, other real estate owned totaled $226,000 consisting of two residential real estate properties. On December 31, 2024, other real estate owned totaled $91,000 consisting of one residential real estate property. There was one agricultural loan with a balance of $2,000,000 secured by equipment, farmland and a small residential real estate property for which formal foreclosure proceedings were in process at December 31, 2025 There was one commercial loan with a balance of $53,000 secured by a residential real estate property for which formal foreclosure proceedings were in process at December 31, 2024. Proceeds from sales of other real estate owned totaled $22,000, $362,000 and $122,000 for the years ended December 31, 2025, 2024 and 2023, respectively. For the years ended December 31, 2025, 2024 and 2023 the Company recorded gains on sale of other real estate owned of $0, $5,000 and $39,000, respectively. Other real estate owned is initially recorded at fair value less cost to sell when acquired. Any excess of the Bank's recorded investment in the loan balance and accrued interest income over the estimated fair value of the property less costs to sell is charged against the allowance for credit losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or write-downs resulting from permanent impairment are also recorded in other expenses as incurred. The following table provides a summary of the change in the OREO balance for the years ended December 31, 2025 and 2024:
|  | Year Ended December 31, |
|  | 2025 |  |  | 2024 |
Beginning balance |  | $ | 91,000 |  |  | $ | 357,000 |
Additions |  |  | 185,000 |  |  |  | 141,000 |
Dispositions |  |  | (23,000 | ) |  |  | (357,000 | )
Provision for change in OREO valuation |  |  | (27,000 | ) |  |  | (50,000 | )
Ending balance |  | $ | 226,000 |  |  | $ | 91,000 |
Intangible Assets Intangible assets consist of core deposit intangibles related to the acquisition of Cornerstone Community Bancorp, Feather River Bancorp and branch acquisitions and are amortized on an accelerated basis method over ten years. The Company evaluates the recoverability and remaining useful life annually to determine whether events or circumstances warrant a revision to the intangible asset or the remaining period of amortization. There were no such events or circumstances during the periods presented. Aggregate amortization expense was $1,300,000, $201,000, and $237,000 for 2025, 2024 and 2023, respectively.2025, 2024 and 2023 The gross carrying amount of intangible assets and accumulated amortization was:
|  | 2025 |  |  | 2024 |
|  | Gross Carrying |  |  | Accumulated |  |  | Gross Carrying |  |  | Accumulated |
|  | Amount |  |  | Amortization |  |  | Amount |  |  | Amortization |
Core deposit intangibles |  | $ | 13,873,000 |  |  | $ | 2,772,000 |  |  | $ | 2,263,000 |  |  | $ | 1,472,000 |
Estimated amortization expense for each of the next five years is $2,235,000, $1,990,000, $1,742,000, $1,479,000 and $1,244,000. Goodwill Goodwill totaling $18,713,000 was recorded on July 1, 2025, related to the acquisition of Cornerstone Community Bancorp resulting in total Goodwill of $24,215,000 at December 31, 2025. Goodwill is not amortized but is evaluated for impairment at least annually including during the fourth quarter of 2025. The Company did not recognize impairment during the years ended December 31, 2025, 2024 and 2023. Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of premises are estimated to be twenty to thirty years. The useful lives of furniture, fixtures and equipment are estimated to be two to ten years. Leasehold improvements are amortized over the life of the asset or the life of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Company evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Bank Owned Life Insurance The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Revenue from Contracts with Customers The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. Most of our revenue-generating transactions are not subject to Topic 606, including revenue generated from financial instruments, such as our loans and investment securities. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The following are descriptions of significant revenues within the scope of ASC 606. Deposit service charges The Company earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied, and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. Debit card interchange fees Debit card interchange income represents fees earned when a debit card issued by the Company is used. The Company earns interchange fees from debit cardholder transactions through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied, and the fees are earned when the cost of the transaction is charged to the cardholders’ debit card. Certain expenses directly associated with the credit and debit card are recorded on a net basis with the interchange income. Low Income Housing Tax Credits The Company accounts for low-income housing tax credits and the related qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Upon entering into a qualified affordable housing project, the Company records, in other liabilities, the entire amount that it has agreed to invest in the project, and an equal amount, in other assets, representing its investment in the project. As the Company disburses cash to satisfy its investment obligation, other liabilities are reduced. Over time, as the tax credits and other tax benefits of the project are realized by the Company, the investment recorded in other assets is reduced using the proportional amortization method. Purchased Transferable Green‑Energy Tax Credits The Company may purchase transferable green‑energy tax credits from third‑party project developers pursuant to the transferability provisions of the Inflation Reduction Act of 2022. Purchased tax credits are accounted for in accordance with ASC 740, Income Taxes. Purchased transferable tax credits are recorded as an income tax‑related asset at the amount of cash consideration paid at the date the Company obtains control of the credits. The asset is subsequently recognized as a reduction of income tax expense in the period in which the credits are utilized to offset the Company’s federal income tax liability. Purchased credits do not give rise to deferred tax assets or liabilities and are not amortized. The Company evaluates the realizability of purchased credits each reporting period based on expected taxable income and statutory expiration dates. If it is more likely than not that any portion of the purchased credits will not be realized, the carrying amount is reduced and a corresponding charge is recorded within the Provision for income taxes in the consolidated statements of income. The Company assesses whether any uncertain tax positions exist related to the eligibility or utilization of purchased credits under the guidance in ASC 740‑10. Any such amounts are recorded as liabilities for unrecognized tax benefits when appropriate. Purchased credits are classified within Accrued interest receivable and other assets. Cash paid for the acquisition of purchased transferable credits is presented within Operating activities in the Consolidated Statements of Cash Flows. Income Taxes The Company files its income taxes on a consolidated basis with its subsidiary. Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available evidence management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. Accounting for Uncertainty in Income Taxes When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated income statement. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the years ended December 31, 2025 and 2024. Earnings Per Share Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common stockholders (net income plus discount on redemption of preferred stock less preferred dividends and accretion) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted EPS. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and unrealized gains on cash flow hedges and fair value hedges which are also recognized as separate components of equity. The amount related to the fair value hedge presented in other comprehensive income represents the basis adjustment to the hedged investment securities attributable to changes in fair value resulting from the hedged risk. The amount reclassified out of other accumulated comprehensive income relating to realized losses on securities available for sale was $5,811,000, $19,817,000 and $0 for 2025, 2024 and 2023, with the related tax benefit of $1,718,000, $5,858,000 and $0, respectively. During 2025 the amount reclassified out of other accumulated comprehensive income relating to realized losses on fair value hedges was $254,000 with the related tax expense of $75,000. During 2023 the amount reclassified out of other accumulated comprehensive income relating to realized losses on cash flow hedges was $1,707,000 with the related tax expense of $505,000. Dividend Restrictions Banking regulations require maintaining certain capital levels and may limit the dividend paid by the bank to the holding company or by the holding company to shareholders. Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Stock-Based Compensation Compensation expense related to the Company’s Stock based compensation plans, net of related tax benefit, recorded in 2025, 2024 and 2023 totaled $320,000, $450,000 and $300,000 or $0.05, $0.08 and $0.05 per diluted share, respectively. Compensation expense is recognized over the vesting period on a straight-line accounting basis. The Company determines the fair value of options on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant. No stock options were granted in 2023, and no restricted stock units or restricted stock were granted in 2025 or 2023. During the twelve months ended December 31, 2025 and 2024 the Company granted options to purchase 30,803 and 107,200 shares, respectively of common stock. The fair value of each option was estimated on the date of grant using the following assumptions.
|  | 2025 |  |  | 2024 |
Expected life of stock options (in years) |  |  | 7.5 |  |  |  | 6.2 |
Risk free interest rate |  |  | 4.50 | % |  |  | 3.98 | %
Annualized Volatility |  |  | 34.8 | % |  |  | 32.3 | %
Dividend yields |  |  | 2.70 | % |  |  | 3.17 | %
Weighted-average fair value of options granted during the year |  | $ | 17.90 |  |  | $ | 9.25 |
Pending Accounting Pronouncements Accounting Standards Update 2024-03 “Income Statement Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): In November 2024, the FASB amended the Income Statement—Reporting Comprehensive Income topic in the Accounting Standards Codification to require public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to financial statements. The amendments are effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements. Accounting Standards Update 2025-08 “Financial Instruments — Credit Losses (Topic 326): Purchased Loans: In November 2025, the FASB amended the Financial Instruments—Credit Losses topic in the Accounting Standards Codification to expand the population of acquired financial assets subject to the gross-up approach. The amendments are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods. Early adoption is permitted in both interim and annual reporting periods in which financial statements have not yet been issued or made available for issuance. The Company does not expect these amendments to have a material effect on its financial statements. Impact of Recently Issued Accounting Pronouncements Accounting Standards Update 2023-09 “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures” (“ASU 2023-09”): In December 2023, the FASB amended the Income Taxes topic in the Accounting Standards Codification to improve the transparency of income tax disclosures. ASU 2023-09 was effective January 1, 2025 and did not have a significant impact on the Company's financial statements. Accounting Standards Update 2024-02 “Codification Improvements” (“ASU 2024-02): In March 2024, the FASB issued amendments to the Codification that remove references to various FASB Concepts Statements. ASU 2024-02 was effective January 1, 2025 and did not have a significant impact on the Company's financial statements.

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