HFWA Heritage Financial Corp /Wa/ - 10-K

ITEM 1A.    RISK FACTORS

Investing in the Company’s common stock involves a high degree of risk. The material risks and uncertainties that management believes affect the Company are described below. Before you decide to invest, you should carefully review and consider the risks described below, together with all other information included in this Form 10-K and other reports and documents the Company files with the SEC. Any of the following risks, as well as risks that the Company does not know or currently deems immaterial, could have a material adverse effect on the Company’s business, reputation, financial condition, results of operations and growth prospects.

Market and Interest Rate Risks

The Company’s business is subject to interest rate risk, and fluctuations in interest rates or monetary policy may adversely affect the Company’s business, financial condition, results of operations and growth prospects.

Fluctuations in interest rates may negatively affect the Company’s business and weaken demand for some of its products. The Company’s earnings and cash flows are primarily dependent on net interest income, which is the difference between the interest income that the Company earns on interest earning assets such as loans and investment securities, and the interest expense that the Company pays on interest-bearing liabilities such as deposits and borrowings. Changes in interest rates also affect the Company’s ability to fund operations with customer deposits and the fair value of securities in the Company’s investment portfolio. Any change in general market interest rates, including changes in federal fiscal and monetary policies, could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. The Company’s interest earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types of assets and liabilities may lag behind. The result of these changes to rates may cause differing spreads on interest earning assets and interest-bearing liabilities.

The Company could also be prevented from altering the interest rates charged on loans or from maintaining the interest rates offered on deposits and money market savings accounts due to “price” competition from other banks and financial institutions with which the Company competes. The Company does not know what market rates will be throughout 2026, including the frequency and significance, if any, with which the target range for the federal funds rate may be changed in 2026. If the Company fails to offer interest at a sufficient level to keep its non-maturity interest-bearing deposits, core deposits may be reduced, which would require the Company to obtain funding in other ways or risk slowing future asset growth.

The Company could recognize additional losses on securities held in the Company’s securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

Factors beyond the Company’s control can influence and cause potential adverse changes to the fair value of securities in the Company’s portfolio including, but not limited to, changes in interest rates, rating agency downgrades or the Company’s own analysis of the value of the securities and defaults by issuers or individual mortgagors with respect to the underlying securities and instability in the credit markets. The foregoing factors, as well as changing economic and market conditions or other factors, could cause write-downs and realized or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. The process for determining whether a write-down is required involves complex, subjective judgments, which could subsequently prove to have been wrong, about the future financial performance and liquidity of the issuer, the fair value of any collateral underlying the security and whether and the extent to which the principal and interest on the security will ultimately be paid in accordance with its payment terms. Decreases in the fair value of investment securities available for sale resulting from

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increases in interest rates could have an adverse effect on stockholders’ equity, specifically AOCI, which is increased or decreased by the amount of change in the estimated fair value of our securities available for sale, net of deferred income taxes. Increases in interest rates generally decrease the fair value of securities available for sale, adversely impacting stockholders’ equity. The company has previously realized losses on the sale of investment securities in connection with strategic balance sheet repositioning transactions. The Company could recognize impairment loss for any security that has declined in fair value below its amortized cost basis if management has the intent to sell the security, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

The Company cannot guarantee that its stock repurchase program will be fully implemented or that it will enhance long-term shareholder value.

On April 24, 2024, the Board approved the repurchase of up to 5% of the Company's outstanding common shares, or 1,734,492 shares. This stock repurchase program supersedes the previous stock repurchase program, authorized in March 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares. The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds and other factors, including opportunities to deploy the Company's capital. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the stock repurchase program’s expiration, without any prior notice. Even if fully implemented, the stock repurchase program may not enhance long-term shareholder value.

Credit Risks

The Company’s business depends on its ability to manage credit risk.

The Company’s banking business requires it to manage credit risk; however, default risk may arise from events or circumstances that are difficult to detect, such as fraud, or difficult to predict, such as catastrophic events affecting certain industries. As a lender, the Company is exposed to the risk that its borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, proper loan underwriting, changes in economic and industry conditions and those inherent in dealing with specific borrowers, including the risk that a borrower may not provide information to the Company about its business in a timely manner, may present inaccurate or incomplete information to the Company or risks relating to the value of collateral.

To manage credit risk, the Company must maintain disciplined and prudent underwriting standards and ensure that the Company’s bankers follow those standards. The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by the Company’s employees in underwriting and monitoring loans, the Company’s inability to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of the Company’s loan portfolio may result in loan defaults, foreclosures and charge-offs and may necessitate that the Company significantly increase its allowance for credit losses, each of which could adversely affect net income. As a result, the Company’s inability to successfully manage credit risk could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company’s high concentration of large loans to certain borrowers may increase the Company’s credit risk.

The Company has developed relationships with certain individuals and businesses that have resulted in a concentration of large loans to a small number of borrowers. As of December 31, 2025, the Company’s 10 largest borrowing relationships accounted for approximately 6.5% of the total loan portfolio. The Company has established an informal, internal limit on loans to one borrower, principal or guarantor, but the Company may, under certain circumstances, consider going above this internal limit in situations where management’s understanding of the industry, the borrower’s business and the credit quality of the borrower are commensurate with the increased size of the loan. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or properties securing these loans, this high concentration of borrowers presents a risk to the Company’s lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of business, economic or market conditions, the Company’s nonaccruing loans and provision for loan losses could increase significantly, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company’s allowance for credit losses may prove to be insufficient to absorb potential losses in its loan portfolio.

Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

• the cash flows of the borrower, guarantors and/or the project being financed;

• the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

• the character and creditworthiness of a particular borrower or guarantor;

• changes in economic and industry conditions; and

• the duration of the loan.

The ACL on loans is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. Loans are charged-off through the ACL on loans when management believes the uncollectibility of a loan balance is considered probable. Subsequent recoveries, if any, are recorded to the ACL on loans. The Company records the changes in the ACL on loans through earnings as a "Provision for (reversal of) credit losses" on the Consolidated Statements of Income.

The determination of the appropriate level of ACL on loans inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the ACL on loans may not be sufficient to cover expected losses in our loan portfolio, resulting in the need for

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increases in our ACL on loans through the provision for credit losses. Management also recognizes that significant new growth in loan segments and new loan products can result in loans segments comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our ACL on loans may be insufficient to absorb losses without significant additional provisions.

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the ACL on loans. If current conditions in the housing and real estate markets weaken, we expect we will experience increased delinquencies and credit losses. Bank regulatory agencies also periodically review our ACL on loans and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on their judgments about information available to them at the time of their examination. In addition, if charge-offs in future periods exceed the ACL on loans, we will need additional provisions to increase the ACL on loans. Any increases in the ACL will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

A decline in the business and economic conditions in the Company’s market areas could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company’s business activities and credit exposure, including real estate collateral for many of its loans, are concentrated in the states of Washington, Oregon and Idaho, although the Company also pursues business opportunities nationally. Adverse economic developments in our market areas, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans, reduce the value of the Company’s loans and affect the Company’s business, financial condition, results of operations and growth prospects. Any regional or local economic downturn that affects the Company’s market areas or existing or prospective borrowers or property values in such areas may affect the Company and the Company’s profitability more significantly and more adversely than the Company’s competitors whose operations are less geographically concentrated.

Negative changes in the economy affecting real estate values and liquidity, as well as environmental factors, could impair the value of collateral securing the Company’s real estate loans and result in loan and other losses.

At December 31, 2025, approximately 79.3% of the Company’s total loan portfolio was comprised of loans with real estate as the primary component of collateral. The repayment of such loans is highly dependent on the ability of the borrowers to meet their loan repayment obligations to us, which can be adversely affected by economic downturns and other factors. The market value of real estate can fluctuate significantly in a short period of time as a result of interest rates and market conditions in the area in which the real estate is located and some of these values have been negatively affected by the rise in prevailing interest rates. Additionally, the repayment of commercial real estate loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Adverse changes affecting real estate values, including decreases in office occupancy due to the shift to remote and hybrid working environments, could increase the credit risk associated with the Company’s loan portfolio, significantly impair the value of property pledged as collateral on loans and affect the Company’s ability to sell the collateral upon foreclosure without a loss or additional losses or the Company’s ability to sell those loans on the secondary market. If real estate values decline, it is also more likely that the Company would be required to increase the Company’s ACL, which would have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Many of the Company’s loans are to commercial borrowers, which have a higher degree of risk than other types of loans.

Commercial and industrial loans represented 17.1% of the Company’s total loan portfolio at December 31, 2025. These loans can be larger in size and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation of the business involved, repayment is often more sensitive than other types of loans to the general business climate and economy. A challenging business and economic environment generally, or in certain specific industries, may increase the Company’s risk related to commercial loans. Cumulative effects of inflation, labor shortages or employee turnover, supply chain constraints and the threat of new tariffs, mass deportations and changes in tax regulations implemented by the current Presidential administration may adversely affect commercial and industrial loans, especially if general economic conditions worsen. The Company’s commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. This collateral generally consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, be difficult to appraise and fluctuate in value based on the success of the business and economic trends. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses recorded on a small number of commercial loans could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Nonperforming assets take significant time and resources to resolve and adversely affect the Company’s net interest income.

The Company’s nonperforming assets adversely affect net interest income in various ways. The Company does not record interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting net income and returns on assets and equity. When the Company takes collateral in foreclosure and similar proceedings, the Company is required to mark the collateral to its then-fair market value, which may result in a loss. Nonperforming loans and foreclosed assets also increase the Company’s risk profile and the level of capital the Company’s regulators believe is appropriate for it to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management, which increase the

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Company’s loan administration costs and adversely affect its efficiency ratio. If the Company experiences increases in nonperforming assets, net interest income may be negatively impacted and the Company’s loan administration costs could increase, each of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Liquidity and Funding Risks

Liquidity risks could affect the Company’s operations and jeopardize its business, financial condition, results of operations and growth prospects.

Liquidity is essential to the Company’s business. Generally, liquidity risk is the risk of being unable to fund obligations to creditors, including, in the case of financial institutions, obligations to depositors, as such obligations become due and/or fund the acquisition of assets, as they come due, and is inherent in the Company’s operations. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities, and from other sources could have a substantial negative effect on our liquidity. The Company’s most important source of funds consists of customer deposits, which can decrease for a variety of reasons, including when customers perceive alternative investments, such as bonds, treasuries or stocks, as providing a better risk/return trade off.

Additionally, uninsured deposits have historically been viewed by the FDIC as less stable than insured deposits. According to statements made by the FDIC staff and leadership of the federal banking agencies, customers with larger uninsured deposit account balances often are small- to mid-sized businesses that rely upon deposit funds for payment of operational expenses and are therefore more likely to closely monitor the financial condition and performance of their depository institutions. In the event of financial distress, uninsured depositors historically have been more likely to withdraw deposits. If a significant portion of our deposits were to be withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal demands, the Company may be unable to obtain funding on favorable terms, which may have an adverse effect on our net interest margin. Moreover, obtaining adequate funding to meet our deposit obligations may be more challenging during periods of higher prevailing interest rates. Our ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited. Interest rates paid for borrowings generally exceed the interest rates paid on deposits, which spread may be exacerbated during a time of higher prevailing interest rates. In addition, because our available for sale securities lose value when interest rates rise, after-tax proceeds resulting from the sale of such assets may be diminished during periods when interest rates are elevated. Under such circumstances, we may be required to access funding from sources such as the FRB’s discount window in order to manage our liquidity risk.

Other primary sources of funds consist of cash from operations, investment security maturities and sales and proceeds from the issuance and sale of the Company’s equity and debt securities to investors, with additional liquidity from the ability to borrow from the FRB, FHLB, and third party lenders. The Company’s access to funding sources in amounts adequate to finance or capitalize the Company’s activities or on favorable terms, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Economic conditions and a loss of confidence in financial institutions may increase the Company’s cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings and borrowings from the discount window of the FRB. Any decline in available funding could adversely impact the Company’s ability to continue to implement its strategic plan or to fulfill its financial obligations, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company may not be able to maintain a strong core deposit base or other low cost funding sources.

The Company depends primarily on its ability to maintain and grow core deposits from its customers, which consist of noninterest demand deposits, interest bearing demand deposits, money market accounts, savings accounts and certificates of deposit as its primary source of funding for lending activities. If customers move money out of bank deposit accounts and into investments (or similar deposit products at other institutions that may provide a higher rate of return), the Company could lose a relatively low-cost source of funds, increasing funding costs and reducing net interest income. The Company supplements its core deposit funding with non-core, short-term funding sources, including brokered deposits, FHLB advances and borrowings from the FRB. If the Company is unable to pledge sufficient qualifying collateral to secure funding from the FHLB, it may lose access to this source of liquidity. If the Company is unable to access any of these types of funding sources or if its costs related to them increases, its liquidity and ability to support demand for loans could be materially adversely affected.

The Company’s liquidity is largely dependent on dividends from the Bank.

The Company is a legal entity separate and distinct from the Bank. A substantial portion of the Company’s cash flow, including cash flow to pay principal and interest on the Company’s debt, comes from dividends the Company receives from the Bank. Federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. In the event the Bank is unable to pay dividends to the Company, it may not be able to service its debt, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company may need to raise additional capital in the future, and failure to maintain sufficient capital would adversely affect its business, financial condition, results of operations, growth prospects and ability to maintain regulatory compliance with capital requirements.

The Company faces significant capital and other regulatory requirements as a financial institution. The Company may need to raise additional capital in the future to provide sufficient capital resources and liquidity to meet its commitments and business needs, including possible acquisition financing. In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Regulatory capital requirements

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could increase from current levels, which could require the Company to raise additional capital or contract the Company’s operations. The Company’s ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions, governmental activities, the Company’s credit ratings, its ability to maintain a listing on Nasdaq and its financial condition and performance. Accordingly, the Company cannot provide assurances that it will be able to raise additional capital if needed or on terms acceptable to the Company. If the Company fails to maintain capital to meet regulatory requirements, or is unable to raise capital to meet its business needs, its business, financial condition, results of operations and growth prospects would be materially and adversely affected.

The Company may be adversely affected by changes in the actual or perceived soundness or condition of other financial institutions.

Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity management, clearing, counterparty, reputational and other relationships. Concerns about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by various institutions. For example, certain community banks experienced deposit outflows following the bank failures in 2023. This systemic risk may adversely affect financial intermediaries with which the Company interacts on a daily basis or key funding providers such as the FHLB, any of which could have a material adverse effect on the Company’s access to liquidity or otherwise have a material adverse effect on its business, financial condition, results of operations and growth prospects.

Operational, Strategic and Reputational Risks

The Company may not be successful in implementing its organic growth strategy, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Part of the Company’s business strategy is to focus on organic growth, which includes leveraging the Company’s business lines across the Company’s entire customer base, enhancing brand awareness and building the Company’s infrastructure. The Company may not be successful in generating organic growth if as a result of numerous factors, including delays in introducing and implementing new products and services and other impediments resulting from regulatory oversight or lack of qualified personnel at the Company’s office locations. In addition, the success of the Company’s organic growth strategy will depend on maintaining sufficient regulatory capital levels, the Company’s ability to raise additional capital to implement its business plan and on favorable economic conditions in the Company’s primary market areas. Failure to adequately manage the risks associated with the Company’s anticipated organic growth could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

In addition to the Company’s organic growth strategy, it intends to expand business by acquiring other banks and financial services companies, but may not be successful in doing so, either because of an inability to find suitable acquisition candidates, constrained capital resources or otherwise.

While a key element of the Company’s business strategy is to grow the Company’s banking franchise and increase the Company’s market share through organic growth, the Company has historically supplemented its organic growth through acquisitions of other financial institutions, including the recent acquisition of Olympic. Although the Company intends to continue to take advantage of opportunities to acquire other financial institutions, whether in whole or in part, the Company may not be able to identify suitable acquisition targets, or may not succeed in seizing such opportunities when they arise or in integrating any such companies within the Company’s existing business framework following acquisition. In addition, even if suitable targets are identified, the Company expects to compete for such businesses with other bidders, some of which may have greater financial resources than the Company, which may adversely affect the Company’s ability to make acquisitions at attractive prices. The Company’s ability to execute on acquisition opportunities may require it to raise additional capital and to increase its capital position to support franchise growth. It will also depend on market conditions over which the Company has no control. Moreover, most acquisitions require the approval of the Company’s bank regulators, and the Company may not be able to obtain such approvals on acceptable terms, or at all. Acquiring other financial institutions involve risks commonly associated with acquisitions, including:

• potential exposure to unknown or contingent liabilities of the banks and businesses the Company acquires;

• exposure to potential asset and credit quality issues of the acquired bank or related business;

• difficulty and expense of integrating the operations, culture and personnel of banks and businesses the Company acquires, including higher than expected deposit attrition;

• potential disruption to the Company’s business;

• potential restrictions on the Company’s business resulting from the regulatory approval process;

• an inability to realize the expected revenue increases, costs savings, gains in market share or other anticipated benefits;

• an inability to successfully integrate the employees, customers and operations of the acquired bank or related business;

• potential diversion of the Company’s management’s time and attention; and

• the possible loss of key employees and customers of the banks and businesses the Company acquires.

The occurrence of fraudulent activity, breaches or failures of the Company’s information security controls or cybersecurity related incidents could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

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As a financial institution, the Company is susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against the Company, its customers or third parties with whom it interacts, which may result in financial losses or increased costs to the Company or its customers, disclosure or misuse of the Company’s information or its customer information, misappropriation of assets, privacy breaches against the Company’s customers, litigation or damage to the Company’s reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by the Company or its customers by insiders or third parties, denial or degradation of service attacks and malware or other cyber-attacks.

In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector, due to both insider fraud and cyber criminals targeting commercial bank accounts, and as a result of increasingly sophisticated methods of conducting cyber-attacks, including those employing artificial intelligence tools. Consistent with industry trends, the Company has also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity related incidents in recent periods. During 2025, the Company is not aware of having experienced any misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information having a material impact on the Company as a result of a direct cyber security breach or other act on the Bank; however, some of the Company’s customers and third party vendors may have been affected by such breaches, which could increase their risks of identity theft and other fraudulent activity that could involve customer accounts at the Bank.

Information pertaining to the Company and its customers is maintained, and transactions are executed, on networks and systems maintained by the Company and third party partners, including online banking, mobile banking, record-keeping or accounting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect the Company and its customers against fraud and security breaches and to maintain customer confidence. Breaches of information security also may occur through intentional or unintentional acts by those having access to the Company’s systems or the confidential information of its customers, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies or other developments could result in a compromise or breach of the technology, processes and controls that the Company uses to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access our systems. The Company’s third party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to the Company or its customers, loss of business or customers, damage to the Company’s reputation, additional expenses, disruption to the Company’s business, additional regulatory scrutiny or penalties or the Company’s exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Issues with the use of artificial intelligence in our marketplace may result in reputational harm or liability, or could otherwise adversely affect the Company’s business.

Artificial intelligence, including generative artificial intelligence, is or may be enabled by or integrated into the Company’s products or those developed by its third party partners. As with many developing technologies, artificial intelligence presents risks and challenges that could affect its further development, adoption, and use, and therefore our business. Artificial intelligence algorithms may be flawed; for example datasets may contain biased information or otherwise be insufficient, and inappropriate or controversial data practices could impair the acceptance of artificial intelligence solutions and result in burdensome new regulations. If the analyses of those products incorporating artificial intelligence assist in producing for the Company or its third party partners are deficient, biased or inaccurate, the Company could be subject to competitive harm, potential legal liability and brand or reputational harm. The use of artificial intelligence may also present ethical issues. If the Company or its third party partners offer artificial intelligence enabled products that are controversial because of their purported or real impact on human rights, privacy, or other issues, the Company may experience competitive harm, potential legal liability and brand or reputational harm. In addition, the Company expects that governments will continue to assess and implement new laws and regulations concerning the use of artificial intelligence, which may affect or impair the usability or efficiency of products and services and those developed by the Company’s third party partners.

The Company depends on information technology and telecommunications systems, and any systems failures, interruptions or data breaches involving these systems could adversely affect the Company’s operations and financial condition.

The Company’s business is highly dependent on the uninterrupted functioning of its information technology and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. The risks resulting from use of these systems result from a variety of factors, both internal and external. The Company is vulnerable to the impact of failures of its systems to operate as needed or intended. Such failures could include those resulting from human error, unexpected transaction volumes, intentional attacks or overall design or performance issues.

The Company outsources to third parties many of its major systems, such as data processing and mobile and online banking. The failure of these systems, or the termination of a critical software license or service agreement, could interrupt the Company’s operations. The Company could also experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. A system failure or service denial could result in a deterioration of the Company’s ability to process loans or gather deposits and provide customer service, compromise the Company’s ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage the Company’s reputation, result in a loss of customer business or subject the Company to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on its business, financial condition, results of operations and growth prospects. In addition,

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failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt the Company’s operations or adversely affect its reputation.

It may be difficult for the Company to replace some of its third party vendors, particularly vendors providing the Company’s core banking and information services, in a timely manner if they are unwilling or unable to provide these services in the future for any reason. Even if the Company is able to replace them, it may result in higher costs or losses of customers. Any such events could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company has a continuing need for technological change, and may not have the resources to effectively implement new technologies or may experience operational challenges when implementing new technologies.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services, including the implementation and integration of tools employing artificial intelligence. The Company’s future success will depend in part upon its, and its third party partners’, ability to address the needs of the Company’s customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. The widespread adoption of new technologies could require the Company in the future to make substantial expenditures to modify or adapt its existing products and services as it grows and develops new products to satisfy customers’ expectations, remain competitive and comply with regulatory rules and guidance. The Company may experience operational challenges as it implements these new technology enhancements, which could result in the Company not fully realizing the anticipated benefits from such new technology or require the Company to incur significant costs to remedy any such challenges in a timely manner. Many of the Company’s larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that the Company will be able to offer, which would put the Company at a competitive disadvantage. Accordingly, a risk exists that the Company will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to customers.

In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause the Company to fail to comply with applicable laws. The Company expects that new technologies and business processes applicable to the financial services industry will continue to emerge, and these new technologies and business processes may be better than those the Company currently uses. Because the pace of technological change is high and the Company’s industry is intensely competitive, it may not be able to sustain the Company’s investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company’s use of third party vendors and its other ongoing third party business relationships is subject to increasing regulatory requirements and attention.

The Company’s use of third party vendors for certain information systems is subject to increasingly demanding regulatory requirements and attention by the Company’s federal bank regulators. Recent regulations require the Company to enhance its due diligence, ongoing monitoring and control over the Company’s third party vendors and other ongoing third party business relationships. In certain cases, the Company may be required to renegotiate the Company’s agreements with these vendors to meet these enhanced requirements, which could increase costs. The Company expects that regulators will hold the Company responsible for deficiencies in oversight and control of its third party relationships and in the performance of the parties with which the Company has these relationships. As a result, if the Company’s regulators conclude that it has not exercised adequate oversight and control over the Company’s third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, the Company could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, as well as requirements for customer remediation, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company is highly dependent on its management team and employees, and the loss of any of these individuals, or the inability to attract and retain qualified personnel, could harm the Company’s ability to implement its strategic plan and impair the Company’s relationships with customers.

The Company’s success is dependent, to a large degree, upon the continued service and skills of the Company’s executive management team and employees. The loss of any of the members of the Company’s executive management team or other key personnel, including successful individuals employed by banks or other businesses that the Company may acquire, to a new or existing competitor or otherwise, could have an adverse impact on the Company’s ability to retain valuable relationships and some of its customers could choose to use the services of a competitor instead of the Company’s services. Leadership changes may occur from time to time, and the Company cannot predict whether significant retirements or resignations will occur or whether the Company will be able to recruit additional qualified personnel.

Competition for high quality personnel is strong and the Company may not be successful in attracting or retaining the personnel it requires, and means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. In particular, many of the Company’s competitors are significantly larger with greater financial resources and may be able to offer more attractive compensation packages and broader career opportunities. Additionally, the Company may incur significant expenses and expend significant time and resources on training, integration, and business development before the Company is able to determine whether a new employee will be profitable or effective in their role. The loss of the services of any senior executive or other key personnel, the inability to recruit and retain qualified personnel in the future or the failure to develop and implement a viable

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succession plan could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company faces intense competition from other banks and non-bank financial services companies that could hurt its business.

The Company competes with national commercial banks, regional banks, private banks, mortgage companies, online lenders, savings banks, credit unions, non-bank financial services companies and other financial institutions, including investment advisory and wealth management firms, fintech companies and digital asset service providers and securities brokerage firms, operating within or near the areas the Company serves. Many of the Company’s non-bank competitors are not subject to the same extensive regulations that govern the Company’s activities and may have greater flexibility in competing for business. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.

While the Company does not offer products relating to digital assets, including cryptocurrencies, stablecoins and other similar assets, there has been a significant increase in digital asset adoption globally over the past several years. Certain characteristics of digital asset transactions, such as the speed with which such transactions can be conducted, the ability to transact without the involvement of regulated intermediaries, the ability to engage in transactions across multiple jurisdictions, and the anonymous nature of the transactions, are appealing to certain consumers notwithstanding the various risks posed by such transactions. Accordingly, digital asset service providers—which, at present are not subject to the same degree of scrutiny and oversight as banking organizations and other financial institutions—are becoming active competitors to more traditional financial institutions. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from using those deposits to fund loans and investment securities. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company’s dividend policy may change.

Although the Company has historically paid dividends to its shareholders and currently intends to maintain or increase its dividend levels in future quarters, the Company has no obligation to continue doing so and may change its dividend policy at any time without providing notice to the Company’s shareholders. Holders of the Company’s common shares are only entitled to receive such cash dividends as the Board, in its discretion, may declare out of funds legally available for such payments. Further, consistent with the Company’s strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, the Company has made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to the Company’s common shareholders.

The Company’s ability to declare and pay dividends is also dependent on federal regulatory considerations, including guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank holding companies should generally pay dividends on capital stock only out of earnings, and only if prospective earnings retention is consistent with the organization’s expected future needs, asset quality and financial condition. The Company is a separate and distinct legal entity from its subsidiaries, including the Bank. The Company receives substantially all of its revenue from dividends from the Bank, which it uses as the principal source of funds to pay dividends. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank does not receive regulatory approval or if its earnings are not sufficient to make dividend payments to the Company while maintaining adequate capital levels, the Company’s ability to pay dividends could be materially and adversely impacted.

Future issuances of common stock could result in dilution, which could cause the Company’s common stock price to decline.

The Company is generally not restricted from issuing additional shares of common stock up to the amount authorized in its Articles of Incorporation. Currently, there are 50,000,000 shares of common stock authorized in the Company’s Articles of Incorporation, which may be increased by a vote of the holders of a majority of the Company’s shares of common stock. The Company may issue additional shares of common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, or in connection with future acquisitions or financings. If the Company chooses to raise capital by selling shares of common stock for any reason, the issuance could have a dilutive effect on the holders of the Company’s common stock and could have a material negative effect on the market price of the Company’s common stock.

The Company may issue shares of preferred stock in the future, which could make it difficult for another company to acquire the Company or could otherwise adversely affect holders of the Company’s common stock, which could depress the price of the Company’s common stock.

Although there are currently no shares of the Company’s preferred stock issued and outstanding, the Company’s Articles of Incorporation authorize it to issue up to 2,500,000 shares of one or more series of preferred stock. The Board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over the Company’s common shares with respect to dividends or in the event of a dissolution, liquidation or winding up, and other terms. If the Company issues preferred stock in the future that has a preference over the Company’s common stock with respect to the payment of dividends or upon the Company’s liquidation, dissolution or winding up, or if the Company issues preferred stock with voting rights that dilute the voting power of the Company’s common stock, the rights of the holders of the Company’s common stock or the market price of its common stock could be adversely affected. In addition, the ability of the Board to issue shares of preferred stock without any action on the part of the Company’s shareholders may impede a takeover of the Company and prevent a transaction perceived to be favorable to the Company’s shareholders.

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The Company’s business and operations may be adversely affected by weak economic conditions and global trade.

The Company’s businesses and operations are sensitive to general business and economic conditions. If the U.S. economy weakens, the Company’s growth and profitability from its lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium- and long-term fiscal outlook of the federal government, the imposition of tariffs, disputes between the presidential administration and the Federal Reserve, immigration enforcement and changes in future tax rates is a concern for businesses, consumers and investors. In addition, economic conditions in foreign countries and weakening global trade due to increased anti-globalization sentiment, international conflicts, and tariff activity could affect the stability of global financial markets, which could hinder the economic growth of the U.S. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Severe weather, natural disasters, pandemics, military conflicts, acts of war or terrorism or other adverse external events could significantly impact the Company’s business.

Severe weather, natural disasters, effects of climate change, widespread disease or pandemics, military conflicts, acts of war or terrorism, civil unrest or other adverse external events could have a significant impact on the Company’s ability to conduct business. In addition, such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause the Company to incur additional expenses. The occurrence of any of these events could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Legal, Accounting and Compliance Risks

The Company’s risk management framework may not be effective in mitigating risks or losses to the Company.

The Company’s risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which the Company is subject, including, among others, credit, market, liquidity, interest rate and compliance risk. The Company’s risk management framework also includes financial or other modeling methodologies that involve management assumptions and judgment. The Company’s risk management framework may not be effective under all circumstances, and may not adequately mitigate any risk or loss. If the Company’s framework is not effective, the Company could suffer unexpected losses and its business, reputation, financial condition, results of operations and growth prospects could be materially and adversely affected. The Company may also be subject to potentially adverse regulatory consequences.

The Company’s accounting estimates and risk management processes and controls rely on analytical and forecasting techniques and models and assumptions, which may not accurately predict future events.

The Company’s accounting policies and methods are fundamental to the way it records and reports its financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods to comply with GAAP and reflect management’s judgment of the most appropriate manner to report the Company’s financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in the reporting of materially different results than would have been reported under a different alternative. Certain accounting policies are critical to presenting the Company’s financial condition and results of operations and require management to make difficult, subjective or complex judgments about uncertain matters. Materially different amounts could be reported under different conditions or using different assumptions or estimates. If the Company’s underlying assumptions or estimates prove to be incorrect, it could have a material adverse effect on its business, financial condition, results of operations and growth prospects.

The Company’s risk management processes, internal controls, disclosure controls and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls, processes and procedures or failure to comply with applicable regulations could necessitate changes in those controls, processes and procedures, which may increase the Company’s compliance costs, divert management attention from its business or subject the Company to regulatory enforcement actions and increased regulatory scrutiny. Any of these could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Changes in accounting policies or standards could materially impact the Company’s financial statements.

From time to time, FASB, PCAOB or the SEC may change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. Such changes may result in the Company becoming subject to new or changing accounting and reporting standards. In addition, the agencies and other entities that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. In addition, trends in financial and business reporting, including environmental, social and governance related disclosures, could require the Company to incur additional reporting expense. These changes may be beyond the Company’s control, can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, or apply an existing standard differently, in each case resulting in the Company’s needing to revise or restate prior period financial statements.

The obligations associated with being a public company require significant resources and management attention, which divert time and attention from the Company’s business operations.

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As a public company, the Company is subject to the reporting requirements of the Exchange Act and SOX. The Exchange Act requires, among other things, that the Company file annual, quarterly and current reports with respect to its business and financial condition with the SEC. SOX requires, among other things, that the Company establish and maintain effective internal controls and procedures for financial reporting. Compliance with these reporting requirements and other rules and regulations, including periodic revisions to and additional rules and regulations of the SEC, could increase the Company’s legal and financial compliance costs and make some activities more time consuming and costly. Further, the need to maintain the corporate infrastructure demanded of a public company is expensive and may divert management’s attention from implementing the Company’s strategic plan, which could prevent the Company from successfully implementing the Company’s growth initiatives and improving its business, results of operations and financial condition.

The financial reporting resources the Company has put in place may not be sufficient to ensure the accuracy of the additional information the Company is required to disclose as a publicly listed company.

As a public company, the Company is subject to heightened financial reporting standards under GAAP and SEC rules, including extensive levels of disclosure. Compliance requires consistent monitoring of and periodic enhancements to the design and operation of the Company’s internal control over financial reporting, as well as financial reporting and accounting staff with appropriate training and experience in relevant rules and regulations. If the Company is unable to meet the demands required of a public company, it may be unable to report its financial results accurately or within the timeframes required by law or stock exchange regulations and could be subject to sanctions or investigations by the SEC or other authorities. If material weaknesses or other deficiencies occur, the Company’s ability to report its financial results accurately and timely could be impaired, which could result in late filings of reports under the Exchange Act, restatements of consolidated financial statements, a decline in stock price, suspension or delisting of the Company’s common stock, and could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. Even if the Company is able to report its financial statements accurately and in a timely manner, any disclosure of material weaknesses in the Company’s future filings could cause the Company’s reputation to be harmed and the Company’s stock price to decline significantly.

Litigation and regulatory actions, including possible enforcement actions, could subject the Company to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on the Company’s business.

The Company’s business is subject to increased litigation and regulatory risks because 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. In the normal course of business, from time to time, the Company has in the past and may in the future be named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with the Company’s current or prior business or acquisition activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. The Company may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company’s current or prior business or acquisition activities. Any such legal or regulatory actions may subject the Company to substantial compensatory or punitive damages, significant fines, penalties, obligations to change the Company’s business practices or other requirements resulting in increased expenses, diminished income and damage to the Company’s reputation. The Company’s involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in the Company’s favor, could also cause significant harm to the Company’s reputation and divert management attention from the operation of the Company’s business. Further, any settlement, enforcement action or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on the Company’s business, reputation, financial condition, results of operations and growth prospects.

The Company is subject to extensive regulation, and the regulatory framework that applies to the Company, together with any future legislative or regulatory changes, may significantly affect its operations.

The banking industry is highly regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, the federal deposit insurance fund and the banking system as a whole, and not for the protection of the Company’s shareholders. The Company is subject to supervision and regulation by the Federal Reserve, and the Bank is subject to supervision and regulation by the FDIC and the DFI. The laws and regulations applicable to the Company govern a variety of matters, including permissible types, amounts and terms of loans and investments the Company may make, the maximum interest rate that may be charged, the types of deposits the Company may accept and the amount of reserves the Company must hold on such deposits, maintenance of adequate capital and liquidity, changes in the control of the Company and the Bank, restrictions on dividends and the establishment of new offices. The Company must obtain approval from its regulators before engaging in certain activities, and there is the risk that such approvals may not be obtained, either in a timely manner or at all. The Company’s regulators also have the ability to compel it to take certain actions, or restrict it from taking certain actions, such as actions that the Company’s regulators deem to constitute an unsafe or unsound banking practice. The Company’s failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in the imposition of enforcement actions or sanctions by regulatory agencies, civil money penalties or damage to the Company’s reputation, all of which could have a material adverse effect on its business, financial condition, results of operations and growth prospects.

While the Company endeavors to maintain safe banking practices and controls beyond the regulatory requirements applicable to the Company, its internal controls may not match those of larger banking institutions that are subject to increased regulatory oversight. Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities, which has

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resulted, and may continue to result in, increased costs of doing business, and may in the future, result in decreased revenues and net income, reduce the Company’s ability to compete effectively, to attract and retain customers, or make it less attractive for the Company to continue providing certain products and services. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect the Company in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations in the United States that may directly affect financial institutions and the global economy.

Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes following elections and changes in federal administration. These changes typically impact the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain, and may take time to be implemented. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.

Banking regulators periodically examine the Company’s business, and the Company may be required to remediate adverse examination findings.

The Federal Reserve, FDIC and DFI periodically examine the Company and the Bank, including their operations and compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that the Company’s financial condition, capital resources, asset quality, asset concentrations, earnings prospects, management, liquidity, sensitivity to market risk or other aspects of any of the Company’s operations had become unsatisfactory, or that the Company was in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in the Company’s capital, to restrict the Company’s growth, to assess civil monetary penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Company’s deposit insurance and place the Company into receivership or conservatorship. Any regulatory action against the Company could have a material adverse effect on its business, reputation, financial condition, results of operations and growth prospects.

Regulations relating to privacy, information security and data protection could increase the Company’s costs, affect or limit how the Company collects and use personal information and adversely affect its business opportunities.

The Company is subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and the Company could be negatively affected by these laws. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Legislators and regulators are also increasingly adopting or revising privacy, information security and data protection laws, including with respect to the use of artificial intelligence by financial institutions and their service providers, that potentially could have a significant impact on the Company’s current and planned privacy, data protection and information security-related practices, the Company’s collection, use, sharing, retention and safeguarding of consumer or employee information and some of the Company’s current or planned business activities. This could also increase the Company’s costs of compliance and business operations and could reduce income from certain business initiatives.

The Federal Reserve may require the Company to commit capital resources to support the Bank.

A bank holding company is required by law to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital, which could result in a material adverse effect on its business, financial condition, results of operations and growth prospects, and could negatively impact the price of its common stock.

The level of the Company’s commercial real estate portfolio may subject the Company to heightened regulatory scrutiny.

The federal banking regulators have issued the Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance, or CRE Guidance, which provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit the Bank’s levels of commercial real estate lending activities, but rather, guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. The federal bank agencies expect FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. As of December 31, 2025, the Bank did not exceed these guidelines.

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If the goodwill that the Company recorded in connection with the Company’s recent acquisitions becomes impaired, it could have a negative impact on its financial condition and results of operations.

As of December 31, 2025, the Company had goodwill of $240.9 million, or 26.1% of the Company’s total stockholders’ equity. As a result of its recent acquisition of Olympic, completed in January 2026, the Company will record additional goodwill which will be determined over the measurement period and subject to measurement period adjustments. The excess purchase price over the fair value of net assets acquired in certain mergers and acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if specific events suggest potential impairment. In testing for impairment, the Company conducts a qualitative assessment, and also estimates the fair value of net assets based on analyses of its market value, discounted cash flows and peer values. Consequently, the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a non-cash adjustment to income. An impairment of goodwill could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations and should be read in conjunction with our financial statements and notes thereto included in Item 8 Financial Statements and Supplementary Data of this Form 10-K. In addition to historical information, this discussion contains forward‑looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections of this Form 10-K entitled “Cautionary Note Regarding Forward Looking Statements” and Item 1A. Risk Factors.

Management’s discussion focuses on 2025 results compared to 2024 results. For a discussion of 2024 results compared to 2023 results, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024, filed with the SEC on February 27, 2025.

Overview

Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our customers in our market areas with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.

Our business consists primarily of commercial lending and deposit relationships with small- to medium-sized businesses and their owners in our market areas, as well as attracting deposits from the general public. We also make real estate construction and land development loans, consumer loans and residential real estate loans on single family properties located primarily in our markets.

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Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, consisting primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits and borrowings. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.

Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio, as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on the CECL methodology.

Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of gains or losses on the sale of investment securities, service charges and other fees, card revenue and other income. Noninterest expense primarily consists of compensation and employee benefits, occupancy and equipment, data processing and professional services expense. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consist primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing expense consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services expense consists primarily of third party service providers such as auditors, consultants and lawyers.

Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from inflation and the governmental actions taken to address this issue, as well as changes in policies driven by the current presidential administration. Net income is also impacted by growth of operations through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."

Recent Acquisition

On January 31, 2026, the Company its acquisition of Olympic Bancorp, Inc., a bank holding company headquartered in Port Orchard, Washington, whereby Olympic merged with and into the Company, and subsequently Kitsap Bank, Olympic's wholly-owned banking subsidiary, merged with and into the Bank. Pursuant to the terms of the merger agreement, Olympic shareholders received 45.0 shares of Heritage common stock for each share of Olympic common stock based on a fixed exchange ratio. Olympic's principal activity was the ownership and operation of Kitsap Bank, a state-chartered banking institution that operated sixteen branches in Washington at the time of closing.

The Company accounts for these transactions under the acquisition method of accounting, and thus, the financial position and results of operations of acquired institutions prior to the consummation date are not included in the accompanying consolidated financial statements. The acquisition method of accounting requires assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determines the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values are subject to refinement for up to one year after deal consummation as additional information becomes available relative to the closing date fair values.

Results of Operations

Net income was $67.5 million, or $1.96 per diluted common share, for the year ended December 31, 2025 up from $43.3 million, or $1.24 per diluted common share, for the year ended December 31, 2024. Net income increased $24.3 million, or 56.1%, compared to the year ended December 31, 2024 due primarily to an increase in net interest income of $15.0 million to $224.4 million from $209.4 million and a decrease in losses on sales of investment securities of $12.0 million to $10.7 million from $22.7 million, largely as a result of a smaller amount of investment portfolio repositioning in 2025 compared to 2024, which increased noninterest income. These increases were partially offset by an increase in noninterest expense of $7.3 million.

Net Interest Income and Margin Overview

One of the Company's key sources of revenue is net interest income. Several factors affect net interest income, including, but not limited to: the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.

Market rates impact the results of the Company's net interest income, including the changes in the federal funds target rate that have been made by the Federal Reserve. The following table provides the federal funds target rate history and changes since December 15, 2022 :

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Change Date

Rate (%)

Rate Change (%)

December 15, 2022

February 2, 2023

March 23, 2023

May 4, 2023

July 27, 2023

September 19, 2024

November 8, 2024

December 19, 2024

September 18, 2025

October 30, 2025

December 11, 2025

Average Balances, Yields and Rates Paid

The following table provides relevant net interest income information for the periods indicated:

Year Ended December 31,

Average

Balance (1)

Interest

Earned/

Paid

Average

Yield/

Rate

Average

Balance (1)

Interest

Earned/

Paid

Average

Yield/

Rate

Average

Balance (1)

Interest

Earned/

Paid

Average

Yield/

Rate

(Dollars in thousands)

Interest Earning Assets:

Loans receivable (2)(3)

Taxable securities

Nontaxable securities (3)

Interest earning deposits

Total interest earning assets

Noninterest earning assets

Total assets

Interest Bearing Liabilities:

Certificates of Deposit

Savings accounts

Interest bearing demand and money market accounts

Total interest bearing deposits

Junior subordinated debentures

Securities sold under agreement to repurchase

Borrowings

Total interest bearing liabilities

Noninterest bearing demand deposits

Other noninterest bearing liabilities

Stockholders’ equity

Total liabilities and stock-holders’ equity

Net interest income and spread

Net interest margin

(1) Average balances are calculated using daily balances.

(2) Average loans receivable, includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, includes the amortization of net deferred loan fees of $3.7 million, $3.6 million and $3.3 million for the years ended December 31, 2025, 2024 and 2023, respectively.

(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.

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The following tables provide the changes in net interest income for the periods indicated due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:

Year Ended December 31,

2025 Compared to 2024

Increase (Decrease) Due to changes in

Volume

Yield/Rate

Total

(Dollars in thousands)

Interest Earning Assets:

Loans receivable, net

Taxable securities

Nontaxable securities

Interest earning deposits

Total interest income

Interest Bearing Liabilities:

Certificates of deposit

Savings accounts

Interest bearing demand and money market accounts

Total interest bearing deposits

Junior subordinated debentures

Borrowings

Total interest expense

Net interest income

Year Ended December 31,

2024 Compared to 2023

Increase (Decrease) Due to changes in

Volume

Yield/Rate

Total

(Dollars in thousands)

Interest Earning Assets:

Loans receivable, net

Taxable securities

Nontaxable securities

Interest earning deposits

Total interest income

Interest Bearing Liabilities:

Certificates of deposit

Savings accounts

Interest bearing demand and money market accounts

Total interest bearing deposits

Junior subordinated debentures

Securities sold under agreement to repurchase

Borrowings

Total interest expense

Net interest income

Total interest income increased $4.5 million, or 1.5%, to $314.2 million for the year ended December 31, 2025 compared to $309.7 million for the year ended December 31, 2024. The increase was primarily due to a 12 basis point increase in the yield on interest earning assets to 5.01% for the year ended December 31, 2025, compared to 4.89% for the year ended December 31, 2024 due primarily to a change in the mix of earning assets to higher yielding loan balances.

Total interest expense decreased $10.5 million, or 10.5%, to $89.8 million for the year ended December 31, 2025 compared to $100.3 million for the year ended December 31, 2024 due primarily to a decrease in borrowing rates and average balances, offset partially by an increase in average balances of interest bearing deposits. The total cost of interest bearing liabilities

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decreased 23 basis points to 2.04% for the year ended December 31, 2025, compared to 2.27% for the year ended December 31, 2024.

Net interest margin increased 27 basis points to 3.58% for the year ended December 31, 2025 compared to 3.31% for the year ended December 31, 2024. The increase in net interest margin was due primarily to an increase in average yields on total interest earning assets, including a change in mix of assets to higher yielding loans from lower yielding investments and interest earning deposits and a decrease in the average cost of interest bearing liabilities .

Provision for Credit Losses Overview

The aggregate of the provision for (reversal of) credit losses on loans and on unfunded commitments is presented in the Consolidated Statements of Income as the "Provision for credit losses." The ACL on unfunded commitments is included in the Consolidated Statements of Financial Condition within "Accrued expenses and other liabilities."

The following table presents the provision for (reversal of) credit losses for the periods indicated:

Year Ended December 31,

Change

(Dollars in thousands)

Provision for credit losses on loans

Provision for (reversal of) credit losses on unfunded commitments

Provision for credit losses

The provision for credit losses on loans recognized during the year ended December 31, 2025 was due primarily to $1.4 million in charge-offs recognized. The provision for credit losses on loans recognized during the year ended December 31, 2024 was due primarily to growth in balances of collectively evaluated loans.

The provision for credit losses on unfunded commitments recognized during the year ended December 31, 2025 was due primarily to a decrease in utilization rates on lines of credit, offset partially by an increase in the unfunded exposure on construction loans.

Noninterest Income Overview

The following table presents the change in the key components of noninterest income for the periods indicated:

Year Ended December 31,

Change

(Dollars in thousands)

Service charges and other fees

Card revenue

Loss on sale of investment securities, net

Gain on sale of loans, net

Interest rate swap fees

BOLI income

Gain on sale of other assets, net

Other income

Total noninterest income

Nonintere st income in creased $14.3 million, or 190.8%, during the year ended December 31, 2025 compared to the same period in 2024. This increase was primarily driven by a lower pre-tax loss of $10.7 million incurred on the sale of investment securities available for sale during the year ended December 31, 2025, compared to a pre-tax loss of $22.7 million incurred during the same period in 2024. The loss on the sale of investment securities in 2025 was a consequence of strategically repositioning the Company's investment portfolio, involving the sale of $152.4 million in investment securities, with the aim of enhancing future earnings. BOLI income increased $1.4 million due primarily to an increase in revenue earned as a result of restructuring the BOLI portfolio which occurred at the end of 2024. Service charge income increased $720,000 due primarily to an increase in service charges on business deposit accounts. Other income increased primarily due to an increase in wealth management income, FHLB dividends received and merchant VISA fee income.

These increases were partially offset by a decrease in the gain on sale of other assets, net due to a $1.5 million gain on the sale of an administrative building recognized during the year ended December 31, 2024.

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Noninterest Expense Overview

The following table presents changes in the key components of noninterest expense for the periods indicated:

Year Ended December 31,

Change

(Dollars in thousands)

Compensation and employee benefits

Occupancy and equipment

Data processing

Marketing

Professional services

State/municipal business and use tax

Federal deposit insurance premium

Amortization of intangible assets

Other expense

Total noninterest expense

Noninterest expense increased $7.3 million, or 4.6%, during the year ended December 31, 2025 compared to the same period in 2024. Compensation and employee benefits increased $5.5 million due primarily to annual merit increases in base pay, an increase in benefit costs and an increase in incentive compensation. Professional services increased $1.7 million due primarily to costs associated with the acquisition of Olympic and consulting costs related to technology-related contract renewals.

The increases were partially offset by a $466,000 reduction in the amortization of intangible assets due to the full amortization of the core deposit intangible related to a prior acquisition and a $408,000 decrease in occupancy expense due primarily to lower depreciation expense as compared to the prior year.

Income Tax Expense Overview

The following table presents the income tax expense and related metrics and the change for the periods indicated:

Year Ended December 31,

2025 Compared to 2024

Change

(Dollars in thousands)

Income before income taxes

Income tax expense

Effective income tax rate

Income tax expense increased during the year ended December 31, 2025 due primarily to higher pre-tax income. The Company also incurred additional tax expense of $2.4 million related to the surrender of certain BOLI policies as part of a BOLI restructuring in the fourth quarter of 2024. The effective income tax rate decreased during the year ended December 31, 2025 due primarily to the additional tax expense related to the previously discussed surrender of BOLI policies recognized in the prior year.

Financial Condition Overview

The table below provides a comparison of changes in key components of the Company's financial condition for the periods indicated:

December 31,

Change

(Dollars in thousands)

Assets

Cash and cash equivalents

Investment securities available for sale, at fair value, net

Investment securities held to maturity, at amortized cost, net

Loans receivable, net

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December 31,

Change

Premises and equipment, net

Federal Home Loan Bank stock, at cost

Bank owned life insurance

Accrued interest receivable

Prepaid expenses and other assets

Other intangible assets, net

Goodwill

Total assets

Liabilities and Stockholders' Equity

Total deposits

Borrowings

Junior subordinated debentures

Accrued expenses and other liabilities

Total liabilities

Common stock

Retained earnings

Accumulated other comprehensive loss, net

Total stockholders' equity

Total liabilities and stockholders' equity

Total assets decreased due primarily to decreases in investment securities offset partially by an increase in cash and cash equivalents. Total liabilities decreased due primarily to a decrease in borrowings and accrued expenses and other liabilities offset partially by an increase in deposits. Total stockholders' equity increased due primarily to net income as well as a decrease in accumulated other comprehensive loss, which was positively impacted by the fair value of our investment securities available for sale as well as the sale of securities at a loss. The changes are discussed in more detail in the sections below.

Investment Activities Overview

Our investment policy is established by the Board and monitored by the Risk Committee of the Board. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Investment in sub-investment grade bonds is not permitted under the policy.

The following table provides information regarding our investment securities at the dates indicated:

December 31, 2025

December 31, 2024

Change

Balance

Total

Balance

Total

(Dollars in thousands)

Investment securities available for sale, at fair value:

U.S. government and agency securities

Municipal securities

Residential CMO and MBS (1)

Commercial CMO and MBS (1)

Corporate obligations

Other asset-backed securities

Total

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December 31, 2025

December 31, 2024

Change

Balance

Total

Balance

Total

(Dollars in thousands)

Investment securities held to maturity, at amortized cost:

U.S. government and agency securities

Residential CMO and MBS (1)

Commercial CMO and MBS (1)

Total

Total investment securities

(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.

Total investment securities decreased $186.1 million to $1.28 billion at December 31, 2025 from $1.47 billion at December 31, 2024 due to sales of investment securities available for sale in connection with a strategic repositioning of the Company's investment portfolio, as well as maturities and repayments of $153.8 million, offset partially by purchases of investment securities available for sale.

During the year ended December 31, 2025, the Company incurred a pre-tax loss of $10.7 million on the sale of investment securities available for sale due to the aforementioned strategic repositioning of its investment portfolio. The Company sold $152.4 million in investment securities with an estimated weighted average book yield of 2.62% and purchased $88.2 million of investment securities with an estimated weighted average book yield of 4.89%. The remaining proceeds were used for other balance sheet initiatives such as the funding of higher yielding loan growth.

The following table provides the weighted average yield of the Company's investment portfolio at December 31, 2025 calculated based upon the fair values of our investment securities available for sale and held to maturity, and excluding any income tax benefits of tax-exempt bonds:

In one year or less

After one year through five years

After five years through ten years

After ten years

Total

Fair

Value

Yield

Fair

Value

Yield

Fair

Value

Yield

Fair

Value

Yield

Fair

Value

Yield

(Dollars in thousands)

Investment securities available for sale:

U.S. government and agency securities

Municipal securities

Residential CMO and MBS (1)

Commercial CMO and MBS (1)

Corporate obligations

Other asset-backed securities

Total

Investment securities held to maturity:

U.S. government and agency securities

Residential CMO and MBS (1)

Commercial CMO and MBS (1)

Total

(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.

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Loan Portfolio Overview

Changes by loan type

The Company originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases. The following table provides information about our loan portfolio by type of loan at the dates indicated:

December 31, 2025

December 31, 2024

Change

Amortized Cost

% of Loans Receivable

Amortized Cost

% of Loans Receivable

(Dollars in thousands)

Commercial business:

Commercial and industrial

Owner-occupied CRE

Non-owner occupied CRE

Total commercial business

Residential real estate

Real estate construction and land development:

Residential

Commercial and multifamily

Total real estate construction and land development

Consumer

Total

Loans receivable decreased $18.9 million, or 0.4%, to $4.78 billion at December 31, 2025 from $4.80 billion at December 31, 2024. New loans funded in the year ended December 31, 2025 totaled $583.3 million. Prepaid and closed loans were elevated in 2025 at $520.3 million, compared to $312.3 million in the prior year.

Commercial and industrial loans decreased $24.7 million, or 2.9%, due primarily to pay downs on outstanding balances, partially offset by new loan production of $138.7 million during the year ended December 31, 2025. Owner-occupied CRE loans increased $31.6 million, or 3.1%, due to new loan production of $137.2 million during the year ended December 31, 2025, partially offset by pay downs on outstanding balances. Non-owner occupied CRE loans increased $148.7 million, or 7.8%, due primarily to transfers from commercial and multifamily construction loans and new loan production of $218.3 million, partially offset by pay downs on outstanding balances. Residential real estate loans decreased $44.1 million, or 10.9%, due to pay downs on outstanding balances. The Company did not originate or purchase residential real estate loans during the year ended December 31, 2025. Residential construction loans increased $11.5 million, or 13.7%, due primarily to new loan production and advances on current loans. Commercial and multifamily construction loans decreased $147.6 million, or 37.3%, during the year ended December 31, 2025 due primarily to transfers to non-owner occupied CRE loans and paydowns on outstanding balances.

Owner-occupied CRE and non-owner occupied CRE loans increased $180.3 million to $3.09 billion at December 31, 2025 compared to $2.91 billion at December 31, 2024 . The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:

December 31, 2025

December 31, 2024

Change

Amortized Cost

% of CRE Loans

Amortized Cost

% of CRE Loans

(Dollars in thousands)

Owner occupied and non-owner occupied CRE loans by collateral type:

Office

Industrial

Multi-family

Retail store / shopping center

Mini-storage

Mixed use property

Warehouse

Motel / hotel

Single purpose

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December 31, 2025

December 31, 2024

Change

Amortized Cost

% of CRE Loans

Amortized Cost

% of CRE Loans

(Dollars in thousands)

Recreational / school

Other

Total

Office loans represented the l argest segment of owner-occupied and non-owner occupied CRE loans totaling $588.8 million, or 19.0% of the total owner-occupied CRE and non-owner occupied CRE at December 31, 2025. Of this total, $288.9 million, or 49.1%, consisted of owner-occupied CRE loans which have a lower risk profile as there is less tenant rollover risk, 82.0% have recourse to the owners and 24.8% of loans are to borrowers in the health care and social assistance sectors, who are less likely to reduce office space. Multi-family loans increased $105.9 million, or 25.5% to $520.6 million from $414.7 million December 31, 2024 due primarily to conversion of multi-family construction loans to permanent loans.

The average individual loan balance of owner-occupied CRE and non-owner occupied CRE was $1.4 million at December 31, 2025. See also Item 1. Business - Commercial Business Lending of this Form 10-K for CRE underwriting standards.

Composition of loans receivable by contractual maturity and interest type

The following table presents the amortized cost of the loan portfolio by segment and contractual maturity at December 31, 2025:

In one year or less

After one year through five years

After five years through 15 years

After 15 years

Total

(Dollars in thousands)

Commercial business:

Commercial and industrial

Owner-occupied CRE

Non-owner occupied CRE

Total commercial business

Residential real estate

Real estate construction and land development:

Residential

Commercial and multifamily

Total real estate construction and land development

Consumer

Total

The following table presents the amortized cost of the loan portfolio by segment and interest rate type that are due after one year, at December 31, 2025:

Have predetermined interest rates (1)

Have floating or adjustable interest rates (1)

Total

(Dollars in thousands)

Commercial business:

Commercial and industrial

Owner-occupied CRE

Non-owner occupied CRE

Total commercial business

Residential real estate

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Have predetermined interest rates (1)

Have floating or adjustable interest rates (1)

Total

(Dollars in thousands)

Real estate construction and land development:

Residential

Commercial and multifamily

Total real estate construction and land development

Consumer

Total

(1) Includes $258.7 million of commercial business loans with floating or adjustable interest rates in which the Company entered into non-hedge interest rate swap contracts with the borrower and a third party. Under these derivative contract arrangements, the Company effectively earns a variable rate of interest based on the one-month SOFR plus a margin.

Loans classified as nonaccrual, performing modified loans and nonperforming assets

The following tables provide information about our nonaccrual loans, nonperforming assets and performing modified loans at the dates indicated:

Change

December 31, 2025

December 31, 2024

(Dollars in thousands)

Nonaccrual loans: (1)

Commercial business

Residential real estate

Real estate construction and land development

Consumer

Total nonaccrual loans

Accruing loans past due 90 days or more

Total nonperforming loans

Other real estate owned

Total nonperforming assets

Credit quality ratios:

Nonaccrual loans to loans receivable

Nonperforming loans to loans receivable

Nonperforming assets to total assets

(1) At December 31, 2025 and December 31, 2024, $2.4 million, and $1.0 million, respectively, of nonaccrual loans were guaranteed by government agencies.

Year Ended December 31,

Change

(Dollars in thousands)

Modified loans:

Commercial business

Real estate construction and land development

Consumer

Total performing modified loans

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The following table provides the changes in nonaccrual loans during the periods indicated:

Year Ended December 31,

Change

(Dollars in thousands)

Balance, beginning of period

Additions

Net principal payments, sales and transfers to accruing status

Payoffs

Charge-offs

Balance, end of period

Nonaccrual loans increased $16.9 million, or 414.2%, due primarily to the migration of two residential construction loans totaling $6.7 million, one $6.0 million commercial and multifamily construction loan, one $1.7 million commercial and industrial loan, and three non-owner occupied CRE loans totaling $3.9 million during the year ended December 31, 2025. These additions were partially offset by principal payments of $3.5 million including a $2.0 million pay down of one owner-occupied CRE loan.

Allowance for Credit Losses on Loans Overview

The following table provides information regarding changes in our ACL on loans for the years indicated:

At or For the Years Ended December 31,

(Dollars in thousands)

ACL on loans at the beginning of the period

Charge-offs:

Commercial business

Residential real estate

Consumer

Total charge-offs

Recoveries:

Commercial business

Residential real estate

Consumer

Total recoveries

Net (charge-offs) recoveries

Provision for credit losses on loans

ACL on loans at the end of period

Credit quality ratios:

ACL on loans to:

Loans receivable

Nonaccrual loans

Nonaccrual loans to loans receivable

Balances at the end of the period:

Loans receivable

Nonaccrual loans

Average balances outstanding during the period: (1)

Commercial business

Residential real estate

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At or For the Years Ended December 31,

(Dollars in thousands)

Real estate construction and land development

Consumer

Total

Net charge-offs (recoveries) during the period to average balances outstanding during the period:

Commercial business

Residential real estate

Real estate construction and land development

Consumer

Total

(1) Average balances exclude the ACL on loans and loans held for sale, but include loans classified as nonaccrual.

The ACL on loans to loans receivable increased to 1.10% at December 31, 2025, compared to 1.09% at December 31, 2024 primarily to an increase in the weighted average life of residential real estate and real estate construction and land development loans which increased the ACL as a percentage of loans in these segments.

The following table presents the ACL on loans by loan portfolio segment at the indicated dates:

December 31, 2025

December 31, 2024

ACL on Loans

ACL as a % of Loans in Loan Category

% of Loans in Loan Category to

Total Loans

ACL on Loans

ACL as a % of Loans in Loan Category

% of Loans in Loan Category to

Total Loans

(Dollars in thousands)

Commercial business

Residential real estate

Real estate construction and land development

Consumer

Total ACL on loans

Deposits Overview

The following table summarizes the Company's deposits at the dates indicated:

December 31, 2025

December 31, 2024

Change

Balance

% of Total

Balance

% of Total

(Dollars in thousands)

Noninterest demand deposits

Interest bearing demand deposits

Money market accounts

Savings accounts

Total non-maturity deposits

Certificates of deposit

Total deposits

Total deposits increased $235.6 million, or 4.1%, to $5.92 billion at December 31, 2025, compared to $5.68 billion at December 31, 2024. Non-maturity deposits increased by $275.0 million, or 5.8%, due primarily to a $168.0 million increase in money market accounts and a $163.1 million increase in interest bearing demand accounts from new accounts opened and transfers of funds from existing noninterest bearing demand deposit accounts into these higher yielding accounts. The decline in certificates of deposit of $39.4 million, or 4.0%, was due primarily to a decline in brokered deposits.

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Total deposits include uninsured deposits of approximately $2.43 billion and $2.27 billion at December 31, 2025 and 2024, respectively, calculated in accordance with FDIC guidelines. Uninsured deposits included $286.4 million and $267.8 million of fully collateralized deposits as of December 31, 2025 and December 31, 2024, respectively. The Bank does not hold any foreign deposits.

The following table provides the estimated uninsured portion of certificates of deposit that are in excess of the FDIC insurance limit, by remaining time until maturity at December 31, 2025, by account, with a maturity of:

(Dollars in thousands)

Three months or less

Over three months through six months

Over six months through twelve months

Over twelve months

Total

Stockholders' Equity Overview

The Company’s stockholders' equity to assets ratio was 13.2% and 12.2% at December 31, 2025 and 2024, respectively. The following table provides the changes to stockholders' equity during the periods indicated:

Year Ended December 31,

Change

(Dollars in thousands)

Balance, beginning of period

Net income

Dividends declared

Other comprehensive income, net of tax

Common stock repurchased

Stock-based compensation expense

Balance, end of period

Stockholders' equity increased for the year ended December 31, 2025 primarily as a result of net income and a decrease in other comprehensive loss, net of tax, which was positively impacted by the fair value of our investment securities available for sale and losses recognized on investment sales. Accumulated other comprehensive income (loss) has no effect on our regulatory capital ratios as the Company opted to exclude it from its common equity tier 1 capital. Cash dividends and stock repurchases partially offset the increase in stockholders' equity during the year ended December 31, 2025.

On April 24, 2024, the Board authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,734,492 shares in total. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will make any repurchases in the future. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds and other factors, including opportunities to deploy the Company's capital. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the stock repurchase program’s expiration, without any prior notice. The stock repurchase program authorized in April 2024 superseded the previous stock repurchase program authorized in March 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares. At the time the April 2024 stock repurchase program was authorized, 3,910 shares remained available for purchase under the March 2020 stock repurchase program.

The Company repurchased 193,690 and 1,051,760 shares of its common stock under the its stock repurchase plan during the years ended December 31, 2025 and December 31, 2024, respectively. As of December 31, 2025, 796,832 shares remained available for future repurchases under the April 2024 stock repurchase program. The Company also repurchased 42,098 and 31,850 shares during the years ended December 31, 2025 and December 31, 2024, respectively, which represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units.

Liquidity and Capital Resources

Liquidity

Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either our assets or liabilities.

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Asset liquidity sources consist of the repayments and maturities of loans, sales of loans, maturities of investment securities and sales of investment securities available for sale. These activities are generally included as investing activities in the Consolidated Statements of Cash Flows. Net cash provided by investing activities was $186.8 million during the year ended December 31, 2025. Investment securities sales and maturities, net of purchases provided $207.3 million in cash and decreases in loan balances provided $21.6 million of cash during the year ended December 31, 2025, offset partially by $63.3 million in capital contributions to tax credit partnerships.

Liquidity may also be affected by liabilities as a result of changes in deposits and borrowings. These activities are included in financing activities in the Consolidated Statements of Cash Flows. During the year ended December 31, 2025, financing activities used $165.6 million of funds resulting primarily from a decrease in short-term borrowings of $363.0 million, $32.6 million in dividend payments and $5.5 million in repurchases of common stock, offset partially by an increase in deposits of $235.6 million.

At December 31, 2025, we had outstanding loan commitments of $1.20 billion, primarily relating to undisbursed loans in process and unused credit lines as discussed in Note (18) Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Form 10-K. Loan commitments represent potential growth in the loan portfolio and lending activities. The current level of commitments is proportionally consistent with our historical experience and does not represent a departure from traditional operations. As of December 31, 2025, we had $22.8 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts. In addition, as of December 31, 2025, we had $25.3 million of commitments under operating lease agreements.

We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and also actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has been to acquire non-maturity deposits from our retail accounts, acquire noninterest bearing demand deposits from our commercial customers and use our borrowing availability to fund growth in assets. We may also acquire brokered deposits when the cost of funds is advantageous compared to other funding sources. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position.

We maintain credit facilities with the FHLB, which provide for advances that in the aggregate would equal the lesser of 45% of the Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock). At December 31, 2025, under these credit facilities based on pledged loan collateral, the Bank had $1.3 billion of available credit capacity. The Bank had $20.0 million in outstanding borrowings from the FHLB at December 31, 2025, compared to $383.0 million in outstanding borrowings from the FHLB at December 31, 2024. In addition, the Bank has access to the FRB Discount Window. Based on pledged investment collateral, the Bank had available lines of credit from the FRB of approximately $346.3 million as of December 31, 2025. The Bank had no outstanding borrowings from the FRB at December 31, 2025 and December 31, 2024. At December 31, 2025, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $145.0 million. No balances were outstanding under these agreements as of either December 31, 2025 or December 31, 2024. Availability of lines of credit is subject to federal funds balances available for loan and continued borrower eligibility. These lines of credit are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.

The following table summarizes the Company's available liquidity as of the dates indicated:

December 31,

December 31,

(Dollars in thousands)

On-balance sheet liquidity

Cash and cash equivalents

Unencumbered investment securities available for sale (1)

Total on-balance sheet liquidity

Off-balance sheet liquidity

FRB borrowing availability

FHLB borrowing availability (2)

Fed funds line borrowing availability with correspondent banks

Total off-balance sheet liquidity

Total available liquidity

(1) Investment securities available for sale at fair value.

(2) Includes FHLB borrowing availability of $1.31 billion at December 31, 2025 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.15 billion.

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Capital Resources

The Company pays dividends to its shareholders. The primary source of the Company's liquidity is dividends from the Bank to the Company. The Bank is subject to strict regulatory capital ratios, and may not be able to issue dividends to the Company in an amount sufficient to maintain our current or anticipated dividend practices. We expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board's discretion to modify or terminate this practice at any time and for any reason without prior notice. No assurances can be given that any dividends will be paid on our common stock in future periods or that, if paid, such dividends will not be reduced in amount. Our current quarterly common stock dividend rate is $0.24 per share, as approved by our Board on January 16, 2026. We believe this dividend rate per share enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2026 at this rate, our average total dividend paid each quarter would be approximately $8.2 million based on the current number of our outstanding shares (assuming no increases or decreases in the number of shares).

From time to time, our Board has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such stock repurchase plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. The Company's current stock repurchase program authorizes us to repurchase up to 5% of the Company's outstanding common shares, or 1,734,492 in total, of which 796,832 shares remained available for future repurchases as of December 31, 2025. The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted under Rule 10b5-1 of the SEC, price, general business and market conditions, and alternative investment opportunities. See Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for additional information relating to stock repurchases.

Management believes that the Company's capital sources are adequate to meet all of the Company's reasonably foreseeable short-term and intermediate-term requirements.

Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company's financial condition or results of operations. The Company considers its critical accounting estimates to be as follows:

ACL on Loans

Management's estimate of the ACL on loans relies on the identification, stratification and separate estimates of loss for both loans individually evaluated for loss and loans collectively evaluated for loss. The estimate of loss for loans collectively evaluated for loss in particular involves a significant level of estimation uncertainty due to its complexity and the quantity of relevant inputs, including: management's determination of baseline loss rate multipliers based on a third party forecast of economic conditions, estimates of the reasonable and supportable forecast period, estimates of the baseline loss rate lookback period, estimates of the reversion period from the reasonable and supportable forecast period to the baseline loss rate and estimates of the prepayment rate and related lookback period. Additionally, management considers other qualitative risk factors to further adjust the estimated ACL on loans through a qualitative allowance.

Management's estimates for these inputs are based on past events and current conditions, are inherently subjective and are susceptible to significant revision as new or different information becomes available. While management utilizes its best judgment and information available at the time of evaluation to recognize credit losses on loans, future additions to the allowance may be necessary based on declines in local and national economic conditions or other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL on loans. Such agencies may require the Company make adjustments to the allowance based on their interpretation of information available to them at the time of their examinations. Unanticipated changes in any of these inputs could have a significant impact on our financial condition and results of operations.

For additional information regarding the ACL on loans, its relation to the provision for credit losses and its risk related to asset quality and lending activity, see Item 1A. Risk Factors—The Company’s allowance for credit losses may prove to be insufficient to absorb potential losses in its loan portfolio, as well as Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (4) Allowance for Credit Losses on Loans of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data of this Form 10-K.

Goodwill

Goodwill is tested for impairment at the reporting unit level on an annual basis as of December 31 each year, and more frequently if events or circumstances indicate that there may be impairment. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount. If the fair value of the reporting unit is less than its carrying value, the difference is the amount of impairment and goodwill is written down to the fair value of the reporting unit. The Company has a single reporting unit.

In testing goodwill, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In this qualitative assessment, the Company evaluates events and circumstances which may include, but are not limited to: the general economic environment; banking industry and market

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conditions; a significant adverse change in legal factors; significant decline in our stock price and market capitalization; unanticipated competition; the testing for recoverability of a significant asset group within the reporting unit; and an adverse action or assessment by a regulator.

If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, the Company performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The determination of the fair value of a reporting unit is a subjective process that involves the use of estimates and judgments about economic and industry factors and the growth and earnings prospects of the Bank. Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations.

The Company performed its annual goodwill impairment test during the fourth quarter of 2025 which consisted of a qualitative assessment and determined that it is more likely than not that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired for the year ended December 31, 2025. Changes in the economic environment, operations of the reporting unit or other adverse events, could result in future impairment charges which could have a material adverse impact on the Company’s operating results.

For additional information regarding goodwill, see Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (6) Goodwill and Other Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.