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.
