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Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.04pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.03pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.05pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
against+1
insufficient+1
conflicting+1
stringent+1
inconsistent+1
Positive rising
greater+1
transparency+1
Risk Factors (Item 1A)
12,521 words
Item 1A. Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.
Risks Related to Macroeconomic Conditions
Adverse economic conditions in the market areas we serve could adversely impact our earnings and could increase the credit risk associated with our loan portfolio.
Our primary market areas are concentrated in North Carolina (the Asheville metropolitan area, the "Piedmont" region, Charlotte and Raleigh/Cary), South Carolina (Greenville and Charleston), East Tennessee (Kingsport/Johnson City and Morristown), Southwest Virginia (the Roanoke Valley) and Georgia (Greater Atlanta). economic conditions in our market areas can reduce our rate of growth, affect our customers’ ability to repay loans and impact our financial condition and earnings. General economic conditions, including inflation, and money supply fluctuations, also may affect our .
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
nonperforming+6
repossessed+2
declined+2
decline+1
Positive rising
gain+3
improved+2
improve+1
efficiencies+1
MD&A (Item 7)
11,517 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and notes thereto which are included in Item 8 of this Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding us as provided in this Form 10-K.
Financial Highlights
(Dollars in thousands)
December 31, 2025
December 31, 2024
December 31, 2023
June 30, 2023
Selected financial condition data
Total assets
Cash and cash equivalents
Certificates of deposit in other banks
Debt securities available for sale, at fair value
Loans, net of ACL and deferred loan fees and costs
A deterioration in economic conditions, particularly within our primary market areas, could result in the following consequences, among others, any of which could materially hurt our business:
• loan delinquencies, problem assets and foreclosures may increase;
• we may need to increase our ACL;
• the slowing of sales and/or the reduction in value of foreclosed assets;
• demand for our products and services may decline, possibly resulting in a decrease in our total loans or assets;
• collateral for loans may decline further in value, exposing us to increased risk of loss on existing loans and reducing customers’ borrowing power;
• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
• the amount of our deposits may decrease and our deposit mix may be adversely affected.
At December 31, 2025, the most significant portion of our loans located outside of our primary market areas were equipment finance loans, SBA loans and purchased HELOCs. As a result, our financial condition and results of operations are subject to general and regional economic conditions and the real estate conditions prevailing in the markets in which the underlying properties securing these loans are located, as well as the conditions in our primary market areas. If economic conditions or the real estate markets decline in the areas where the properties securing these loans are located, we may suffer decreased net income or losses associated with higher default rates and decreased collateral values on our existing portfolio. Further, because they are outside of our primary market areas, these loans can be more difficult to monitor than other loans.
A decline in economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Many of the loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in governmental rules or policies and natural disasters. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
A continued weak economic recovery or recessionary conditions could increase our level of nonperforming assets, lower real estate values and reduce demand for loans, which would result in increased loan losses and lower earnings.
Recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and higher unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur reduced earnings or even losses , and may adversely affect our capital, liquidity and financial condition.
Inflationary pressures and rising prices may adversely affect our results of operations and financial condition.
Inflation rose sharply starting at the end of 2021 to levels not seen in more than 40 years. This rise continued through the first half of 2024. From September through the end of 2024, the Federal Open Market Committee (“FOMC”) of the Federal Reserve reduced the targeted federal funds rate three times to a range of 4.25% to 4.50%, and further reduced the rate in September, October and December 2025 to a range of 3.50% to 3.75%; however, despite these actions, general market rates of interest remain elevated. Small- and medium-sized businesses may be impacted more during periods of high inflation, as they are not able to leverage economies of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.
Severe weather and other natural disasters, acts of war or terrorism, new public health issues or other adverse external events could harm our business.
Severe weather and other natural disasters, acts of war or terrorism, public health issues or other adverse external events could have a significant impact on our ability to conduct business. Such events could harm our operations through interference with communications, including the interruption or loss of our computer systems, which could prevent or impede us from gathering deposits, originating loans and processing and controlling the flow of business, as well as through the destruction of our facilities and our operational, financial and management information systems. There is no assurance that our business continuity and disaster recovery program can adequately mitigate these risks. Such events could also affect the stability of our deposit base, cause significant property damage, adversely affect our employees, adversely impact the values of collateral securing our loans and/or interfere with our borrowers’ abilities to repay their debt obligations to us.
Risks Related to Lending Activities
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2025, $633.5 million, or 17.7% of our total loan portfolio, was secured by liens on one-to-four family residential loans. These types of loans are generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the housing markets in which we operate may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or sales prices coupled with elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations.
A majority of our residential loans are “non-conforming” because they are adjustable rate mortgages that contain interest rate floors or do not satisfy credit or other requirements due to personal and financial reasons (e.g., divorce, bankruptcy, length of time employed, etc.), conforming loan limits (i.e., jumbo mortgages), and other requirements imposed by secondary market purchasers. Some of the borrowers on these loans have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. We believe that these loans satisfy a need in our local market areas. As a result, subject to market conditions, we intend to continue to originate these types of loans.
High loan-to-value ratios on a portion of our residential mortgage loan portfolio expose us to greater risk of loss.
Many of our one-to-four family loans and home equity lines of credit are secured by liens on mortgage properties that were originated at a higher loan-to-value or which now have a higher loan-to-value due to a decline in property value. Residential loans with high combined loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the sale proceeds. Further, a majority of our home equity lines of credit consist of second mortgage loans. For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property. For these reasons, we may experience higher rates of delinquency, default and loss.
Our non-owner occupied residential real estate loans may expose us to increased credit risk.
At December 31, 2025, $142.6 million, or 22.5% of our one-to-four family loans and 4.0% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depends primarily on the tenant’s continuing ability to pay rent to the property owner who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan outstanding with the Bank, which may expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied residential mortgage loan.
Our construction and land development loans have a higher risk of loss than residential or commercial real estate loans.
At December 31, 2025, construction and land development loans in our residential real estate loan portfolio were $45.6 million, or 1.3% of our total loan portfolio, and consisted primarily of construction to permanent loans to homeowners building a residence or developing lots in residential subdivisions intending to construct a residence within one year. Construction and land development loans in our commercial real estate loan portfolio at December 31, 2025, totaled $277.0 million, or 7.7% of our total loan portfolio, and consisted of loans to contractors and builders primarily to finance the construction of single and multifamily homes, subdivisions, as well as commercial properties. We originate these loans whether or not the collateral property underlying the loan is under contract for sale.
Construction and land development lending involves additional risks when compared with permanent residential or commercial real estate lending because funds are advanced based on an estimate of costs that will produce a future value at completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to accurately evaluate the total funds required to complete a project and the completed project loan-to-value ratio. Changes in demand for new housing or commercial buildings and higher than anticipated building costs may cause the actual results of this type of lending to vary significantly from those estimated. This type of lending also typically involves higher loan principal amounts and is often concentrated with loans to a small number of builders. For these reasons, a downturn in the housing or real estate market could increase loan delinquencies, defaults and foreclosures and significantly impair the value of the collateral underlying our construction and land development loans and our ability to sell the collateral upon foreclosure. Some of the builders we deal with have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.
In addition, during the term of some of our construction and land development loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the ultimate success of the project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. In addition, increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchaser's borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold, which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser or tenant for the finished project. At December 31, 2025, $161.0 million of our construction and land development loans were for speculative construction and none were classified as nonaccruing.
Loans on land under development or held for future construction as well as lot loans made to individuals for the future construction of a residence pose additional risk because the time period from financing to completion of a development project is significantly longer than for a traditional construction loan. This makes them more susceptible to declines in real estate values, declines in overall economic conditions, which may delay the development of the land, changes in the political landscape that could affect the permitted and intended use of the land being financed, and the potential illiquid nature of the collateral. In addition, during this long period of time from financing to completion, the collateral often does not generate any cash flow to support debt service.
Our non-owner occupied and owner occupied commercial real estate loans involve higher principal amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control of our borrowers.
While commercial real estate lending is potentially more profitable than single-family residential lending, it is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in these types of loans require a more detailed analysis at the time of loan underwriting and on an ongoing basis. At December 31, 2025, commercial real estate loans were $1.8 billion, or 49.8% of our total loan portfolio, including multifamily loans totaling $110.9 million or 3.1% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage loan. Repayment of these loans is dependent upon income being generated from the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Commercial real estate loans also expose a lender to greater credit risk than loans secured by one-to-four family residential real estate because commercial real estate typically cannot be sold as easily as residential real estate. In addition, many of our commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. At December 31, 2025, commercial real estate loans that were nonperforming totaled $17.4 million, or 39.8% of our total nonperforming loans.
A secondary market for many types of commercial real estate loans is not readily available, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans. As a result of these characteristics, if we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for one-to-four family residential loans because there are fewer potential purchasers of the collateral. Additionally, charge-offs on commercial real estate loans may be larger on a per loan basis than those incurred with our residential and consumer loan portfolios.
The level of our non-owner occupied commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of total capital, or (ii) total reported loans secured by multifamily and non-farm/non-residential properties, loans for construction, land development and other land and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Our total loans for multifamily, non-farm/non-residential, construction, land development and other land represented 209.9% of total risk-based capital at December 31, 2025. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or out of an abundance of caution). The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including Board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. While not exceeding the 300% of capital threshold, we have implemented policies and procedures with respect to our commercial real estate loan portfolio that we believe are consistent with this guidance. Bank regulators could, however, require us to implement additional policies and procedures pursuant to their interpretation of the guidance that may result in additional costs to us.
Our equipment finance and auto finance lending increases our exposure to lending risks.
At December 31, 2025, $311.4 million and $38.3 million, or 8.7% and 1.0% of our total loan portfolio, consisted of equipment finance and indirect auto finance loans, respectively. Equipment finance and indirect auto finance loans are inherently risky as they are secured by assets that depreciate rapidly. In some cases, repossessed collateral for transportation and construction loans, and manufacturing equipment for
equipment finance loans may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency may not warrant further substantial collection efforts against the borrower. Equipment finance loan collections depend on the borrower's continuing financial stability and, therefore, are more likely to be adversely affected by reduced cash flows of the borrower's business within certain industries.
Specific to the equipment finance portfolio, during the year ended December 31, 2023, our balances of both nonaccrual loans and net charge-offs increased significantly due to pressure in the over-the-road trucking sector, in particular loans to smaller operators. In response, we elected to cease further originations within the sector as of December 31, 2023 and have devoted additional attention towards resolving loans within the existing portfolio. As a reflection of those efforts, although net charge-offs within the portfolio remained elevated, the outstanding balance of over-the-road trucking loans has declined from $121.4 million at December 31, 2023 to $74.5 million at December 31, 2024 and $38.0 million as of December 31, 2025, respectively.
Lastly, as a result of our decision to cease indirect auto finance loan originations as of March 31, 2024, the outstanding balance of the portfolio has declined from $107.0 million at December 31, 2023 to $69.1 million at December 31, 2024 and $38.3 million at December 31, 2025, respectively. The collectability of the existing portfolio of auto loans depends on the borrower’s continuing financial stability, and therefore is more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy.
Repayment of our municipal leases is dependent on fire departments receiving tax revenues from counties/municipalities.
At December 31, 2025, municipal leases were $166.4 million, or 4.7% of our total loan portfolio. We offer ground and equipment lease financing to fire departments located throughout North Carolina and, to a lesser extent, South Carolina and Virginia. Repayment of our municipal leases is often dependent on the tax revenues collected by the county/municipality on behalf of the fire department. Although a municipal lease does not constitute a general obligation of the county/municipality for which the county/municipality's taxing power is pledged, a municipal lease is ordinarily backed by the county/municipality's covenant to budget for, appropriate and pay the tax revenues to the fire department. However, certain municipal leases contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for that purpose on a yearly basis. In the case of a "non-appropriation" lease, our ability to recover under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property, without recourse to the general credit of the lessee, and disposition or releasing of the property might prove difficult. At December 31, 2025, $30.6 million of our municipal leases contained a non-appropriation clause.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.
Lending money is a substantial part of our business, and each 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:
• cash flow of the borrower and/or the project being financed;
• in the case of a collateralized loan, changes and uncertainties as to the future value of the collateral;
• the duration of the loan;
• the character and creditworthiness of a particular borrower; and
• changes in economic and industry conditions.
We maintain an ACL, established through a provision for expected losses charged against income, which we believe is appropriate to provide for lifetime ECLs in our loan portfolio. The amount of this ACL is determined by our management through periodic reviews and consideration of several factors, including, but not limited to:
• our reserve on loans collectively evaluated, based on peer loss experience, which management believes provides the best basis for its assessment of ECLs, and consideration of the effects of past events, current conditions and reasonable and supportable forecasts on the collectability of the loan portfolio;
• a qualitative reserve adjustment based on factors that are relevant within the qualitative framework; and
• our reserve on individually evaluated loans that no longer share similar risk characteristics, which is based on a DCF analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of "collateral dependent."
Our determination of the appropriate level of the ACL 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 over time. If our estimates are incorrect, the ACL may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need for increases in our ACL. Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our ACL may be insufficient to absorb losses without significant additional provisions.
In addition, bank regulatory agencies periodically review our ACL and may require an increase in the provision for credit losses or the recognition of further loan charge-offs based on judgments different than those of management. If charge-offs in future periods exceed the ACL, we may need additional provisions to increase the ACL. Any increases in the ACL will result in a decrease in net income and possibly capital and may have a material adverse effect on our financial condition and results of operations.
If our nonperforming assets increase, our earnings will be adversely affected.
Our nonperforming assets (which consist of nonaccruing loans and repossessed assets) were $44.4 million, or 0.98% of total assets, at December 31, 2025, compared to $28.8 million, or 0.63% of total assets, at December 31, 2024, respectively. Our nonperforming assets adversely affect our net income in various ways:
• we record interest income only on a cash basis for nonaccrual loans and any nonperforming debt securities, and do not record interest income for repossessed assets;
• we must provide for ECLs through a current period charge to the provision for credit losses;
• noninterest expense increases when we write down the value of repossessed assets to reflect changing market values or recognize credit impairment on nonperforming debt securities;
• there are legal fees associated with the resolution of problem assets, as well as carrying costs such as taxes, insurance and maintenance fees related to our repossessed assets; and
• the resolution of nonperforming assets requires the active involvement of management, a distraction from more profitable activity.
If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.
If our repossessed assets are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the property repossessed, and at certain other times during the asset’s holding period. Our net book value in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s net book value over its fair value. If our valuation process is incorrect, or if property values decline, the fair value of our repossessed assets may not be sufficient to recover our carrying value in such assets, resulting in the need for additional charge-offs. Significant charge-offs to our repossessed assets could have a material adverse effect on our financial condition and results of operations.
In addition, bank regulators periodically review our repossessed assets and may require us to recognize further charge-offs. Any increase in our write-downs may have a material adverse effect on our financial condition, liquidity and results of operations.
Risks Related to Market Interest Rates
Fluctuating interest rates can adversely affect our profitability.
Our earnings and cash flows are largely dependent upon our net interest income, which is the difference, or spread, between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings and other interest-bearing liabilities. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. In March 2020, in response to the COVID-19 pandemic, the FOMC of the Federal Reserve reduced the targeted federal funds rate by 150 basis points to a range of 0.00% to 0.25%. The reduction in the targeted federal funds rate resulted in a decline in overall interest rates which negatively impacted our net interest income. Starting in March 2022, the FOMC increased the targeted federal funds rate 11 separate times, raising the rate by 525 basis points to a range of 5.25% to 5.50%, before decreasing the rate three times in 2024 to a range of 4.25% to 4.50% and three additional times in 2025 to a range of 3.50% to 3.75%. If the FOMC increases the targeted federal funds rate, overall interest rates will likely rise, which may negatively impact both the housing market, by reducing refinancing activity and new home purchases, and the U.S. economy. In addition, deflationary pressures, while possibly lowering our operational costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans, which could negatively affect our financial performance.
We principally manage interest rate risk by managing our volume and mix of earning assets and funding liabilities. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but also (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, which could negatively impact stockholders' equity and our ability to realize gains from the sale of such assets; (iii) our ability to obtain and retain deposits in competition with other available investment alternatives; (iv) the ability of our borrowers to repay adjustable or variable rate loans; and (v) the average duration of our debt securities portfolio and other interest-earning assets.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations (generally, if rates increase) or by reducing our margins and profitability (generally, if rates decrease). Our net interest margin is the difference between the yield we earn on our assets and the rate we pay for deposits and our other sources of funding. Changes in interest rates, up or down, could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. When we anticipate a rising-rate environment, we work to adjust our assets to be shorter in duration than our liabilities, so that they may adjust faster in response to changes in interest rates. As a result, when interest rates decline, the yield we earn on our assets may decline faster than the rate we pay on funding, causing our net interest margin to contract until the interest rates on interest-bearing liabilities catch up. When we anticipate a declining-rate environment, we work to adjust our liabilities to be shorter in duration than our assets, so that they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yields on interest-earning assets catch up. Changes in the slope of the “yield curve,” or the spread between short-term and long-term interest rates, could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. As our liabilities tend to be shorter in duration than our assets in periods where we anticipate a declining-rate environment, when the yield curve flattens or even inverts, we will experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.
A sustained increase in market interest rates, such as the increases experienced during 2022 and 2023, could adversely affect our earnings. A significant portion of our loans have fixed interest rates and longer terms than our deposits and borrowings. As is the case with many other financial institutions, our emphasis on increasing the development of core deposits, those deposits bearing no or a relatively low interest rate with no stated maturity date, resulted in our having a significant amount of these deposits, which have a shorter duration than our assets. At
December 31, 2025, we had $882.2 million in certificates of deposit that mature within one year and $2.8 billion in checking, savings and money market accounts with no stated maturity. We have incurred and may continue to incur a higher cost of funds to retain these deposits in a rising interest rate environment or one that is maintained for a significant period of time at a historically high interest rate, as well as supplementing any runoff with other types of borrowings also at a higher cost of funds. Our net interest income has been and could continue to be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans and other investments.
In addition, a substantial amount of our loans have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment. Further, a significant portion of our adjustable rate loans have interest rate floors, below which the loan’s contractual interest rate may not adjust. As of December 31, 2025, our loans with interest rate floors totaled approximately $744.9 million, or 20.8% of our total loan portfolio, and had a weighted average floor rate of 5.03%, of which $155.1 million were at their floor rate. The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance these loans during such periods. Also, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates, which could have a material adverse effect on our results of operations.
Changes in interest rates also affect the value of our interest-earning assets and in particular our debt securities portfolio. Generally, the fair values of fixed-rate debt securities fluctuate inversely with changes in interest rates. Unrealized gains and losses on debt securities available for sale are reported as a separate component of stockholders' equity, net of tax. Decreases in the fair value of debt securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our consolidated balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk management.
We may incur losses on our securities portfolio due to factors beyond our control, including changes in interest rates.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by, or other adverse events affecting the issuer or the underlying securities, and changes in market interest rates and instability in the capital markets. Any of these factors, among others, and any changes to the Company's intent or ability to hold the securities until such securities recover in value could cause impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have an adverse effect on our business, financial condition and results of operations. The process for determining whether the decline in fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security to assess the probability of receiving all contractual principal and interest payments on the security. Furthermore, there can be no assurance that the declines in market value will not result in impairments of these assets and lead to accounting charges that could have a material adverse effect on our net income and capital levels. Any impairment that is not credit-related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. As of December 31, 2025, an ACL was not deemed necessary by the Company for credit-related impairment on our securities portfolio.
Changes in the programs offered by GSEs, our ability to qualify for such programs, and changes in interest rates may affect our gains on sale of loans held for sale, which could negatively impact our noninterest income.
Our mortgage banking and SBA lending operations provide a significant portion of our noninterest income. We generate mortgage revenues primarily from gains on the sale of single-family residential loans pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and other investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. We also generate commercial business loan revenues from gains on the sale of the guaranteed portion of SBA and business and industry loans pursuant to programs currently offered by the SBA and USDA B&I. Any future changes in these programs, significant impairment of our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities could, in turn, result in a lower volume of corresponding loan originations or increase other administrative costs, which may materially adversely affect our results of operations.
Mortgage production, especially refinancing, generally declines in rising interest rate environments, resulting in fewer loans that are available to be sold to investors. When interest rates rise, or even if they do not, there can be no assurance that our mortgage production will continue at current levels. The profitability of our mortgage banking operations depends in large part upon our ability to aggregate a high volume of loans and sell them in the secondary market at a gain. Thus, in addition to the interest rate environment, our mortgage business is dependent upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans into that market. Similar to mortgage production, our SBA and USDA B&I operations are likewise dependent upon these two factors. The loans in our held-for-sale portfolio are carried at either fair market value or the lower of cost or fair market value less estimated costs to sell, with changes recognized in our statement of operations. Carrying the loans at fair value may also increase the volatility in our earnings.
In addition, our results of operations are affected by the amount of noninterest expense associated with mortgage banking and SBA lending activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. Also, although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase.
Risks Related to Acquisition Activities
Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
We have implemented a strategy of supplementing organic growth by acquiring other financial institutions or other businesses that we believe will help us fulfill our strategic objectives and enhance our earnings; however, there are risks associated with this strategy, including the following:
• we may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected.
• prices at which future acquisitions can be made may not be acceptable to us.
• our growth initiatives may require us to recruit experienced personnel to assist in such initiatives. The failure to identify and retain such personnel would place significant limitations on our ability to execute our growth strategy.
• our strategic efforts may divert resources or management’s attention from ongoing business operations and may subject us to additional regulatory scrutiny.
• the acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time-consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions to the extent expected or within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful.
• to finance a future acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing stockholders.
• we have completed six acquisitions during the past 13 years that enhanced our rate of growth. We may not be able to continue to maintain our past rate of growth or to grow at all in the future, even if we do have additional acquisitions.
• we expect our net income will increase following our acquisitions; however, we also expect our general and administrative expenses, and consequently our efficiency rates, will also increase. Ultimately, we would expect our efficiency ratio to improve; however, if we are not successful in our integration process, this may not occur, and our acquisitions or branching activities may not be accretive to earnings in the short or long-term.
The required accounting treatment of loans we acquire through acquisitions, including purchased financial assets with credit deterioration, could result in higher net interest margins and interest income initially and lower net interest margins and interest income in future periods.
Under US GAAP, we are required to record loans acquired through acquisitions, including PCD, at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances as of the acquisition date. Actual performance could differ from management's initial estimates. If these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our net interest margins may increase due to the discount. We expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and the discount decreases, and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in lower net interest margins and lower interest income in future periods.
We may experience future goodwill impairment, which could reduce our earnings.
Our annual goodwill impairment test did not identify any impairment for the year ended December 31, 2025. In testing goodwill for impairment, the Company has the option to assess either qualitative or quantitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform a quantitative impairment test; otherwise, no further analysis is required. Under the quantitative impairment test, the evaluation involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill is deemed to exist, we would be required to write down our goodwill which would adversely affect our results of operations, perhaps materially; however, it would have no impact on our liquidity, operations or regulatory capital.
Risks Related to Regulation
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company’s stockholders. These regulations may sometimes impose significant limitations on operations. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s ACL. Bank regulators can also impose conditions on the approval of merger and acquisition transactions.
The significant federal and state banking regulations that affect us are described under the heading "Business – How We Are Regulated” in Item 1 of this Form 10-K. These regulations, along with the currently existing tax, accounting, securities, insurance and monetary laws, regulations, rules, standards, policies and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator’s interpretation of a law or regulation, may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations. Additionally, actions by regulatory agencies or significant
litigationagainst us may lead to penalties that materially affect us. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These accounting changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations as could our interpretation of those changes.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions or other activities.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent them from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions or other activities. Banking institutions can receive large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventingviolations of these laws and regulations.
Our framework for managing risks may not be effective in mitigating risk and loss to us .
We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk and reputational risk, among others. We also maintain a compliance program to identify, measure, assess and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could sufferunexpectedlosses, which could have a material adverse effect on our financial condition and results of operations.
Risks Related to Cybersecurity, Data and Fraud
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the conduct of our business, as we use these systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Further, our cardholders use their debit and credit cards to make purchases from third parties or through third-party processing services. As such, we are subject to risk from data breaches of a third party’s information systems or their payment processors. Such a data security breach could compromise our account information. The payment methods that we offer also subject us to potential fraud and theft by criminals who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploitweaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for losses associated with reimbursing our clients for fraudulent transactions on clients’ card accounts, as well as costs incurred by payment card issuing banks and other third-parties. We may also be subject to fines and higher transaction fees, and our ability to accept or facilitate certain types of payments may be impaired. In addition, we may incur other costs related to data security breaches, such as replacing cards associated with compromised card accounts. Our customers could also lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs.
Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’ confidential information, including employees. The Company is continuously working to install new, and upgrade its existing, information technology systems and provide employee awareness training around phishing, malware and other cyber risks to further protect the Company against such risks and security breaches.
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 cyber criminals targeting commercial bank accounts. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. Insider or employee cyber and security threats are increasingly a concern for companies, including ours. We are not aware that we have experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber-security breach or other act; however, some of our clients may have been affected by these breaches, which could increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise
of our security could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our security measures may not protect us from system failures or interruptions of our own systems or those of our third-party vendors . While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While the Company selects third-party vendors carefully, it does not control their actions. If our third-party providers encounter difficulties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks or security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third-parties on which we rely. We may not be insured against all types of losses as a result of third-party failures, and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
Our current and future use of artificial intelligence ("AI") and other emerging technologies may create additional risks. The increasing adoption of AI in financial services presents significant opportunities but also introduces a range of risks that could impact our operations, regulatory compliance and customer trust. AI introduces model risk, where flawed algorithms or biased data could result in inaccurate credit decisions, compliance violations or discriminatory outcomes in lending or customer service. Cybersecurity threats, such as data breaches, adversarial attacks and data poisoning, pose significant challenges, particularly as these systems handle large volumes of sensitive customer information. Additionally, the opaque nature of some AI models, often referred to as "black-box" systems, raises regulatory compliance concerns, as regulators increasingly require transparency and explainability in AI-driven decision-making.
Operational risks also arise from potential system failures, over-reliance on AI and integration challenges with existing infrastructure. Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring and customer support. Ethical and reputational risks, including unintended consequences or perceived unfairness in AI-driven decisions, may erode customer trust and expose us to regulatory scrutiny.
To mitigate these risks requires a robust governance framework, regular testing and auditing of AI models, and strong human oversight. Investments in cybersecurity, data privacy protections and employee training are critical to manage these risks.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes .
As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breachesagainst our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent or reduce the severity of such losses, there can be no assurance that such losses will not occur.
Risks Related to Our Business and Industry Generally
Ineffective liquidity management could adversely affect our financial results and condition.
Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans or debt securities and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Georgia, North Carolina, South Carolina, Tennessee and/or Virginia markets, which is where the majority of our loans are concentrated, or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets. In particular, our liquidity position could be significantly constrained if we are unable to access funds from the FHLB Atlanta or other wholesale funding sources, or if adequate financing is not available at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources, our revenues may not increase proportionately to cover our costs. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material
adverse effect on our business, financial condition and results of operations. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” of this Form 10-K.
Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality’s fiscal policies and cash flow needs.
Competition with other financial institutions could adversely affect our profitability.
Although we consider ourselves competitive in our market areas, we face intense competition in both making loans and attracting deposits. Price competition for loans and deposits might result in our earning less on our loans and paying more on our deposits, which reduces net interest income. Some of the institutions with which we compete have substantially greater resources than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability will depend upon our continued ability to compete successfully in our market areas.
Our ability to retain and recruit key management personnel and bankers is critical to the success of our business strategy and any failure to do so could impair our customer relationships and adversely affect our business and results of operations.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Bank conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. Our ability to retain and grow our loans, deposits and fee income depends upon the business generation capabilities, reputation and relationship management skills of our bankers. If we were to lose the services of any of our bankers, including successful bankers employed by banks that we may acquire, to a new or existing competitor, or otherwise, we may not be able to retain valuable relationships and some of our customers could choose to use the services of a competitor instead of our services. In addition, our success has been and continues to be highly dependent upon the services of our directors, several of whom have reached or are nearing the mandatory retirement age under our bylaws, and we may not be able to identify and attract suitable candidates to replace these directors.
The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we will not be able to effectively compete.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success will depend, in part, on our ability to keep pace with technological changes and to use technology to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations. We expect that we will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological changes. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations may be adversely affected .
We rely on other companies to provide key components of our business infrastructure.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to the risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of a vendor’s performance, including aspects which the vendor delegates to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our business and clients could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.
As a community bank, maintaining our reputation in our market areas is critical to the success of our business, and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable aspects of our business. A key component of our business strategy is to utilize our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees or customers, with or without merit, may result in the loss of customers, investors and employees, costlylitigation, a decline in revenues and increased governmental regulation.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital, if needed, on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
We rely on dividends from the Bank for substantially all of our revenue at the holding company level.
We are an entity separate and distinct from our principal subsidiary, the Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from the Bank to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on and repurchase our common stock. The Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock or continue stock repurchases.
Scrutiny and evolving expectations from customers, regulators, investors and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
In recent years, companies have faced scrutiny from customers, regulators, investors and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosures. Investor advocacy groups, investment funds and influential investors are also focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. ESG-related compliance costs could increase our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners and our stock price.
Recent changes in the regulatory landscape and shifting federal priorities have moved toward a reduction in emphasis on certain ESG priorities, particularly around climate change and diversity, equity and inclusion (“DEI”). This shift has led to a rollback of regulations that mandate specific disclosures and operational practices in these areas. However, some stakeholder groups continue to demand greatertransparency and action, resulting in a complex and potentially conflicting environment for companies. If regulatory enforcement of ESG-related policies becomes less stringent, companies may face reputational risks if their practices are seen as insufficient or inconsistent with broader societal expectations, especially related to DEI and environmental stewardship. As a result, navigating this evolving regulatory and public opinion landscape may require us to balance compliance with regulatory requirements against maintaining investor, customer, and stakeholder trust.
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Selected operations data
Total interest and dividend income
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Net interest income after provision for credit losses
Service charges and fees on deposit accounts
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At or For the Year Ended December 31,
At or For the Six Months Ended December 31, 2023
At or For the Year Ended
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Return on assets (ratio of net income to average total assets) (1)
Return on equity (ratio of net income to average equity) (1)
Yield on earning assets (1)
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Average interest rate spread (1)
Net interest margin (1)(2)
Average interest-earning assets to average interest-bearing liabilities
Noninterest expense to average total assets (1)
Efficiency ratio
Efficiency ratio – adjusted (3)
At or For the Year Ended December 31,
At or For the Six Months Ended December 31, 2023
At or For the Year Ended
June 30, 2023
Asset quality ratios
Nonperforming assets to total assets (4)
Nonperforming loans to total loans (4)
Total classified assets to total assets
Allowance for credit losses to nonperforming loans (4)
Allowance for credit losses to total loans
Net charge-offs to average loans (1)
Capital ratios
Equity to total assets at end of period
Tangible equity to total tangible assets (3)
Average equity to average assets
Dividend payout ratio
Dividends declared per common share
(1) Ratio is annualized for the six months ended December 31, 2023.
(2) Net interest income divided by average interest-earning assets.
(3) See "GAAP Reconciliation of Non-GAAP Financial Measures" section below for additional details.
(4) Nonperforming assets and loans include nonaccruing loans and repossessed assets. There were no accruing loans more than 90 days past due at the dates indicated. At December 31, 2025, $10.1 million, or 23.2%, of nonaccruing loans were current on their loan payments.
GAAP Reconciliation of Non-GAAP Financial Measures
We believe the non-GAAP financial measures included above provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with US GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. The following reconciliation tables provide detailed analyses of these non-GAAP financial measures.
Set forth below is a reconciliation to US GAAP of our efficiency ratio:
Year Ended December 31,
Six Months Ended December 31, 2023
Year Ended June 30, 2023
(Dollars in thousands)
Noninterest expense
Less: merger-related expenses
Less: contract renewal consulting fee
Noninterest expense – adjusted
Net interest income
Plus: tax equivalent adjustment
Plus: noninterest income
Less: BOLI death benefit proceeds in excess of cash surrender value
Less: gain on sale of branches
Less: gain on sale of available for sale and equity securities
Less: gain (loss) on sale of premises and equipment
Net interest income plus noninterest income – adjusted
Efficiency ratio
Efficiency ratio – adjusted
Set forth below is a reconciliation to US GAAP of tangible book value and tangible book value per share:
(Dollars in thousands, except per share data)
December 31, 2025
December 31, 2024
December 31, 2023
June 30, 2023
Total stockholders' equity
Less: goodwill, core deposit intangibles, net of taxes
Tangible book value
Common shares outstanding
Book value per share
Tangible book value per share
Set forth below is a reconciliation to US GAAP of tangible equity to tangible assets:
(Dollars in thousands)
December 31, 2025
December 31, 2024
December 31, 2023
June 30, 2023
Tangible equity (1)
Total assets
Less: goodwill, core deposit intangibles, net of taxes
Total tangible assets
Tangible equity to tangible assets
(1) Tangible equity (or tangible book value) is equal to total stockholders' equity less goodwill and core deposit intangibles, net of related deferred tax liabilities.
Overview
The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2025 and 2024 and results of operations for the years ended December 31, 2025 and 2024. Refer to "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the SEC on March 13, 2025 (the “2024 Form 10-K") for a discussion and analysis of the more significant factors that affected periods prior to the year ended December 31, 2025.
Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services including service charges and fees on deposit accounts, loan income and fees, gains on sale of loans held for sale, BOLI income and operating lease income.
An offset to net interest income is the provision for credit losses to establish the ACL at a level that provides for ECLs inherent in our loan portfolio, off balance sheet commitments and available for sale debt securities. See "Note 1 – Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for further discussion.
Our noninterest expenses consist primarily of salaries and employee benefits, occupancy expenses, computer services, operating lease depreciation, marketing and FDIC deposit insurance premiums. Salaries and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, property taxes, depreciation charges, maintenance and costs of utilities.
Critical Accounting Policies and Estimates
Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances which could include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. The following represents our critical accounting policy:
Allowance for Credit Losses, or ACL, on Loans. The ACL on loans held for investment reflects our estimate of credit losses that will result from the inability of our borrowers to make required loan payments. We charge off loans against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized. We use a systematic methodology to determine our ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL on loans held for investment is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. The estimate of our ACL on loans held for investment involves a high degree of judgment including consideration of the effects of past events, current conditions and reasonable and supportable forecasts on the collectability of the loan portfolio. We recognize in net income the amount needed to adjust the ACL on loans held for investment and certain off-balance sheet credit exposures for management’s current estimate of ECLs. Our ACL on loans held for investment is calculated using collectively evaluated and individually evaluated loans.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see “Note 1 – Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements in Item 8 of this report on Form 10-K for further discussion.
Item(s) of Note – Year Ended December 31, 2025
On May 23, 2025, the Company completed the sale of the Bank's two branches located in Knoxville, Tennessee, to a third party financial institution. Through the transaction, the Company sold $34.3 million of deposits along with $6.3 million in branch premises and equipment, while HomeTrust retained all loans associated with the branches. The Company recorded a $1.4 million pre-tax gain associated with the transaction. The transaction aligns with the Company's strategic plan to tighten its geographic footprint, improve branch efficiencies, and allocate capital to support long-term growth in other core markets.
As noted in the "Item(s) of Note – Year Ended December 31, 2024" section which follows, in an effort to assist customers in their post-Hurricane Helene recovery and clean-up efforts, at the end of the prior calendar year we granted payment deferrals of up to six months to provide short-term relief to impacted customers. The outstanding balance of these deferrals declined from $136.0 million at December 31, 2024 to $318,000 at December 31, 2025. To date, $165,000 in charge-offs have been recognized which were directly related to Hurricane Helene.
Item(s) of Note – Year Ended December 31, 2024
In January 2024, the Company announced the decision to cease indirect auto originations and right-size our mortgage banking line of business. These changes are expected to result in annual cost savings of $800,000.
On September 26, 2024, Hurricane Helene made landfall causing significant property damage across certain parts of the Company's market areas, particularly in Western North Carolina. In an effort to assist customers in their post-Hurricane Helene recovery and clean-up efforts, in the fourth quarter we granted payment deferrals of up to six months to provide short-term relief to impacted customers. The outstanding balance of these deferrals was $136.0 million at December 31, 2024. As of this same date, we retained a $2.2 million qualitative allocation in our ACL for the potential impact of the storm upon our loan portfolio which had been established in the third quarter.
In December 2024, the Company paid a $3.0 million fee to a consulting firm who assisted in negotiating the multiyear renewal of our largest core IT processing contract. The renewal will result both in future cost savings and the expansion of our technology solutions, supporting the Company's growth initiatives and digital strategies all with the goal of enhancing the customer experience.
Comparison of Results of Operations for the Years Ended December 31 , 2025 and December 31, 2024
Net Income. Net income totaled $64.4 million, or $3.72 per diluted share, for the year ended December 31, 2025 compared to $54.8 million, or $3.20 per diluted share, for the year ended December 31, 2024, an increase of $9.6 million, or 17.4%. The results for the year ended December 31, 2025 compared to the prior year were positively impacted by a $7.2 million increase in net interest income, a $2.9 million increase in noninterest income, a $607,000 decrease in the provision for credit losses and a $321,000 decrease in noninterest expense. Details of the changes in the various components of net income are further discussed below.
Net Interest Income. The following table presents the distribution of average assets, liabilities and equity, as well as interest income earned on average interest-earning assets and interest expense paid on average interest-bearing liabilities. All average balances are daily average balances. Nonaccruing loans have been included in the table as loans carrying a zero yield.
Years Ended December 31,
(Dollars in thousands)
Average
Balance
Outstanding
Interest
Earned /
Paid
Yield /
Rate
Average
Balance
Outstanding
Interest
Earned /
Paid
Yield /
Rate
Assets
Interest-earning assets
Loans receivable (1)
Debt securities available for sale
Other interest-earning assets (2)
Total interest-earning assets
Other assets
Total assets
Liabilities and equity
Interest-bearing liabilities
Interest-bearing checking accounts
Money market accounts
Savings accounts
Certificate accounts
Total interest-bearing deposits
Junior subordinated debt
Borrowings
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Net earning assets
Average interest-earning assets to average interest-bearing liabilities
Non-tax-equivalent
Net interest income
Interest rate spread
Net interest margin (3)
Tax-equivalent (4)
Net interest income
Interest rate spread
Net interest margin (3)
(1) Average loans receivable balances include loans held for sale and nonaccruing loans.
(2) Average other interest-earning assets consist of FRB stock, FHLB stock, SBIC investments and deposits in other banks.
(3) Net interest income divided by average interest-earning assets.
(4) Tax-equivalent results include adjustments to interest income of $1,737 and $1,460 for the years ended December 31, 2025 and 2024, respectively, calculated based on a combined federal and state tax rate of 24%.
Total interest and dividend income for the year ended December 31, 2025 decreased $5.5 million, or 2.1%, compared to the year ended December 31, 2024. Regarding the components of this income, loan interest income decreased $7.2 million, or 2.9%, primarily due to an overall decrease in average loan balances and the impact of decreases in the federal funds rate upon loan yields, partially offset by a $1.1 million increase in interest income on other investments and interest-bearing accounts, and a $661,000 increase in interest income on debt securities available for sale. Accretion income on acquired loans of $2.2 million and $3.2 million was recognized during the same periods, respectively, and was included in loan interest income.
Total interest expense for the year ended December 31, 2025 decreased $12.7 million, or 13.8%, compared to the year ended December 31, 2024, the result of a $9.8 million, or 11.2%, decrease in interest expense on deposits and a $2.8 million, or 73.8%, decrease in interest expense on other borrowings. The decrease in interest expense on deposits can primarily be traced to a decrease in the average cost of funds, while the decrease in interest expense on other borrowings was primarily the result of a decline in average borrowings outstanding.
The following table shows the effects that changes in average balances (volume), including differences in the number of days in the periods compared, and average interest rates (rate) had on the interest earned on interest-earning assets and interest paid on interest-bearing liabilities:
Increase / (Decrease)
Due to
Total
Increase /
(Decrease)
(Dollars in thousands)
Volume
Rate
Interest-earning assets
Loans receivable
Debt securities available for sale
Other interest-earning assets
Total interest-earning assets
Interest-bearing liabilities
Interest-bearing checking accounts
Money market accounts
Savings accounts
Certificate accounts
Junior subordinated debt
Borrowings
Total interest-bearing liabilities
Increase in net interest income
Provision for Credit Losses. The provision for credit losses is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under the CECL model. The determination of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to "Note 1 – Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for detailed discussion regarding ACL methodologies for available for sale debt securities, loans held for investment and unfunded commitments. The following table presents a breakdown of the components of the provision for credit losses:
Years Ended December 31,
(Dollars in thousands)
$ Change
% Change
Provision for credit losses
Loans
Off-balance sheet credit exposure
Total provision for credit losses
For the year ended December 31 , 2025 , the "loans" portion of the provision for credit losses was the result of the following, offset by net charge-offs of $9.3 million during the period:
• $2.5 million benefit driven by changes in the loan mix.
• $1.5 million benefit due to changes in the projected economic forecast, specifically the national unemployment rate, and changes in qualitative adjustments. Of note, in the quarter ended June 30, 2025, we released the $2.2 million qualitative allocation previously established in the prior year for the potential impact of Hurricane Helene on our loan portfolio. Any residual impact of the Hurricane is believed to have now been reflected elsewhere within the ACL calculation.
• $0.2 million increase in specific reserves on individually evaluated credits.
For the year ended December 31 , 2024 , the "loans" portion of the provision for credit losses was the result of the following, offset by net charge-offs of $10.8 million during the period:
• $1.6 million benefit driven by changes in the loan mix.
• $0.7 million benefit due to changes in the projected economic forecast, specifically the national unemployment rate, and changes in qualitative adjustments. Included in this change was the addition of a $2.2 million qualitative allocation in the quarter ended September 30, 2024 for the potential impact of Hurricane Helene on our loan portfolio.
• $1.0 million decrease in specific reserves on individually evaluated credits.
For the years ended December 31 , 2025 and December 31 , 2024 , the amounts recorded for off-balance sheet credit exposure were the result of changes in the balance of loan commitments, loan mix and the projected economic forecast as outlined above.
See further discussion in the "Comparison of Financial Condition at December 31 , 2025 and December 31 , 2024 – Allowance for Credit Losses on Loans" section below.
Noninterest Income. Noninterest income for the year ended December 31, 2025 increased $2.9 million, or 8.6%, when compared to last year. Changes in the components of noninterest income are discussed below:
Years Ended December 31,
(Dollars in thousands)
$ Change
% Change
Noninterest income
Service charges and fees on deposit accounts
Loan income and fees
Gain on sale of loans held for sale
BOLI income
Operating lease income
Gain on sale of branches
Gain (loss) on sale of premises and equipment
Other
Total noninterest income
• Gain on sale of loans held for sale: The increase was primarily driven by growth in the volume of HELOCs and residential mortgage loans sold during the current period, partially offset by a reduction in the sales volume of the guaranteed portion of SBA commercial loans. During the year ended December 31, 2025, there were $257.2 million of HELOCs sold with gains of $2.4 million compared to $95.4 million sold with gains of $887,000 in the prior year. There were $113.5 million of residential mortgage loans originated for sale which were sold with gains of $2.4 million compared to $82.0 million sold with gains of $1.4 million in the prior year. There were $40.4 million of sales of the guaranteed portion of SBA commercial loans with gains of $3.0 million compared to $48.7 million sold with gains of $3.9 million during the prior year. Lastly, our hedging of mandatory commitments on the residential mortgage loan pipeline resulted in a net loss of $131,000 for the year ended December 31, 2025 versus a net gain of $81,000 in the prior year.
• BOLI income: The decrease was due to a $1.0 million decrease in tax-free gains on death benefit proceeds in excess of the cash surrender value of the policies year-over-year, partially offset by higher yielding policies as a result of restructuring the portfolio at the end of calendar year 2023.
• Gain on sale of branches: During the current year we completed the sale of our two Knoxville, Tennessee branches, recognizing a gain of $1.4 million in the current year, with no similar activity occurring in the prior year.
Noninterest Expense. Noninterest expense for the year ended December 31, 2025 decreased $321,000, or 0.3%, when compared to last year. Changes in the components of noninterest expense are discussed below:
Years Ended December 31,
(Dollars in thousands)
$ Change
% Change
Noninterest expense
Salaries and employee benefits
Occupancy expense, net
Computer services
Operating lease depreciation expense
Telecom, postage and supplies
Marketing and advertising
Deposit insurance premiums
Core deposit intangible amortization
Contract renewal consulting fee
Other
Total noninterest expense
• Salaries and employee benefits: The increase was primarily the result of increases in both pay and incentive compensation.
• Computer services: At the end of 2024, we finalized a multiyear renewal of our largest core processing contract. The decrease in expense year-over-year is a reflection of the improved vendor pricing negotiated through this effort.
• Operating lease depreciation expense: The decrease was due to a decline in the population of operating lease contracts (assets being depreciated) year-over-year.
• Deposit insurance premiums: The decrease year-over-year was the result of higher regulatory capital ratios.
• Core deposit intangible amortization: The intangible recorded associated with the Quantum merger is being amortized on an accelerated basis, so the rate of amortization slowed year-over-year.
• Contract renewal consulting fee: In the prior year we paid a fee to a consultant to negotiate the multiyear renewal of our largest core processing contract, with no similar fee being recognized in the current year.
• Other: The change year-over-year was driven by increases of $415,000 in community association banking deposit line of business referral fees, $285,000 in losses on the sale of repossessed equipment, and $226,000 in other consulting fees.
Income Taxes. The amount of income tax expense is influenced by the amount of pre-tax income, tax-exempt income, changes in the statutory rate and the effect of changes in valuation allowances maintained against deferred tax benefits. The effective tax rate was 20.5% and 21.6% for the years ended December 31, 2025 and 2024, respectively.
Comparison of Financial Condition at December 31, 2025 and December 31, 2024
Assets. Total assets were $4.5 billion and $4.6 billion at December 31, 2025 and 2024, respectively, a decrease of $49.8 million, or 1.1%, the components of which are discussed below.
Debt Securities Available for Sale. Debt securities available for sale decreased $9.5 million, or 6.2%, to $142.5 million at December 31, 2025. Outside of changes in value, the changes between years were the result of $36.6 million in proceeds from the maturity, call and paydown of securities, partially offset by $23.0 million in purchases. All purchases were residential MBS and consistent with the composition of the existing securities held in the portfolio. The following table illustrates the changes in the fair value of the portfolio.
(Dollars in thousands)
December 31, 2025
December 31, 2024
$ Change
% Change
MBS, residential
Municipal bonds
Corporate bonds
Total
The composition and contractual maturities of our debt securities portfolio as of December 31, 2025 is indicated in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Weighted average yields were calculated using amortized cost on a fully-taxable equivalent basis. The Company did not hold any tax-exempt debt securities as of December 31, 2025.
(Dollars in thousands)
1 year or less
Over 1 to 5 years
Over 5 to 10 years
Over 10 years
Total
MBS, residential
Book value
Fair value
Weighted average yield
Municipal bonds
Book value
Fair value
Weighted average yield
Corporate bonds
Book value
Fair value
Weighted average yield
Total
Book value
Fair value
Weighted average yield
Total Loans, Net of Deferred Loan Fees and Costs. Loans held for investment totaled $3.6 billion at December 31, 2025, a decrease of $70.1 million, or 1.9%, compared to the balance as of December 31, 2024. The following table illustrates the changes within the portfolio.
December 31, 2025
December 31, 2024
Change
% of Total at December 31, 2025
% of Total at December 31, 2024
(Dollars in thousands)
Commercial real estate loans
Construction and land development
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Multifamily
Total commercial real estate loans
Commercial loans
Commercial and industrial
Equipment finance
Municipal leases
Total commercial loans
Residential real estate loans
Construction and land development
One-to-four family
HELOCs
Total residential real estate loans
Consumer loans
Loans, net of deferred loan fees and costs
The principal categories of our loan portfolio are discussed below.
Commercial Real Estate – Construction and Land Development . We originate residential construction and development loans for the construction of single-family residences, condominiums, townhouses and residential developments. Our commercial construction development loans are for the development of business properties, including multifamily, retail, office/warehouse and office buildings. Our land, lots and development loans are predominately for the purchase or refinance of unimproved land held for future residential development, improved residential lots held for speculative investment purposes and for the future construction of one-to-four family (speculative and pre-sold) or commercial real estate. Unfunded commitments totaled $111.9 million and $48.1 million at December 31, 2025 and 2024, respectively.
Land acquisition and development loans are included in the construction and land development loan portfolio and include completed residential lots where the borrower was not the developer, commercial improved and raw land for future development and residential development loans. Residential development loans are made to developers for the purpose of acquiring raw land for the subsequent development and sale of residential lots. Such loans typically finance land purchase and infrastructure development of properties (i.e., roads, utilities, etc.) into residential lots for sale. The end buyer for the majority of these lots are local, regional and national builders for the ultimate construction of residential units. The primary source of repayment is the sale of the lots or improved parcels of land, while personal guarantees may serve as secondary sources. These loans are generally secured by property in our primary market areas. In addition, these loans are secured by a first lien on the property, are generally limited to 65% of the lower of the acquisition price or the appraised value of the unimproved land and 75% of the improved land. Residential acquisition and development loans are generally paid out within three years unless there are multiple phases to the development.
The Bank provides funding to a number of builders for the construction of both speculative and pre-sold 1-4 family homes. Speculative construction loans are made to home builders and are termed “speculative” because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either us or another lender for the finished home. Loans to finance the construction of speculative single-family homes are generally offered to experienced builders with a proven track record of performance. These loans require interest-only payments during the construction phase. Unfunded commitments on these loans were $75.0 million and $67.6 million at December 31, 2025 and 2024, respectively.
Both adjustable and fixed rates are offered on commercial construction loans. Adjustable interest rate loans typically include a floor and ceiling interest rate and are indexed to The Wall Street Journal prime rate, plus or minus an interest rate margin. The initial construction period for owner occupied loans is generally limited to 12 to 24 months from the date of origination versus a construction and stabilization period for non-owner occupied loans of 24 to 36 months, both with amortization terms up to 25 years. Construction-to-permanent loans generally include a balloon maturity of five years or less; however, balloon maturities of greater than five years are allowed on a limited basis depending on factors such as property type, amortization term, lease terms, pricing or the availability of credit enhancements. Construction loan proceeds are disbursed based on the percent completion of budget as documented by periodic third-party inspections. The maximum loan-to-value limit applicable to these loans is generally 80% of the appraised post-construction value.
Commercial Real Estate Lending, including Multifamily . We originate commercial real estate loans, including loans secured by retail/wholesale facilities, hotels, industrial facilities, medical and professional buildings, office buildings, churches and multifamily residential properties located primarily in our market areas. The average outstanding loan balance was $1.0 million as of December 31, 2025. Specific to our non-owner occupied portfolio, the outstanding balance of loans secured by offices totaled $97.0 million and $93.7 million as of December 31, 2025 and 2024, respectively.
We offer both fixed- and adjustable-rate commercial real estate loans. Our commercial real estate mortgage loans generally include a balloon maturity of five years or less. Amortization terms are generally offered up to 25 years. Adjustable rate-based loans typically include a floor and ceiling interest rate and are indexed to The Wall Street Journal prime rate or the one-month term SOFR, plus or minus an interest rate margin and rates generally adjust daily. The maximum loan-to-value ratio for commercial real estate loans is generally up to 85% on purchases and refinances.
Commercial – Commercial and Industrial Loans . Over the last two years, we have intentionally focused on the growth of commercial and industrial loans to businesses located in our primary market areas. These loans are primarily originated as conventional loans to business borrowers, which include lines of credit, term loans and letters of credit. These loans are typically secured by collateral and are used for general business purposes, including working capital financing, equipment financing, capital investment and general investments. Loan terms typically vary from one to five years. The interest rates on such loans are either fixed rate or adjustable rate indexed to The Wall Street Journal prime rate plus a margin.
We originate commercial business loans made under the SBA 7(a) and USDA B&I programs to small businesses located throughout the country. Loans made by the Bank under the SBA 7(a) and USDA B&I programs generally are made to small businesses to provide working capital needs, to refinance existing debt or to provide funding for the purchase of businesses, real estate, machinery and equipment. These loans generally are secured by a combination of assets that may include receivables, inventory, furniture, fixtures, equipment, business real property, commercial real estate and sometimes additional collateral such as an assignment of life insurance and a lien on personal real estate owned by the guarantor(s). Typical maturities for this type of loan vary up to 25 years and can be 30 years in some circumstances. Under the SBA 7(a) and USDA B&I loan program the loans carry a government guaranty up to 90% of the loan in some cases. SBA 7(a) and USDA B&I loans will normally be adjustable rate loans based upon The Wall Street Journal prime lending rate. Under the loan programs, we will typically sell in the secondary market the guaranteed portion of these loans to generate noninterest income and retain the related unguaranteed portion of these loans.
Commercial – Equipment Finance . Our equipment finance line of business offers companies that are purchasing equipment for their business various products to help manage working capital needs, while offering flexible and customizable repayment terms. These products are primarily made up of commercial finance agreements and commercial loans for transportation, construction, healthcare and manufacturing equipment. The loans have terms ranging from 24 to 96 months, with an average of five years, and are secured by the financed equipment. Typical transaction sizes range from $10,000 to $4.0 million, with an average outstanding loan balance of $134,000.
Commercial – Municipal Leases . We offer ground and equipment lease financing to fire departments located primarily throughout North Carolina, South Carolina and, to a lesser extent, Virginia. Municipal leases are secured primarily by a ground lease in our name with a sublease to the borrower for a fire station or an equipment lease for fire trucks and firefighting equipment. We originate and underwrite all leases prior to funding. These leases are at a fixed interest rate and may have a term to maturity of up to 20 years. At December 31, 2025, $105.6 million, or 63.5%, of our municipal leases were secured by fire trucks, $54.3 million, or 32.6%, were secured by fire stations, with the remaining $6.5 million, or 3.9%, secured by miscellaneous firefighting equipment and land. At December 31, 2025, the average outstanding municipal lease balance was $436,000.
Residential Real Estate – Construction and Land Development . We originate construction-to-permanent loans to homeowners building a residence. In addition, we originate land/lot loans predominately for the purchase or refinance of an improved lot for the construction of a residence to be occupied by the borrower. All of our construction and land/lot loans were made on properties located within our market area. Unfunded loan commitments totaled $38.7 million and $29.8 million at December 31, 2025 and 2024, respectively.
Construction-to-permanent loans are made for the construction of a one-to-four family property which is intended to be occupied by the borrower as either a primary or secondary residence. Construction-to-permanent loans are originated to the homeowner rather than the homebuilder and are structured to be converted to a first lien fixed- or adjustable-rate permanent loan at the completion of the construction phase. During the construction phase, which typically lasts six to 12 months, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made in monthly draws during the construction period. Loan proceeds are disbursed based on a percentage of completion. Construction-to-permanent loans require payment of interest only during the construction phase. Construction loans may be originated up to 90% of the cost or of the appraised value upon completion, whichever is less; however, we generally do not originate conforming construction loans which exceed an 80% loan-to-value without securing adequate private mortgage insurance.
Included in our construction and land/lot loan portfolio are land/lot loans, which are typically loans secured by developed lots in residential subdivisions located in our market areas. We originate these loans to individuals intending to construct their primary or secondary residence on the lot within one year of the origination date. This portfolio may also include loans for the purchase or refinance of unimproved land that is generally less than or equal to five acres and for which the purpose is to commence the improvement of the land and construction of an owner occupied primary or secondary residence within one year of the origination date.
Land/lot loans are typically originated in an amount up to 70% of the lower of the purchase price or appraisal, are secured by a first lien on the property, for up to a 20-year term, require payments of interest only and are structured with an adjustable interest rate on terms similar to our one-to-four family residential mortgage loans.
Residential Real Estate – One-to-Four Family . We originate loans secured by first mortgages on one-to-four family residences typically for the purchase or refinance of owner occupied primary or secondary residences located primarily in our market areas. We originate both fixed-rate loans and adjustable-rate loans. We generally originate fixed rate mortgage loans with terms greater than 10 years for sale to various secondary market investors, currently on a servicing retained basis. We also originate adjustable-rate mortgage, or ARM, loans which have interest rates that adjust to the average 30-day yield on the SOFR plus a margin. Most of our ARM loans are hybrid loans, which after an initial fixed rate period of one, five, seven or 10 years will convert to an annual adjustable interest rate for the remaining term of the loan. Our ARM loans have terms up to 30 years.
Residential Real Estate – Home Equity Lines of Credit . Our HELOCs consist primarily of adjustable-rate lines of credit. The lines of credit may be originated in amounts, together with the amount of the existing first mortgage, typically up to 85% of the value of the property securing the loan (less any prior mortgage loans) with an adjustable-rate based on The Wall Street Journal prime rate plus a margin. HELOCs generally have up to a 10-year draw period and amounts may be reborrowed after payment at any time during the draw period. Once the draw period has lapsed, the payment is amortized over a 15-year period based on the loan balance at that time. Unfunded commitments on these lines of credit, including loans held for sale, totaled $491.2 million and $436.0 million at December 31, 2025 and 2024, respectively.
Consumer Lending . Our consumer loans consist of loans secured by deposit accounts or personal property such as automobiles, boats and motorcycles, as well as unsecured consumer debt. This portfolio includes indirect auto finance installment contracts on new and used vehicles sourced through our relationships with automobile dealerships, both manufacturer franchised dealerships and independent dealerships. As a result of our decision to cease indirect auto finance loan originations as of March 31, 2024, the outstanding balance of the indirect auto portfolio declined to $38.3 million at December 31, 2025, a $30.8 million, or 44.5%, decrease compared to the prior year end.
The following table details the contractual maturity ranges of our loan portfolio without factoring in scheduled payments or potential prepayments. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income or the ACL. In addition, we have disclosed those loans with predetermined (fixed) and floating interest rates at December 31, 2025.
(Dollars in thousands)
1 Year or Less
After 1 but Within 5 Years
After 5 but Within 15 Years
Over 15 Years
Total
Commercial real estate loans
Construction and land development
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Multifamily
Total commercial real estate loans
Commercial loans
Commercial and industrial
Equipment finance
Municipal leases
Total commercial loans
Residential real estate loans
Construction and land development
One-to-four family
HELOCs
Total residential real estate loans
Consumer loans
Loans, net of deferred loan fees and costs
Commercial real estate loans
Fixed rate loans
Adjustable rate loans
Commercial loans
Fixed rate loans
Adjustable rate loans
Residential real estate loans
Fixed rate loans
Adjustable rate loans
Consumer loans
Fixed rate loans
Adjustable rate loans
Total fixed rate loans
Total adjustable rate loans
Nonperforming Assets. Nonperforming assets include nonaccrual loans and repossessed assets. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status. Total nonperforming assets were $44.4 million, or 0.98% of total assets, at December 31, 2025, compared to $28.8 milion, or 0.63% of total assets, at December 31, 2024. The following table sets forth the composition of our nonperforming assets among our different asset categories.
(Dollars in thousands)
December 31, 2025
December 31, 2024
Nonaccruing loans
Commercial real estate
Construction and land development
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Multifamily
Total commercial real estate
Commercial
Commercial and industrial
Equipment finance
Municipal leases
Total commercial
Residential real estate
Construction and land development
One-to-four family
HELOCs
Total residential real estate
Consumer
Total nonaccruing loans
Total repossessed assets
Total nonperforming assets
Total nonperforming assets as a percentage of total assets
Total SBA loans included in nonaccrual loans
Portion of SBA loans fully guaranteed by the SBA
Total nonaccruing loans, excluding the balance fully guaranteed by the SBA
Total repossessed assets
Total nonperforming assets, excluding the balance fully guaranteed by the SBA
Total nonperforming assets, excluding the balance fully guaranteed by the SBA, as a percentage of total assets
SBA loans made up the largest portion of nonperforming assets at $20.6 million and $6.6 million at December 31, 2025 and 2024, respectively. The year-over-year increase of $14.0 million was primarily the result of a management decision to accelerate the repurchase of the sold portion of nonperforming SBA loans (fully guaranteed portion) to simplify the workout process. Of the remaining nonperforming assets, equipment finance loans (concentrated in the transportation sector) made up $6.6 million and $4.6 million, respectively, and HELOCs totaled $6.5 million and $4.0 million, respectively, both at these same dates.
The ratio of nonperforming loans to total loans was 1.22% at December 31, 2025 compared to 0.76% at December 31, 2024. When adjusted for the fully guaranteed portion of SBA loans, the ratio of nonperforming loans to total loans was 0.81% at December 31, 2025 compared to 0.67% at December 31, 2024.
Allowance for Credit Losses on Loans . The ACL on loans held for investment is a valuation account that reflects our estimation of the credit losses that will result from the inability of our borrowers to make required loan payments. The ACL is maintained through provisions for credit losses that are charged to earnings in the period they are established. We charge losses on loans against the ACL when we believe the collection of loan principal is unlikely. Recoveries on loans previously charged off are added back to the ACL. See "Note 1 – Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for discussion of our ACL methodology on loans.
The following table summarizes the distribution of the ACL by loan category at the dates indicated.
December 31, 2025
December 31, 2024
(Dollars in thousands)
Allocated Allowance
% of Loan Portfolio
ACL to Loans
Allocated Allowance
% of Loan Portfolio
ACL to Loans
Commercial real estate
Construction and land development
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Multifamily
Total commercial real estate
Commercial
Commercial and industrial
Equipment finance
Municipal leases
Total commercial
Residential real estate
Construction and land development
One-to-four family
HELOCs
Total residential real estate
Consumer
Total loans
December 31, 2025
December 31, 2024
(Dollars in thousands)
Allocated Allowance
ACL to Loans
Allocated Allowance
ACL to Loans
ACL composition
Quantitative allocation
Qualitative allocation
Individual allocation
Total ACL
At or For the Year Ended December 31,
Asset quality ratios
ACL to nonaccruing loans (1)
Net charge-offs to average loans
(1) At December 31, 2025, $10.1 million, or 23.2%, of nonaccruing loans were current on their loan payments. At December 31, 2024, $13.0 million, or 47.1%, of nonaccruing loans were current on their loan payments.
The ACL on loans decreased $3.8 million, or 8.4%, during the year ended December 31, 2025. See further discussion of the drivers of the change in the "Comparison of Results of Operations for the Years Ended December 31, 2025 and December 31, 2024 – Provision for Credit Losses" section above.
In an effort to assist customers in their post-Hurricane Helene recovery and clean-up efforts, in the fourth quarter of 2024 we granted payment deferrals of up to six months to provide short-term relief to impacted customers, the outstanding balance of which was $136.0 million at December 31, 2024. In the same year we established a $2.2 million qualitative allocation to address the potential impact of the Hurricane upon our loan portfolio. As of December 31, 2025, the outstanding balance of loans where payment deferrals had been granted declined to $318,000, while $165,000 in charge-offs were recognized which were directly related to Hurricane Helene. As any residual impact of the Hurricane was believed to have now been reflected elsewhere within the ACL, in 2025 we released the $2.2 million qualitative allocation previously established.
Our individually evaluated loans are comprised of loans meeting certain thresholds including those on nonaccrual status. Individually evaluated loans may be evaluated for ACL purposes using either the cash flow or the collateral valuation method. As of December 31, 2025, there were $11.5 million of loans individually evaluated compared to $13.8 million at December 31, 2024.
The following table summarizes net charge-offs (recoveries) to average loans outstanding by loan category for the years indicated.
Year Ended December 31, 2025
Year Ended December 31, 2024
(Dollars in thousands)
Net Charge-Offs (Recoveries)
Average Loans Outstanding
Net Charge-Off (Recovery) Ratio
Net Charge-Offs (Recoveries)
Average Loans Outstanding
Net Charge-Off (Recovery) Ratio
Commercial real estate
Commercial
Residential real estate
Consumer
Total
Liabilities. Total liabilities were $3.9 billion at December 31, 2025, compared to $4.0 billion at December 31, 2024, a decrease of $98.7 million, or 2.4%, the components of which are discussed below.
Deposits. The following table summarizes the composition of our deposit portfolio as of the dates indicated.
(Dollars in thousands)
December 31, 2025
December 31, 2024
$ Change
% Change
Core deposits
Noninterest-bearing deposits
NOW accounts
Money market accounts
Savings accounts
Total core deposits
Certificates of deposit
Total
The following bullet points provide further information regarding the composition of our deposit portfolio as of December 31, 2025:
• The balance of uninsured deposits was $971.5 million, or 26.2% of total deposits, which included $262.0 million of collateralized deposits to municipalities.
• The balance of brokered deposits was $271.3 million, or 7.3% of total deposits.
• Commercial and consumer depositors represented 56% and 44% of total deposits, respectively.
• The average balance of our deposit accounts was $36,000.
• Our largest 25 depositors made up $534.8 million, or 14.4% of total deposits.
Specific to time deposits, we held approximately $198.5 million in uninsured CDs as of December 31, 2025. The uninsured amount is an estimate consistent with the methodology used for the Company's regulatory reporting disclosures.
The following table indicates the amount of our CDs, both within and in excess of the $250,000 FDIC insurance limit, by time remaining until maturity as of December 31, 2025.
(Dollars in thousands)
3 Months
or Less
Over 3 to 6
Months
Over 6 to 12 Months
Over
12 Months
Total
CDs less than $250,000
CDs of $250,000 or more
Total certificates of deposit
Borrowings. Although deposits are our primary source of funds, we may utilize borrowings to manage interest rate risk or as a cost-effective source of funds. Our borrowings typically consist of advances from the FHLB of Atlanta and FRB. We may obtain advances from the FHLB of Atlanta upon the security of certain of our commercial and residential real estate loans and/or securities as well as obtain advances from the FRB upon the security of certain of our commercial and consumer loans. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.
In addition to borrowings deemed necessary to address funding needs, as a result of our merger with Quantum, we assumed $11.3 million of junior subordinated debentures, which carried a purchase accounting discount of $1.1 million as of December 31, 2025. See "Note 10 – Borrowings" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for discussion of the origin and terms of the debt.
The following tables set forth information regarding our borrowings at the end of and during the periods indicated.
Year Ended December 31,
(Dollars in thousands)
Average balances
Junior subordinated debentures
FHLB advances
FRB advances
Revolving lines of credit
Weighted average interest rate
Junior subordinated debentures
FHLB advances
FRB advances
Revolving lines of credit
(Dollars in thousands)
December 31, 2025
December 31, 2024
Balance outstanding at end of period
Junior subordinated debentures
FHLB advances
FRB advances
Revolving lines of credit
Weighted average interest rate
Junior subordinated debentures
FHLB advances
FRB advances
Revolving lines of credit
All qualifying one-to-four family loans, HELOCs, commercial real estate loans, multifamily loans and FHLB of Atlanta stock are pledged as collateral to secure outstanding FHLB advances while commercial construction loans, indirect auto loans, and equipment and municipal leases are pledged as collateral to secure outstanding FRB advances. At December 31, 2025 and 2024, the Company had the ability to borrow $355.3 million and $315.5 million, respectively, through FHLB advances and $66.3 million and $106.6 million, respectively, through the unused portion of a line of credit with the FRB.
At both December 31, 2025 and 2024, the Company maintained revolving lines of credit with four unaffiliated banks, the unused portion of which totaled $165.0 million.
Capital Resources
Stockholders' equity increased $48.9 million, or 8.9%, to $600.7 million at December 31, 2025 as compared to December 31, 2024. Activity within stockholders' equity included $64.4 million in net income and $5.6 million in share-based compensation and stock option exercises, partially offset by $8.4 million in cash dividends declared and $13.6 million in stock repurchases. In addition, accumulated other comprehensive income improved by $2.3 million due to a reduction in the unrealized loss on available for sale securities due to lower market interest rates.
As of December 31, 2025, the Bank was considered "well capitalized" in accordance with its regulatory capital guidelines and exceeded all regulatory capital requirements. See “Business – How We are Regulated” included in Item 1 and “Note 18 – Regulatory Capital Matters” of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional details on our capital requirements.
Liquidity Management
Management maintains a liquidity position that it believes will adequately provide for funding of loan demand and deposit run-off that may occur in the normal course of business. We rely on a number of different sources in order to meet our potential liquidity demands. The primary sources are increases in deposit accounts, wholesale borrowings and cash flows from loan payments and the securities portfolio.
In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements as outlined in the "Comparison of Financial Condition at December 31 , 2025 and December 31, 2024 – Borrowings" section above. Additionally, we classify our securities portfolio as available for sale, providing an additional source of liquidity. Management believes that our securities portfolio is of high quality, of short duration, and the securities would therefore be readily marketable. In addition, we have historically sold fixed-rate mortgage loans in the secondary market to reduce interest rate risk and to create still another source of liquidity. From time to time we also utilize brokered time deposits to supplement our other sources of funds. Brokered time deposits are obtained by utilizing an outside broker that is paid a fee. This funding requires advance notification to structure the type of deposit desired by us. Brokered deposits can vary in term from one month to several years and have the benefit of being a source of longer-term funding. We also utilize brokered deposits to help manage interest rate risk by extending the term to repricing of our liabilities, enhance our liquidity and fund asset growth. Brokered deposits are typically from outside our primary market areas, and our brokered deposit levels may vary from time to time depending on competitive interest rate conditions and other factors. At December 31, 2025, brokered deposits totaled $271.3 million, or 7.3% of total deposits.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending
products and debt securities, including MBS. On a stand-alone level we are a separate legal entity from the Bank and must provide for our own liquidity and pay our own operating expenses. Our primary source of funds consists of dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At December 31, 2025, we (on an unconsolidated basis) had liquid assets of $8.3 million.
At the Bank level, we use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals and to fund loan commitments. At December 31, 2025, the total approved loan commitments and unused lines of credit outstanding amounted to $347.6 million and $831.3 million, respectively, as compared to $230.5 million and $712.3 million as of December 31, 2024. Certificates of deposit scheduled to mature in one year or less at December 31, 2025 totaled $882.2 million. It is management's policy to manage deposit rates that are competitive with other local financial institutions. Based on this strategy, we believe that a majority of maturing deposits will be retained.
Off-Balance Sheet Activities
In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements, mainly to manage customers' requests for funding. These transactions primarily take the form of loan commitments and lines of credit and involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. For further information, see “Note 17 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Asset/Liability Management and Interest Rate Risk
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our process to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In monitoring interest rate risk we continually analyze and manage assets and liabilities based on market conditions, their payment streams and interest rates, the timing of their maturities, their sensitivity to actual or potential changes in market interest rates and interest rate sensitivities of our non-maturity deposits with respect to interest rates paid and the level of balances. The Board of Directors sets the asset and liability policy of HomeTrust Bank, which is implemented by management and an asset/liability committee whose members include certain members of senior management.
The purpose of this committee is to communicate, coordinate and control asset/liability management consistent with our business plan and Board approved policies. The committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals.
The committee generally meets on a quarterly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis and income simulations. The committee recommends strategy changes based on this review. The committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Asset/Liability Committee of the Board of Directors at least quarterly.
Among the techniques we have used at various times to manage interest rate risk are: (i) increasing our portfolio of hybrid and adjustable-rate one-to-four family residential loans and commercial loans; (ii) maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities; and (iii) emphasizing less interest rate sensitive and lower-costing “core deposits.” We also maintain a portfolio of short-term or adjustable-rate assets and use fixed-rate FHLB advances and brokered deposits to extend the term to repricing of our liabilities.
We consider the relatively short duration of our loans and deposits in our overall asset/liability management process. As short-term rates increase, we have assets and liabilities that increase with the market. This is reflected in the change in our PVE when rates increase (see the table below). PVE is defined as the net present value of our existing assets and liabilities. In addition, we have historically demonstrated an ability to maintain retail deposits through various interest rate cycles. If local retail deposit rates increase dramatically, we also have access to wholesale funding through our lines of credit with the FHLB and FRB and the brokered deposit market to replace retail deposits, as needed.
Depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the committee may in the future determine to increase our interest rate risk position somewhat in order to maintain or increase our net interest margin. In particular, during certain periods of stable or declining interest rates, we believe that the increased net interest income resulting from a mismatch in the maturity of our assets and liabilities portfolios may provide high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy, our results of operations and the economic value of our equity will remain vulnerable to increases in interest rates and to declines due to differences between long- and short-term interest rates.
The committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and our PVE. The committee also evaluates these impacts against the potential changes in net interest income and market value of our portfolio equity that are monitored by the Board of Directors of HomeTrust Bank generally on a quarterly basis.
Our asset/liability management strategy sets limits on the change in PVE given certain changes in interest rates. The table presented here, as of December 31, 2025, is forward-looking information about our sensitivity to changes in interest rates. The table incorporates data from an independent service, as it relates to maturity repricing and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. Interest rate risk is measured by changes in PVE for instantaneous parallel shifts in the yield curve up and down 400 basis points. Overall, our interest rate sensitivity is very low with minimal changes to our PVE with rate increases or smaller rate decreases. Loans with interest rate
floors assist in maintaining our net interest income when rates decrease. If larger rate decreases occur, our PVE decreases more as lower rate deposit accounts will not reprice lower than zero, causing our net interest margin to shrink. As of December 31, 2025, our loans with interest rate floors totaled approximately $744.9 million, or 20.8% of our total loan portfolio, and had a weighted average floor rate of 5.03%, of which $155.1 million were at their floor rate.
December 31, 2025
Change in Interest
Rates in Basis Points
Present Value Equity (Dollars in Thousands)
Amount
$ Change
% Change
PVE Ratio
Base
In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk.
The Board of Directors and management of HomeTrust Bank believe that certain factors afford HomeTrust Bank the ability to operate successfullydespite its exposure to interest rate risk. HomeTrust Bank may manage its interest rate risk by originating and retaining adjustable rate loans in its portfolio, by borrowing from the FHLB to match the duration of our funding to the duration of originated fixed rate one-to-four family and commercial loans held in portfolio and by selling on an ongoing basis certain currently originated longer term fixed rate one-to-four family real estate loans.
