Heritage Financial Corp: Form 10-Q for the period ended Sep 30, 2025
Filed with the SEC on Nov 7, 2025 and accepted by EDGAR at Nov 7, 2025, 18:56 ET.
Management's discussion and analysis
As filed, 63,557 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three and nine months ended September 30, 2025. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Cautionary Note Regarding Forward-Looking Statements included herein and the December 31, 2024 audited Consolidated Financial Statements, and the accompanying Notes included in our 2024 Annual Form 10-K.
Overview
Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to customers in our market areas with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.
Our business consists primarily of commercial lending and deposit relationships with small- to medium-sized businesses and their owners in our market areas, as well as attracting deposits from the general public. We also make real estate construction and land development loans, consumer loans and residential real estate loans on single family properties located primarily in our markets.
Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, consisting primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits and borrowings. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.
Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio, as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on the CECL methodology.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of gains or losses on the sale of investment securities, service charges and other fees, card revenue and other income. Noninterest expense primarily consists of compensation and employee benefits, occupancy and equipment, data processing and professional services expense. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees and payroll taxes and expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consist primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing expense consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services expense consists primarily of third-party service providers such as auditors, consultants and lawyers.
Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from inflation and the governmental actions taken to address this issue, as well as changes in policies driven by the new presidential administration, including policies on tariffs and immigration, which may impact our operations or those of our customers. Net income is also impacted by our ability to execute our strategic plan to grow the Company through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."
Results of Operations
Net Income
Comparison of the quarter ended September 30, 2025 to the comparable quarter in the prior year
Net income increased $7.7 million, or 67.8%, to $19.2 million, or $0.55 per diluted common share, for the three months ended September 30, 2025, compared to $11.4 million, or $0.33 per diluted common share, for the same period in 2024.
The increase in net income was primarily due to a $6.5 million increase in noninterest income and a $4.7 million decrease in total interest expense. Noninterest income increased due to a $6.9 million pre-tax loss on the sale of investment securities recognized during the three months ended September 30, 2024 while no loss was recognized during the three months ended September 30, 2025. Total interest expense decreased due primarily to a decrease in borrowing costs.
These improvements were partially offset by a $2.3 million increase in noninterest expense due primarily to increase in compensation and employee benefits and professional services expense.
Comparison of the nine months ended September 30, 2025 to the comparable period in the prior year.
Net income increased $14.0 million, or 44.6%, to $45.3 million, or $1.31 per diluted common share, for the nine months ended September 30, 2025, compared to $31.3 million, or $0.90 per diluted common share, for the same period in 2024.
The increase in net income was due primarily to a $4.6 million increase in total interest income due to increased yields earned on interest earning assets as a result of higher market interest rates, a $5.8 million decrease in total interest expense due to lower funding costs and a $9.6 million increase in noninterest income due to lower losses on sales of investment securities.
These improvements were partially offset by an increase in noninterest expense of $5.3 million due primarily to increase in compensation and employee benefits and professional services expense.
Net Interest Income and Margin
One of the Company's key sources of revenue is net interest income. Several factors affect net interest income, including, but not limited to: the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.
Comparison of the quarter ended September 30, 2025 to the comparable quarter in the prior year
The following table provides net interest income information for the periods indicated:
(Dollars in thousands)
| Interest Earning Assets: | Three Months Ended September 30, 2025 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2024 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) |
|---|---|---|---|---|---|---|---|---|---|
| Loans receivable (2)(3) | $4,762,648 | $66,422 | 5.53% | $4,606,856 | $64,138 | 5.54% | $155,792 | $2,284 | (0.01)% |
| Taxable securities | 1,314,374 | 11,102 | 3.35 | 1,604,529 | 13,472 | 3.34 | (290,155) | (2,370) | 0.01 |
| Nontaxable securities (3) | 15,242 | 138 | 3.59 | 17,482 | 159 | 3.62 | (2,240) | (21) | (0.03) |
| Interest earning deposits | 166,182 | 1,846 | 4.41 | 150,384 | 2,048 | 5.42 | 15,798 | (202) | (1.01) |
| Total interest earning assets | 6,258,446 | 79,508 | 5.04% | 6,379,251 | 79,817 | 4.98% | (120,805) | (309) | 0.06% |
| Noninterest earning assets | 747,694 | 803,670 | (55,976) | ||||||
| Total assets | $7,006,140 | $7,182,921 | $(176,781) | ||||||
| Interest Bearing Liabilities: | |||||||||
| Certificates of deposit | $955,737 | $8,822 | 3.66% | $906,743 | $10,052 | 4.41% | $48,994 | $(1,230) | (0.75)% |
| Savings accounts | 428,256 | 296 | 0.27 | 445,926 | 220 | 0.20 | (17,670) | 76 | 0.07 |
40
(Dollars in thousands)
| Three Months Ended September 30, 2025 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2024 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | |
|---|---|---|---|---|---|---|---|---|---|
| Interest bearing demand and money market accounts | 2,833,048 | 11,003 | 1.54 | 2,644,827 | 9,984 | 1.50 | 188,221 | 1,019 | 0.04 |
| Total interest bearing deposits | 4,217,041 | 20,121 | 1.89 | 3,997,496 | 20,256 | 2.02 | 219,545 | (135) | (0.13) |
| Junior subordinated debentures | 22,239 | 474 | 8.46 | 21,946 | 541 | 9.81 | 293 | (67) | (1.35) |
| Borrowings | 136,582 | 1,542 | 4.48 | 452,364 | 6,062 | 5.33 | (315,782) | (4,520) | (0.85) |
| Total interest bearing liabilities | 4,375,862 | 22,137 | 2.01% | 4,471,806 | 26,859 | 2.39% | (95,944) | (4,722) | (0.38)% |
| Noninterest bearing demand deposits | 1,625,945 | 1,677,984 | (52,039) | ||||||
| Other noninterest bearing liabilities | 112,053 | 175,332 | (63,279) | ||||||
| Stockholders’ equity | 892,280 | 857,799 | 34,481 | ||||||
| Total liabilities and stock-holders’ equity | $7,006,140 | $7,182,921 | $(176,781) | ||||||
| Net interest income and spread | $57,371 | 3.03% | $52,958 | 2.59% | $4,413 | 0.44% | |||
| Net interest margin | 3.64% | 3.30% | 0.34% |
(1) Average balances are calculated using daily balances. Average yield/rate is annualized.
(2) Average loans receivable includes loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable includes the amortization of net deferred loan fees of $1,054,000 and $938,000 for the three months ended September 30, 2025 and 2024, respectively.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
The following table provides the changes in net interest income for the three months ended September 30, 2025 compared to the same period in 2024, due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:
(Dollars in thousands)
| Interest Earning Assets: | Increase (Decrease) Due to Changes In: Volume | Yield/Rate | Total |
|---|---|---|---|
| Loans receivable | $2,173 | $111 | $2,284 |
| Taxable securities | (2,451) | 81 | (2,370) |
| Nontaxable securities | (20) | (1) | (21) |
| Interest earning deposits | 200 | (402) | (202) |
| Total interest income | $(98) | $(211) | $(309) |
| Interest Bearing Liabilities: | |||
| Certificates of deposit | $521 | $(1,751) | $(1,230) |
| Savings accounts | (9) | 85 | 76 |
| Interest bearing demand and money market accounts | 725 | 294 | 1,019 |
| Total interest bearing deposits | 1,237 | (1,372) | (135) |
| Junior subordinated debentures | 7 | (74) | (67) |
| Borrowings | (3,688) | (832) | (4,520) |
| Total interest expense | $(2,444) | $(2,278) | $(4,722) |
| Net interest income | $2,346 | $2,067 | $4,413 |
Net interest income increased $4.4 million, or 8.3%, to $57.4 million for the three months ended September 30, 2025, compared to $53.0 million for the same period in 2024, due primarily to a $4.7 million decrease in total interest expense.
Total interest income decreased to $79.5 million for the three months ended September 30, 2025, compared to $79.8 million for the same period in 2024. The decrease was primarily due to a $2.4 million decrease in interest income on investment securities and a $0.2 million decrease in interest income on interest earning deposits, offset partially by a $2.3 million increase in interest income on loans receivable during the three months ended September 30, 2025, compared to the same period in 2024.
Interest income on securities decreased due to a decrease in the average balance of investment securities as of result of investment sales, maturities and repayments. Average balances of taxable securities decreased $290.2 million to $1.31 billion during the three months ended September 30, 2025, compared to $1.60 billion during the same period in 2024.
Interest income on loans receivable increased due to increases in the average outstanding balance of those assets. The average balance of loans receivable increased $155.8 million to $4.76 billion during the three months ended September 30, 2025, compared to $4.61 billion for the same period in 2024.
Total interest expense decreased to $22.1 million during the three months ended September 30, 2025, compared to $26.9 million for the same period in 2024. The decrease was due primarily to a $4.5 million decrease in interest expense on borrowings. The decrease in borrowing expense was due primarily to a $315.8 million decrease in the average balance of outstanding borrowings to $136.6 million during the three months ended September 30, 2025, compared to $452.4 million for the same period in 2024 and secondarily due to an 85 basis point decrease on the average rate to 4.48% for the three months ended September 30, 2025, compared to 5.33% for the same period in 2024.
Net interest margin increased 34 basis points to 3.64% for the three months ended September 30, 2025, compared to 3.30% for the same period in 2024.
Comparison of nine months ended September 30, 2025 to the comparable period in the prior year
The following table provides net interest income information for the periods indicated:
(Dollars in thousands)
| Interest Earning Assets: | Nine Months Ended September 30, 2025 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2024 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate |
|---|---|---|---|---|---|---|---|---|---|
| Loans receivable (2)(3) | $4,774,926 | $196,231 | 5.49% | $4,475,642 | $182,608 | 5.45% | $299,284 | $13,623 | 0.04% |
| Taxable securities | 1,371,957 | 34,420 | 3.35 | 1,699,995 | 42,462 | 3.34 | (328,038) | (8,042) | 0.01 |
| Nontaxable securities (3) | 15,406 | 414 | 3.59 | 19,193 | 505 | 3.51 | (3,787) | (91) | 0.08 |
| Interest earning deposits | 130,253 | 4,309 | 4.42 | 126,970 | 5,177 | 5.45 | 3,283 | (868) | (1.03) |
| Total interest earning assets | 6,292,542 | 235,374 | 5.00% | 6,321,800 | 230,752 | 4.88% | (29,258) | 4,622 | 0.12% |
| Noninterest earning assets | 759,206 | 805,790 | (46,584) | ||||||
| Total assets | $7,051,748 | $7,127,590 | $(75,842) | ||||||
| Interest Bearing Liabilities: | |||||||||
| Certificates of Deposit | $971,933 | $27,841 | 3.83% | $826,575 | $26,852 | 4.34% | $145,358 | $989 | (0.51)% |
| Savings accounts | 426,767 | 877 | 0.27 | 457,989 | 640 | 0.19 | (31,222) | 237 | 0.08 |
| Interest bearing demand and money market accounts | 2,770,162 | 31,042 | 1.50 | 2,643,478 | 27,605 | 1.39 | 126,684 | 3,437 | 0.11 |
| Total interest bearing deposits | 4,168,862 | 59,760 | 1.92 | 3,928,042 | 55,097 | 1.87 | 240,820 | 4,663 | 0.05 |
| Junior subordinated debentures | 22,164 | 1,417 | 8.55 | 21,874 | 1,627 | 9.94 | 290 | (210) | (1.39) |
| Borrowings | 233,504 | 8,153 | 4.67 | 484,300 | 18,427 | 5.08% | (250,796) | (10,274) | (0.41) |
| Total interest bearing liabilities | 4,424,530 | 69,330 | 2.10% | 4,434,216 | 75,151 | 2.26% | (9,686) | (5,821) | (0.16)% |
| Noninterest bearing demand deposits | 1,620,047 | 1,657,867 | (37,820) | ||||||
| Other noninterest bearing liabilities | 127,505 | 186,081 | (58,576) | ||||||
| Stockholders’ equity | 879,666 | 849,426 | 30,240 | ||||||
| Total liabilities and stock-holders’ equity | $7,051,748 | $7,127,590 | $(75,842) | ||||||
| Net interest income and spread | $166,044 | 2.90% | $155,601 | 2.62% | $10,443 | 0.28% | |||
| Net interest margin | 3.53% | 3.29% | 0.24% |
(1) Average balances are calculated using daily balances. Average yield/rate is annualized.
(2) Average loans receivable includes loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable includes the amortization of net deferred loan fees of $2.7 million and $2.7 million for the nine months ended September 30, 2025 and 2024, respectively.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
The following table provides the changes in net interest income for the nine months ended September 30, 2025 compared to the same period in 2024, due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:
(Dollars in thousands)
| Interest Earning Assets: | Increase (Decrease) Due to Changes In: Volume | Yield/Rate | Total |
|---|---|---|---|
| Loans receivable | $12,292 | $1,331 | $13,623 |
| Taxable securities | (8,229) | 187 | (8,042) |
| Nontaxable securities | (102) | 11 | (91) |
| Interest earning deposits | 131 | (999) | (868) |
| Total interest income | $4,092 | $530 | $4,622 |
| Interest Bearing Liabilities: | |||
| Certificates of deposit | $4,388 | $(3,399) | $989 |
| Savings accounts | (47) | 284 | 237 |
| Interest bearing demand and money market accounts | 1,361 | 2,076 | 3,437 |
| Total interest bearing deposits | 5,702 | (1,039) | 4,663 |
| Junior subordinated debentures | 22 | (232) | (210) |
| Borrowings | (8,865) | (1,409) | (10,274) |
| Total interest expense | $(3,141) | $(2,680) | $(5,821) |
| Net interest income | $7,233 | $3,210 | $10,443 |
Net interest income increased $10.4 million, or 6.7%, to $166.0 million for the nine months ended September 30, 2025, compared to $155.6 million for the same period in 2024, due primarily to an increase in total interest income and a decrease in total interest expense.
Total interest income increased $4.6 million, or 2.0%, to $235.4 million for the nine months ended September 30, 2025, compared to $230.8 million for the same period in 2024. The increase was primarily due to a $13.6 million increase in interest income on loans receivable, offset partially by an $8.1 million decrease in interest income on investment securities and a $0.9 million decrease in interest income on interest earning deposits during the nine months ended September 30, 2025, compared to the same period in 2024. Interest income on loans receivable increased due to increases in both the average yield earned on and the average outstanding balance of those assets. The average yield earned on loans receivable increased 4 basis points to 5.49% and the average balance of loans receivable increased $299.3 million to $4.77 billion during the nine months ended September 30, 2025, compared to $4.48 billion for the same period in 2024.
Interest income on investment securities decreased $8.1 million due primarily to a decrease in average balances as a result of investment sales, maturities and repayments. Average balances on taxable securities decreased $328.0 million to $1.37 billion during the nine months ended September 30, 2025, compared to $1.70 billion during the same period in 2024. Interest income on interest earning deposits decreased $0.9 million due primarily to a 103 basis point decrease in the yield earned on interest earning deposits to 4.42%, compared to 5.45% during the same period in 2024, as a result of decreases in market rates.
Total interest expense decreased $5.8 million, or 7.7%, to $69.3 million during the nine months ended September 30, 2025, compared to $75.2 million for the same period in 2024. The decrease was due primarily to a $10.3 million decrease in interest expense on borrowings, offset by a $4.7 million increase in interest expense on interest bearing deposits during the nine months ended September 30, 2025, compared to the same period in 2024. The decrease in borrowing expense was due primarily to a $250.8 million decrease in the average balance of outstanding borrowings to $233.5 million during the nine months ended September 30, 2025, compared to $484.3 million for the same period in 2024, and secondarily due to a 41 basis point decrease on the average rate to 4.67% for the nine months ended September 30, 2025, compared to 5.08% for the same period in 2024.
The increase in interest expense on interest bearing deposits was due primarily to a $240.8 million increase in the average balance of interest bearing accounts to $4.17 billion during the nine months ended September 30, 2025, compared to $3.93 billion for the same period in 2024, and a 11 basis point increase on the average rate of interest bearing demand and money market accounts to 1.50% for the nine months ended September 30, 2025, compared to 1.39% for the same period in 2024, due to competitive rate pressures. The increase was partially offset by a 51 basis point decline on the average rate of certificates of deposits to 3.83% for the nine months ended September 30, 2025, compared to 4.34% for the same period in 2024, due to repricing of certificates of deposits at lower rates.
Net interest margin increased 24 basis points to 3.53% for the nine months ended September 30, 2025, compared to 3.29% for the same period in 2024.
Provision for Credit Losses
The aggregate of the provision for (reversal of) credit losses on loans and on unfunded commitments is presented on the unaudited Condensed Consolidated Statements of Income as the provision for credit losses. The ACL on unfunded commitments is included on the unaudited Condensed Consolidated Statements of Financial Condition within accrued expenses and other liabilities.
Comparison of the quarter ended September 30, 2025 to the comparable quarter in the prior year
The following table presents the provision for (reversal of) credit losses for the periods indicated:
(Dollars in thousands)
| Three Months Ended September 30, 2025 | 2024 | Change $% | ||
|---|---|---|---|---|
| Provision for credit losses on loans | $1,563 | $2,705 | $(1,142) | 42.2% |
| Provision for (reversal of) credit losses on unfunded commitments | 212 | (266) | 478 | 179.7 |
| Provision for credit losses | $1,775 | $2,439 | $(664) | 27.2% |
The provision for credit losses on loans reflects the amount required to maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves and is impacted by quarterly charge-offs and recoveries. The provision for credit losses on loans was $1.6 million during the three months ended September 30, 2025 and was due primarily to an increase in the weighted average life of residential real estate and real estate construction and land development loans which increased the calculated reserves and an increase in real estate construction and land development loan balances. Future assessments of expected credit losses will be impacted not only by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but also by an updated assessment of qualitative factors, as well as consideration of any changes in the reasonable and supportable forecast reversion period.
The provision for credit losses on unfunded commitments recognized during the three months ended September 30, 2025 was due primarily to an increase in the unfunded exposure on construction loans.
The provision for credit losses on loans was $2.7 million during the three months ended September 30, 2024, and was driven primarily by $2.5 million in net charge-offs recognized and loan growth during the quarter. The net charge-offs of $2.5 million resulted primarily from one owner-occupied commercial real estate loan that migrated to nonaccrual status during the quarter. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended September 30, 2024 was due primarily to a decrease in the unfunded exposure on construction loans.
Comparison of the nine months ended September 30, 2025 to the comparable period in the prior year
The following table presents the provision for (reversal of) credit losses for the periods indicated:
(Dollars in thousands)
| Nine Months Ended September 30, 2025 | 2024 | Change $% | ||
|---|---|---|---|---|
| Provision for credit losses on loans | $2,417 | $5,879 | $(3,462) | (58.9)% |
| Provision for (reversal of) credit losses on unfunded commitments | 365 | (780) | 1,145 | (146.8) |
| Provision for credit losses | $2,782 | $5,099 | $(2,317) | (45.4)% |
The $2.4 million provision for credit losses on loans recognized during the nine months ended September 30, 2025 was due primarily to $911,000 in net charge-offs and an increase in the weighted average life of residential real estate and real estate construction and land development loans which increased the calculated reserves. The $365,000 provision for credit losses on unfunded commitments recognized during the nine months ended September 30, 2025 was due primarily to an increase in the unfunded exposure on construction loans.
The $5.9 million provision for credit losses recognized during the nine months ended September 30, 2024 was primarily driven by $2.5 million in net charge-offs and an increase in loans receivable as well as a change in mix of loans. The $780,000 reversal of provision for credit losses on unfunded commitments recognized during the nine months ended September 30, 2024 was due primarily to a $110.4 million decrease in the unfunded exposure on construction loans which reduced the unfunded exposure and secondarily due to an increase in revolving loan utilization rates.
Noninterest Income
Comparison of the three months ended September 30, 2025 to the comparable period in the prior year
The following table presents the change in the key components of noninterest income for the periods indicated:
(Dollars in thousands)
| Three Months Ended September 30, 2025 | 2024 | Change $% | ||
|---|---|---|---|---|
| Service charges and other fees | $3,046 | $2,788 | $258 | 9.3% |
| Card revenue | 2,209 | 2,134 | 75 | 3.5 |
| Loss on sale of investment securities, net | — | (6,945) | 6,945 | (100.0) |
| Interest rate swap fees | 96 | — | 96 | 100.0 |
| Bank owned life insurance income | 1,008 | 860 | 148 | 17.2 |
| Gain on sale of other assets, net | — | 1,480 | (1,480) | (100.0) |
| Other income | 1,966 | 1,520 | 446 | 29.3 |
| Total noninterest income | $8,325 | $1,837 | $6,488 | 353.2% |
Noninterest income increased $6.5 million from the same period in 2024, due primarily to a $6.9 million pre-tax loss on the sale of investment securities recognized during the three months ended September 30, 2024 as part of the Company's strategic balance sheet repositioning efforts. Gain on sale of other assets, net declined due to a $1.5 million gain on the sale of an administrative building recognized during the three months ended September 30, 2024.
Comparison of nine months ended September 30, 2025 to the comparable period in the prior year
The following table presents the change in the key components of noninterest income for the periods indicated:
(Dollars in thousands)
| Nine Months Ended September 30, 2025 | 2024 | Change $% | ||
|---|---|---|---|---|
| Service charges and other fees | $8,953 | $8,393 | $560 | 6.7% |
| Card revenue | 5,950 | 5,903 | 47 | 0.8 |
| Loss on sale of investment securities, net | (10,741) | (18,839) | 8,098 | (43.0) |
| Gain on sale of loans, net | — | 26 | (26) | (100.0) |
| Interest rate swap fees | 115 | 52 | 63 | 121.2 |
| Bank owned life insurance income | 3,206 | 2,711 | 495 | 18.3 |
| Gain on sale of other assets, net | 8 | 1,529 | (1,521) | (99.5) |
| Other income | 6,254 | 4,408 | 1,846 | 41.9 |
| Total noninterest income | $13,745 | $4,183 | $9,562 | 228.6% |
Noninterest income increased $9.6 million, or 228.6%, during the nine months ended September 30, 2025, compared to the same period in 2024. Loss on sale of securities decreased $8.1 million due to a smaller pre-tax loss of $10.7 million recognized during the nine months ended September 30, 2025, compared to an $18.8 million pre-tax loss recognized during the same period in 2024. BOLI income increased as a result of a BOLI restructuring that occurred in 2024 to invest in higher yielding policies. Other income increased due primarily to an increase in FHLB dividends received during the nine months ended September 30, 2025, compared to the same period in 2024. Gain on sale of other assets, net declined due to a $1.5 million gain on the sale of an administrative building recognized during the nine months ended September 30, 2024.
Noninterest Expense
Comparison of three months ended September 30, 2025 to the comparable period in the prior year
The following table presents changes in the key components of noninterest expense for the periods indicated:
(Dollars in thousands)
| Three Months Ended September 30, 2025 | 2024 | Change $% | ||
|---|---|---|---|---|
| Compensation and employee benefits | $26,082 | $24,367 | $1,715 | 7.0% |
| Occupancy and equipment | 4,665 | 4,850 | (185) | (3.8) |
| Data processing | 3,754 | 3,964 | (210) | (5.3) |
| Marketing | 284 | 128 | 156 | 121.9 |
| Professional services | 1,332 | 490 | 842 | 171.8 |
| State/municipal business and use taxes | 1,235 | 1,249 | (14) | (1.1) |
| Federal deposit insurance premium | 796 | 824 | (28) | (3.4) |
| Amortization of intangible assets | 284 | 399 | (115) | (28.8) |
| Other expense | 3,183 | 3,019 | 164 | 5.4 |
| Total noninterest expense | $41,615 | $39,290 | $2,325 | 5.9% |
Noninterest expense increased $2.3 million, or 5.9%, during the three months ended September 30, 2025, compared to the same period in 2024 due primarily to an increase in compensation and employee benefits resulting from annual merit increases in base pay and an increase in benefit costs. Professional services increased due primarily to merger-related costs associated with the ongoing acquisition of Olympic incurred during the three months ended September 30, 2025.
Comparison of the nine months ended September 30, 2025 to the comparable period in the prior year
The following table presents changes in the key components of noninterest expense for the periods indicated:
(Dollars in thousands)
| Nine Months Ended September 30, 2025 | 2024 | Change $% | ||
|---|---|---|---|---|
| Compensation and employee benefits | $77,348 | $74,291 | $3,057 | 4.1% |
| Occupancy and equipment | 14,431 | 14,547 | (116) | (0.8) |
| Data processing | 11,317 | 10,879 | 438 | 4.0 |
| Marketing | 955 | 583 | 372 | 63.8 |
| Professional services | 3,188 | 1,852 | 1,336 | 72.1 |
| State/municipal business and use taxes | 3,660 | 3,709 | (49) | (1.3) |
| Federal deposit insurance premium | 2,418 | 2,431 | (13) | (0.5) |
| Amortization of intangible assets | 889 | 1,241 | (352) | (28.4) |
| Other expense | 9,877 | 9,223 | 654 | 7.1 |
| Total noninterest expense | $124,083 | $118,756 | $5,327 | 4.5% |
Noninterest expense increased $5.3 million, or 4.5%, during the nine months ended September 30, 2025, compared to the same period in 2024 due primarily to an increase in compensation and employee benefits primarily resulting from annual merit increases in base pay and an increase in benefit costs. Data processing expense increased primarily due to annual cost increases during the nine months ended September 30, 2025 and a $243,000 refund recognized in the nine months ended September 30, 2024 related to a contract termination. Professional services increased due primarily to consulting costs related to technology-related contract renewals and merger-related costs associated with the ongoing acquisition of Olympic recognized during the nine months ended September 30, 2025.
Income Tax Expense
Comparison of the three months ended September 30, 2025 to the comparable period in the prior year
The following table presents the income tax expense, and related metrics and change for the periods indicated:
(Dollars in thousands)
| Three Months Ended September 30, 2025 | 2024 | Change | |
|---|---|---|---|
| Income before income taxes | $22,306 | $13,066 | $9,240 |
| Income tax expense | $3,137 | $1,643 | $1,494 |
| Effective income tax rate | 14.1% | 12.6% | 1.5% |
Income tax expense and the effective income tax rate both increased due primarily to higher estimated pre-tax income, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in BOLI and LIHTC investments during the three months ended September 30, 2025 compared to the same period in 2024.
Comparison of the nine months ended September 30, 2025 to the comparable period in the prior year.
The following table presents the income tax expense and related metrics and the change for the periods indicated:
(Dollars in thousands)
| Nine Months Ended September 30, 2025 | 2024 | Change $ | |
|---|---|---|---|
| Income before income taxes | $52,924 | $35,929 | $16,995 |
| Income tax expense | $7,629 | $4,599 | $3,030 |
| Effective income tax rate | 14.4% | 12.8% | 1.6% |
Income tax expense and the effective income tax rate both increased due to higher estimated pre-tax income during the nine months ended September 30, 2025, compared to the same period in 2024, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in BOLI and LIHTC investments. The increase was also due to the recognition of income tax expense of $515,000 related to the surrender of $8.5 million in BOLI policies during nine months ended September 30, 2025.
Financial Condition
The following table provides a comparison of the changes in the Company's financial condition at the periods indicated:
(Dollars in thousands)
| Assets | September 30, 2025 | December 31, 2024 $% | Change | |
|---|---|---|---|---|
| Cash and cash equivalents | $245,491 | $117,100 | $128,391 | 109.6% |
| Investment securities available for sale, at fair value, net | 631,231 | 764,394 | (133,163) | (17.4) |
| Investment securities held to maturity, at amortized cost, net | 681,626 | 703,285 | (21,659) | (3.1) |
| Loans receivable, net | 4,715,186 | 4,749,655 | (34,469) | (0.7) |
| Premises and equipment, net | 70,382 | 71,580 | (1,198) | (1.7) |
| Federal Home Loan Bank stock, at cost | 10,473 | 21,538 | (11,065) | (51.4) |
| Bank owned life insurance | 105,464 | 111,699 | (6,235) | (5.6) |
| Accrued interest receivable | 19,146 | 19,483 | (337) | (1.7) |
| Prepaid expenses and other assets | 289,677 | 303,452 | (13,775) | (4.5) |
| Other intangible assets, net | 2,264 | 3,153 | (889) | (28.2) |
| Goodwill | 240,939 | 240,939 | — | — |
| Total assets | $7,011,879 | $7,106,278 | $(94,399) | (1.3)% |
47
| Liabilities and Stockholders' Equity | September 30, 2025 | December 31, 2024 $% | Change | |
|---|---|---|---|---|
| Total deposits | $5,857,464 | $5,684,613 | $172,851 | 3.0% |
| Borrowings | 138,000 | 383,000 | (245,000) | (64.0) |
| Junior subordinated debentures | 22,277 | 22,058 | 219 | 1.0 |
| Accrued expenses and other liabilities | 90,074 | 153,080 | (63,006) | (41.2) |
| Total liabilities | 6,107,815 | 6,242,751 | (134,936) | (2.2) |
| Common stock | 529,949 | 531,674 | (1,725) | (0.3) |
| Retained earnings | 407,561 | 387,097 | 20,464 | 5.3 |
| Accumulated other comprehensive loss, net | (33,446) | (55,244) | 21,798 | 39.5 |
| Total stockholders' equity | 904,064 | 863,527 | 40,537 | 4.7 |
| Total liabilities and stockholders' equity | $7,011,879 | $7,106,278 | $(94,399) | (1.3)% |
Total assets decreased during the nine months ended September 30, 2025 due to a decrease in investment securities available for sale, resulting from sales of investment securities as part of the Company's strategic balance sheet repositioning efforts discussed above, and a decline in loans receivable, offset partially by an increase in cash and cash equivalents. Total liabilities and stockholders' equity decreased during the period due primarily to a decrease in borrowings and accrued expenses and other liabilities, offset partially by an increase in deposits and an increase in stockholders' equity due primarily to a decline in accumulated other comprehensive loss, net.
Investment Activities
Our investment policy is established by the Board and monitored by the Risk Committee of the Board. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Investment in sub-investment grade bonds is not permitted under the policy.
The following table provides information regarding our investment securities at the dates indicated:
(Dollars in thousands)
Investment securities available for sale, at fair value:
| September 30, 2025 Balance | % of Total | December 31, 2024 Balance | % of Total | Change $% | ||
|---|---|---|---|---|---|---|
| U.S. government and agency securities | $11,642 | 0.9% | $12,544 | 0.9% | $(902) | (7.2)% |
| Municipal securities | 51,197 | 3.9 | 50,942 | 3.5 | 255 | 0.5 |
| Residential CMO and MBS(1) | 298,737 | 22.8 | 369,331 | 25.2 | (70,594) | (19.1) |
| Commercial CMO and MBS(1) | 255,995 | 19.5 | 309,741 | 21.0 | (53,746) | (17.4) |
| Corporate obligations | 7,019 | 0.5 | 11,770 | 0.8 | (4,751) | (40.4) |
| Other asset-backed securities | 6,641 | 0.5 | 10,066 | 0.7 | (3,425) | (34.0) |
| Total | $631,231 | 48.1% | $764,394 | 52.1% | $(133,163) | (17.4)% |
| Investment securities held to maturity, at amortized cost: | ||||||
| U.S. government and agency securities | $151,297 | 11.5% | $151,216 | 10.3% | $81 | 0.1% |
| Residential CMO and MBS(1) | 224,654 | 17.1 | 244,309 | 16.6 | (19,655) | (8.0) |
| Commercial CMO and MBS(1) | 305,675 | 23.3 | 307,760 | 21.0 | (2,085) | (0.7) |
| Total | $681,626 | 51.9% | $703,285 | 47.9% | $(21,659) | (3.1)% |
| Total investment securities | $1,312,857 | 100.0% | $1,467,679 | 100.0% | $(154,822) | (10.5)% |
(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.
Total investment securities decreased $154.8 million, or 10.5%, to $1.31 billion at September 30, 2025 from $1.47 billion at December 31, 2024. The Company sold $152.4 million of investment securities at a pre-tax loss of $10.7 million as part of its strategic balance sheet repositioning during the nine months ended September 30, 2025. In addition, there were investment maturities and repayments of $116.1 million during the nine months ended September 30, 2025. The decrease was partially offset by investment securities purchases of $84.7 million and a $28.3 million decrease in unrealized losses on available for sale securities during the nine months ended September 30, 2025.
Loan Portfolio
Changes by loan type
The Company originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases.
The following table provides information about our loan portfolio by type of loan at the dates indicated:
(Dollars in thousands)
| Commercial business: | September 30, 2025 Amortized Cost | % of Loans Receivable | December 31, 2024 Amortized Cost | % of Loans Receivable | Change $% | |
|---|---|---|---|---|---|---|
| Commercial and industrial | $819,076 | 17.2% | $842,672 | 17.5% | $(23,596) | (2.8)% |
| Owner-occupied CRE | 1,022,727 | 21.4 | 1,003,243 | 20.9 | 19,484 | 1.9 |
| Non-owner occupied CRE | 1,938,190 | 40.6 | 1,909,107 | 39.9 | 29,083 | 1.5 |
| Total commercial business | 3,779,993 | 79.2 | 3,755,022 | 78.3 | 24,971 | 0.7 |
| Residential real estate | 374,875 | 7.9 | 402,954 | 8.4 | (28,079) | (7.0) |
| Real estate construction and land development: | ||||||
| Residential | 90,440 | 1.9 | 83,890 | 1.7 | 6,550 | 7.8 |
| Commercial and multifamily | 351,196 | 7.4 | 395,553 | 8.2 | (44,357) | (11.2) |
| Total real estate construction and land development | 441,636 | 9.3 | 479,443 | 9.9 | (37,807) | (7.9) |
| Consumer | 172,656 | 3.6 | 164,704 | 3.4 | 7,952 | 4.8 |
| Total | $4,769,160 | 100.0% | $4,802,123 | 100.0% | $(32,963) | (0.7)% |
Loans receivable decreased $33.0 million, or 0.7%, to $4.77 billion at September 30, 2025, from $4.80 billion at December 31, 2024. New loans funded declined during the nine months ended September 30, 2025 to $410.2 million, compared to $445.3 million during the same period in 2024. Loan prepayments totaled $214.4 million and loan payoffs were $154.2 million during the nine months ended September 30, 2025, compared to loan prepayments of $132.4 million and loan payoffs of $111.8 million during the same period in 2024.
Commercial and industrial loans decreased $23.6 million, or 2.8%, during the nine months ended September 30, 2025, due primarily to pay downs on outstanding balances, partially offset by new loan production of $109.9 million. Owner-occupied CRE loans increased $19.5 million, or 1.9%, during the nine months ended September 30, 2025, due primarily to new loan production of $97.2 million, offset partially by pay downs on outstanding balances. Non-owner occupied CRE loans increased $29.1 million, or 1.5%, during the nine months ended September 30, 2025, due primarily to new loan production of $141.8 million, offset by pay downs on outstanding balances. Residential loans decreased $28.1 million, or 7.0%, during the nine months ended September 30, 2025, due to pay downs on outstanding balances. Commercial and multifamily construction loans decreased $44.4 million, or 11.2%, during the nine months ended September 30, 2025, due primarily to transfers to owner occupied CRE and non-owner occupied CRE and pay downs on outstanding balances.
The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:
(Dollars in thousands)
Owner occupied and non-owner occupied CRE loans by collateral type:
| September 30, 2025 Amortized Cost | % of CRE Loans | December 31, 2024 Amortized Cost | % of CRE Loans | Change $% | ||
|---|---|---|---|---|---|---|
| Office | $582,336 | 19.7% | $565,892 | 19.4% | $16,444 | 2.9% |
| Industrial | 517,291 | 17.5 | 513,615 | 17.6 | 3,676 | 0.7 |
| Multi-family | 442,350 | 14.9 | 414,728 | 14.2 | 27,622 | 6.7 |
| Retail store / shopping center | 317,584 | 10.7 | 304,562 | 10.5 | 13,022 | 4.3 |
| Mini-storage | 158,357 | 5.3 | 161,390 | 5.5 | (3,033) | (1.9) |
| Mixed use property | 162,154 | 5.5 | 156,627 | 5.4 | 5,527 | 3.5 |
| Motel / hotel | 132,409 | 4.5 | 165,420 | 5.7 | (33,011) | (20.0) |
49
(Dollars in thousands)
| September 30, 2025 Amortized Cost | % of CRE Loans | December 31, 2024 Amortized Cost | % of CRE Loans | Change $% | ||
|---|---|---|---|---|---|---|
| Warehouse | 127,806 | 4.3 | 139,341 | 4.8 | (11,535) | (8.3) |
| Single purpose | 127,327 | 4.3 | 125,430 | 4.3 | 1,897 | 1.5 |
| Recreational / school | 81,273 | 2.7 | 68,416 | 2.3 | 12,857 | 18.8 |
| Other | 312,030 | 10.6 | 296,929 | 10.3 | 15,101 | 5.1 |
| Total | $2,960,917 | 100.0% | $2,912,350 | 100.0% | $48,567 | 1.7% |
Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans, totaling $582.3 million, or 19.7% of total CRE loans, at September 30, 2025. Of this total, $289.7 million, or 49.7%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile than non-owner occupied CRE loans, as there is less tenant rollover risk and they generally include guarantees from the company occupying the space as well as the owners of the company. Multi-family loans increased $27.6 million to $442.4 million, or 14.9% of total CRE loans, due to the completion of $29.8 million in commercial construction loans converting to term CRE loans and $34.7 million in new production offset partially by pay downs on outstanding balances. The average balance of CRE loans was $1.3 million at September 30, 2025.
Loans classified as nonaccrual and nonperforming assets
The following table provides information about our nonaccrual loans and nonperforming assets at the dates indicated:
(Dollars in thousands)
| Nonaccrual loans: (1) | September 30, 2025 | December 31, 2024 $% | Change | |
|---|---|---|---|---|
| Commercial business | $3,418 | $3,919 | $(501) | (12.8)% |
| Residential real estate | 1,290 | — | 1,290 | 100.0 |
| Real estate construction and land development | 12,760 | — | 12,760 | 100.0 |
| Consumer | 144 | 160 | (16) | (10.0) |
| Total nonaccrual loans | 17,612 | 4,079 | 13,533 | 331.8 |
| Accruing loans past due 90 days or more | $3,338 | $1,195 | $2,143 | 179.3% |
| Total nonperforming assets | $20,950 | $5,274 | $15,676 | 297.2% |
| Credit quality ratios: | ||||
| Nonaccrual loans to loans receivable | 0.37% | 0.08% | 0.29 | 362.5 |
| Nonperforming loans to loans receivable | 0.44 | 0.11 | 0.33 | 300.0 |
| Nonperforming assets to total assets | 0.30 | 0.07 | 0.23 | 328.6 |
(1) At September 30, 2025 and December 31, 2024, $2.8 million and $1.0 million, respectively, of nonaccrual loans, were guaranteed by government agencies.
The following table provides the changes in nonaccrual loans during the nine months ended September 30, 2025:
(Dollars in thousands)
| Balance, beginning of period | $4,079 |
| Additions | 17,042 |
| Net principal payments, sales and transfers to accruing status | (2,462) |
| Payoffs | (175) |
| Charge-offs | (872) |
| Balance, end of period | $17,612 |
Nonaccrual loans increased $13.5 million to $17.6 million at September 30, 2025, compared to $4.1 million at December 31, 2024. Additions during the nine months ended September 30, 2025 consisted of sixteen loans totaling $17.0 million, including four real estate construction and land development loans totaling $12.7 million, three residential real estate loans totaling $1.3 million, and nine commercial business loans totaling $3.0 million. These additions were partially offset by a $2.0 million pay down on one nonaccrual commercial business loan.
Accruing loans past due 90 days or more included one $1.6 million commercial business loan that is well secured and in the process of collection and two commercial business loans totaling $1.7 million that are classified as loan modifications and are in the process of renewal.
Allowance for Credit Losses on Loans
The following table provides information regarding our ACL on loans for the periods indicated:
(Dollars in thousands)
| At or For the Nine Months Ended September 30, 2025 | 2024 | Change | |
|---|---|---|---|
| ACL on loans at the end of period | $53,974 | $51,391 | $2,583 |
| Credit quality ratios: | |||
| ACL on loans to loans receivable | 1.13% | 1.10% | 0.03% |
| ACL on loans to nonaccrual loans | 306.46 | 1,194.86 | (888.40) |
| Net charge-offs (recoveries) | $911 | $2,487 | $(1,576) |
| Average balance of loans receivable during the period | 4,774,926 | 4,475,642 | 299,284 |
| Net charge-offs (recoveries) on loans to average loans receivable annualized | 0.03% | 0.07% | (0.04)% |
The ACL on loans as a percentage of loans receivable was 1.13% at September 30, 2025 compared to 1.09% at December 31, 2024. The ACL on loans increased $1.5 million, or 2.9%, to $54.0 million at September 30, 2025, compared to $52.5 million at December 31, 2024.
The ACL on loans as a percentage of loans receivable increased 3 basis points to 1.13% at September 30, 2025 from 1.10% at September 30, 2024 due primarily to an increase in the weighted average life of residential real estate and real estate construction and land development loans which increased the calculated reserves for these segments.
The following table presents the ACL on loans by loan portfolio segment at the dates indicated:
(Dollars in thousands)
| September 30, 2025 ACL on Loans | ACL as a % of Loans in Loan Category | % of Loans in Loan Category to Total Loans | December 31, 2024 ACL on Loans | ACL as a % of Loans in Loan Category | % of Loans in Loan Category to Total Loans | |
|---|---|---|---|---|---|---|
| Commercial business | $38,346 | 1.01% | 79.2% | $38,293 | 1.02% | 78.3% |
| Residential real estate | 4,083 | 1.09 | 7.9 | 3,464 | 0.86 | 8.4 |
| Real estate construction and land development | 9,656 | 2.19 | 9.3 | 8,656 | 1.81 | 9.9 |
| Consumer | 1,889 | 1.09 | 3.6 | 2,055 | 1.25 | 3.4 |
| Total ACL on loans | $53,974 | 1.13% | 100.0% | $52,468 | 1.09% | 100.0% |
Deposits
The following table summarizes the Company's deposits at the dates indicated:
(Dollars in thousands)
| September 30, 2025 Balance | % of Total Deposits | December 31, 2024 Balance | % of Total Deposits | Change $% | ||
|---|---|---|---|---|---|---|
| Noninterest demand deposits | $1,617,909 | 27.6% | $1,654,955 | 29.1% | $(37,046) | (2.2)% |
| Interest bearing demand deposits | 1,526,685 | 26.1 | 1,464,129 | 25.8 | 62,556 | 4.3 |
| Money market accounts | 1,332,501 | 22.7 | 1,166,901 | 20.5 | 165,600 | 14.2 |
| Savings accounts | 430,127 | 7.3 | 421,377 | 7.4 | 8,750 | 2.1 |
| Total non-maturity deposits | 4,907,222 | 83.7 | 4,707,362 | 82.8 | 199,860 | 4.2 |
| Certificates of deposit | 950,242 | 16.3 | 977,251 | 17.2 | (27,009) | (2.8) |
| Total deposits | $5,857,464 | 100.0% | $5,684,613 | 100.0% | $172,851 | 3.0% |
Total deposits increased $172.9 million, or 3.0%, to $5.86 billion at September 30, 2025, from $5.68 billion at December 31, 2024. Non-maturity deposits increased by $199.9 million, or 4.2%, from December 31, 2024. The increase in non-maturity deposits was due primarily to a $165.6 million increase in money market accounts and a $62.6 million increase in interest bearing demand accounts from new accounts opened and transfers of funds from existing noninterest demand deposit accounts into these higher yielding accounts. The decline in certificates of deposit of $27.0 million, or 2.8%, was due primarily to a decline in brokered deposits.
Borrowings
At September 30, 2025, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.28 billion. The FHLB functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB’s assessment of the institution’s creditworthiness. The Bank had $138.0 million in FHLB advances outstanding at September 30, 2025, and $383.0 million in FHLB advances outstanding at December 31, 2024. Advances from the FHLB may be collateralized by FHLB stock owned by the Bank, deposits at the FHLB, certain commercial and residential real estate loans, investment securities or other assets. All FHLB advances at September 30, 2025 were short-term and mature in less than one year.
The Bank maintains a credit facility with the FRB through the Discount Window with available borrowing capacity of $347.1 million at September 30, 2025. The Bank had no FRB borrowings outstanding at September 30, 2025 or December 31, 2024.
In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and the related junior subordinated debentures as part of a prior acquisition. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital. The junior subordinated debentures outstanding were $22.3 million as of September 30, 2025 and $22.1 million as of December 31, 2024, net of unaccreted discount.
The Bank maintains available unsecured federal funds lines with four correspondent banks totaling $145.0 million, with no outstanding borrowings at September 30, 2025 and December 31, 2024.
Stockholders' Equity
Total stockholders' equity increased $40.5 million, or 4.7%, to $904.1 million at September 30, 2025, compared to $863.5 million at December 31, 2024, due primarily to $45.3 million of net income recognized for the nine months ended September 30, 2025 and a $21.8 million decrease in accumulated other comprehensive loss, net, offset partially by $24.8 million in dividends paid to common shareholders and $5.5 million in common stock repurchases during the nine months ended September 30, 2025. The Company’s stockholders' equity to assets ratio was 12.9% at September 30, 2025, compared to 12.2% at December 31, 2024.
The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our Board after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon the receipt of dividends from the Bank, which is the Company’s predominant source of income. On October 22, 2025, the Board declared a regular quarterly dividend of $0.24 per common share payable on November 19, 2025 to shareholders of record on November 5, 2025.
On April 24, 2024, the Board authorized the Repurchase Program. The Company is not obligated to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any prior notice.
Regulatory Requirements
The Company is a bank holding company under the supervision of the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect in the unaudited Condensed Consolidated Financial Statements and operations. Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Management believes that, as of September 30, 2025, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of September 30, 2025 and December 31, 2024, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.
The following table summarizes the Company's consolidated and the Bank's actual capital ratios compared to the regulatory "adequately capitalized" capital ratio and the regulatory minimum capital ratio needed to qualify as a "well capitalized" institution, as calculated under regulatory guideline at the dates presented:
(Dollars in thousands)
| September 30, 2025 Total capital ratio | Actual | Adequately Capitalized | Well-Capitalized (1) | |||
|---|---|---|---|---|---|---|
| Company | $771,926 | 13.8% | $446,546 | 8.0% | $558,182 | 10.0% |
| Bank | 761,434 | 13.7 | 446,094 | 8.0 | 577,618 | 10.0 |
| Tier 1 capital ratio | ||||||
| Company | 717,050 | 12.8 | 334,909 | 6.0 | 446,546 | 8.0 |
| Bank | 706,558 | 12.7 | 334,571 | 6.0 | 446,094 | 8.0 |
| Common equity Tier 1 capital ratio | ||||||
| Company | 694,773 | 12.4 | 251,182 | 4.5 | 362,818 | 6.5 |
| Bank | 706,558 | 12.7 | 250,928 | 4.5 | 362,451 | 6.5 |
| Leverage ratio | ||||||
| Company | 717,050 | 10.5 | 272,474 | 4.0 | 340,593 | 5.0 |
| Bank | 706,558 | 10.4 | 272,266 | 4.0 | 340,333 | 5.0 |
| December 31, 2024 | ||||||
| Total capital ratio | ||||||
| Company | $749,854 | 13.3% | $450,307 | 8.0% | $562,884 | 10.0% |
| Bank | 742,222 | 13.2 | 450,002 | 8.0 | 562,503 | 10.0 |
| Tier 1 capital ratio | ||||||
| Company | 698,412 | 12.4 | 337,730 | 6.0 | 450,307 | 8.0 |
| Bank | 690,780 | 12.3 | 337,502 | 6.0 | 450,002 | 8.0 |
| Common equity Tier 1 capital ratio | ||||||
| Company | 676,354 | 12.0 | 253,298 | 4.5 | 365,874 | 6.5 |
| Bank | 690,780 | 12.3 | 253,126 | 4.5 | 365,627 | 6.5 |
| Leverage ratio | ||||||
| Company | 698,412 | 10.0 | 278,910 | 4.0 | 348,637 | 5.0 |
| Bank | 690,780 | 9.9 | 278,749 | 4.0 | 348,436 | 5.0 |
(1) The ratios to meet the requirements to be deemed “well-capitalized” under prompt corrective action regulations are only applicable to the Bank. However, the Company manages its capital position as if the requirements apply to the consolidated Company and has presented the ratios as if they also applied on a consolidated basis.
Liquidity and Capital Resources
We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has been to focus on acquiring non-maturity deposits from our retail accounts, and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. Our liquidity policy permits the purchase of brokered deposits in an amount not to exceed 15% of the Company's total deposits as a secondary source for funding. The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $2.49 billion, or 42.6% of total deposits, at September 30, 2025 and $2.27 billion, or 40.0% of total deposits, at December 31, 2024. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. At September 30, 2025, we had $77.4 million in brokered deposits, or 1.32% of total deposits, compared to $110.0 million, or 1.93% of total deposits, at December 31, 2024. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.
The following table summarizes the Company's available liquidity as of the dates indicated:
(Dollars in thousands)
| On-balance sheet liquidity | September 30, 2025 | December 31, 2024 |
|---|---|---|
| Cash and cash equivalents | $245,491 | $117,100 |
| Unencumbered investment securities available for sale (1) | 630,666 | 746,163 |
| Total on-balance sheet liquidity | $876,157 | $863,263 |
| Off-balance sheet liquidity | ||
| FRB borrowing availability | $347,119 | $360,104 |
| FHLB borrowing availability (2) | 1,140,425 | 976,288 |
| Fed funds line borrowing availability with correspondent banks | 145,000 | 145,000 |
| Total off-balance sheet liquidity | $1,632,544 | $1,481,392 |
| Total available liquidity | $2,508,701 | $2,344,655 |
(1) Investment securities available for sale at fair value.
(2) Includes FHLB borrowing availability of $1.28 billion at September 30, 2025 based on pledged assets; however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears, or $3.18 billion.
Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our capital resources since the information disclosed in our 2024 Annual Form 10-K. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.
Critical Accounting Estimates
Our critical accounting estimates are described in detail in the "Critical Accounting Estimates" section within Item 7 of our 2024 Annual Form 10-K. The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's critical accounting estimates include estimates of the ACL on loans and goodwill. There have been no material changes in these estimates during the nine months ended September 30, 2025.
Market risk
As filed, 5,470 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Like other financial institutions, the Company is subject to direct and indirect market risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur direct market risk in the normal course of business through our exposure to market interest rates, equity prices and credit spreads. Our primary market risk is interest rate risk, which is the risk of loss of net interest income or net interest margin resulting from changes in market interest rates. Interest rate risk results primarily from the traditional banking activities in which the Company engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on our assets and the interest paid on our liabilities.
Our Asset/Liability Management Committee is responsible for developing, monitoring and reviewing asset/liability processes, interest rate risk exposures, strategies and tactics and reporting to the Risk and Technology Committee of the Board. It is the responsibility of the Board to establish policies and interest rate limits and to approve these policies and interest rate limits annually. It is the responsibility of management to execute the approved policies, develop and implement risk management strategies and to report to the Board on a regular basis. We maintain an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk. The policy guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. These guidelines establish limits for interest rate risk sensitivity.
Net interest income simulation
We use an income simulation model as the primary tool to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Modeling the sensitivity of net interest income is highly dependent on numerous assumptions incorporated into the modeling process. Key assumptions in the model include prepayment speeds on loans and investment securities, repricing betas on non-maturity deposits, and repricing on investment securities, loans, and borrowings. In order to measure the interest rate risk sensitivity as of September 30, 2025, this simulation model uses a “static balance sheet” assumption, meaning the size and mix of the balance sheet remains the same as maturing cash flows from assets and liabilities are reinvested into the same categories at the current level of interest rates. The simulation also assumes an instantaneous and sustained uniform change in market interest rates at all maturities.
The following table summarizes the estimated effect on net interest income over a 12 month period measured against a flat rate (no interest rate change) scenario for the dates indicated:
(Dollars in thousands)
| Change in Interest Rates (Basis Points) | September 30, 2025 $ Change in Net Interest Income | % Change in Net Interest Income | December 31, 2024 $ Change in Net Interest Income | % Change in Net Interest Income |
|---|---|---|---|---|
| +200(shock) | 6,878 | 2.9 | (218) | (0.1) |
| +100(shock) | 4,582 | 1.9 | 658 | 0.3 |
| +0(flat) | — | — | — | — |
| -100(shock) | (3,738) | (1.6) | (72) | — |
| -200(shock) | (10,635) | (4.5) | (2,624) | (1.1) |
The Company’s balance sheet sensitivity to changes in market rates shows an increase in asset sensitivity at September 30, 2025 compared to December 31, 2024. This is due primarily to balance sheet changes that included an increase in interest earning deposits, a reduction in short-term wholesale funding, and a reduction in fixed rate investment securities. For each of the interest rate scenarios modeled and measured by management as presented in the preceding table, results at September 30, 2025 were well within established risk tolerances as established by policy.
The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of interest rate deviations. In addition, the simulation results noted above contain various assumptions such as a static balance sheet, and the rate that deposit interest rates change as market interest rates change. Therefore, these simulation results do not likely reflect actual results, but continue to serve as estimates of interest rate risk.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding table. For example, although certain of the Company’s assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain of the Company’s asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in the preceding table. Further, a change in Treasury rates accompanied by a change in the shape of the treasury yield curve could result in different estimations from those presented herein. Accordingly, the results in the preceding table should not be relied upon as indicative of actual results in the event of changing market interest rates.
Controls and procedures
As filed, 1,465 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
(a) Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation and under the supervision of our Chief Executive Officer (the Company’s principal executive officer) and Chief Financial Officer (the Company’s principal financial officer), the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that that information required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Risk factors
As filed, 7,480 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Other than as set forth below, there have been no material changes to the risk factors set forth in Item 1A of the Company’s 2024 Annual Form 10-K.
Risks Related to the Proposed Merger
Litigation may be Filed Against the Company or Olympic (or their Respective Boards of Directors) that Could Prevent or Delay the Consummation of the Merger or Result in the Payment of Damages Following Consummation of the Merger.
It is possible that, in connection with the merger of Olympic Bancorp, Inc. (“Olympic”) with and into the Company (the “Olympic Merger”), shareholders may file demands or putative class action lawsuits against the Company or Olympic (or their respective boards of directors). Among other remedies, these shareholders could seek financial damages or to enjoin the Olympic Merger. The outcome of any such litigation is uncertain. Additionally, one of the conditions to the closing of the Olympic Merger is that there must be no order, injunction, decree, statute, rule, regulation or other legal restraint or prohibition preventing or making illegal the consummation of the Olympic Merger or any of the other transactions contemplated by the merger agreement between the Company and Olympic (the “Merger Agreement”). If a dismissal is not granted or a settlement is not reached and any plaintiff were successful in obtaining an injunction prohibiting the Company or Olympic from completing the Olympic Merger or any of the other transactions contemplated by the Merger Agreement, then such injunction may delay or prevent the effectiveness of the Olympic Merger and could result in significant costs to the Company or Olympic, including any cost associated with the indemnification of directors and officers of each company. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Olympic Merger is consummated may adversely affect the combined company’s business, financial condition, results of operations and cash flows and the market price of the combined company.
Issuance of Shares of the Company’s Common Stock Pursuant to the Merger Agreement May Adversely Affect the Market Price of the Company’s Common Stock.
Pursuant to the Merger Agreement, the Company expects to issue approximately 7,167,600 shares of the Company’s common stock to Olympic shareholders. The dilution caused by the issuance of a large number of new shares of the Company’s common stock may result in fluctuations in the market price of the Company’s common stock, including a potential stock price decrease.
The Company May Fail to Realize the Anticipated Benefits of the Olympic Merger.
The Company and Olympic have operated and, until the consummation of the Olympic Merger, will continue to operate, independently. The success of the Olympic Merger, including anticipated benefits and cost savings, will depend on, among other things, the Company’s ability to combine the businesses of the Company and Olympic in a manner that permits growth opportunities, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies, and does not materially disrupt the existing customer relationships of the Company or Olympic, nor result in decreased revenues due to any loss of customers. If the Company is not able to successfully achieve these objectives, the anticipated benefits of the Olympic Merger may not be realized fully or at all or may take longer to realize than expected. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could have an adverse effect on the surviving corporation’s business, financial condition, operating results, prospects and stock price.
While individuals employed by Olympic or Kitsap Bank, the wholly-owned banking subsidiary of Olympic, immediately prior to the effective time will automatically become employees of the Company or Heritage Bank following the Olympic Merger, certain employees may not be retained by the Company after the merger. In addition, certain employees that the Company wishes to retain may elect to terminate their employment as a result of the Olympic Merger, which could delay or disrupt the integration process. It is possible that the integration process could result in the disruption of the Company’s or Olympic’s ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect the ability of the Company or Olympic to maintain relationships with customers and employees or to achieve the anticipated benefits and cost savings of the Olympic Merger.
Among the factors considered by the boards of directors of both the Company and Olympic in connection with their respective approvals of the Merger Agreement were the anticipated benefits that could result from the Olympic Merger. There can be no assurance that these benefits will be realized within the time periods contemplated or at all.
Regulatory Approvals May Not be Received, May Take Longer than Expected or May Impose Conditions that are Not Presently Anticipated or Cannot be Met.
Before the transactions contemplated in the Merger Agreement can be consummated, various approvals must be obtained from the bank regulatory and other governmental authorities. In deciding whether to grant regulatory clearances, the relevant governmental entities will consider a variety of factors, including the regulatory standing of each of the parties. An adverse condition or development in either party’s regulatory standing or other factors could result in an inability to obtain one or more of the required regulatory approvals, or delay their receipt. The terms and conditions of the approvals that are granted may impose requirements, limitations or costs, or may place restrictions on the conduct of the combined company’s business.
The Company and Olympic believe that the Olympic Merger should not raise significant regulatory concerns, and that the parties will be able to obtain all requisite regulatory approvals in a timely manner. Despite the parties’ commitments to use their reasonable best efforts to comply with conditions imposed by regulatory entities, under the terms of the Merger Agreement, the Company and Olympic will not be required to consummate the Olympic Merger if any such approvals would reasonably be expected to materially restrict or burden the Company following the merger. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions, or that such conditions, terms, obligations or restrictions will not have the effect of delaying the consummation of the Olympic Merger, imposing additional material costs on or materially limiting the revenues of the combined company following the Olympic Merger or otherwise reduce the anticipated benefits of the Olympic
Merger if the Olympic Merger were consummated successfully within the expected timeframe. In addition, neither the Company nor Olympic can provide assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the Olympic Merger. The consummation of the Olympic Merger is further conditioned on the absence of certain orders, injunctions or decrees by any court or regulatory agency of competent jurisdiction that would prohibit or make illegal the consummation of the Olympic Merger.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2025-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Income tax | 3 months2025-07-01 to 2025-09-30 | $3.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2025-01-01 to 2025-09-30 | $7.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2025-07-01 to 2025-09-30 | $19.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months2025-01-01 to 2025-09-30 | $45.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2025-07-01 to 2025-09-30 | $0.55 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2025-01-01 to 2025-09-30 | $1.31 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2025-07-01 to 2025-09-30 | $0.56 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2025-01-01 to 2025-09-30 | $1.33 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2025-07-01 to 2025-09-30 | 34,413,386 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2025-01-01 to 2025-09-30 | 34,481,877 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2025-01-01 to 2025-09-30 | $66.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2025-01-01 to 2025-09-30 | $3.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months2025-01-01 to 2025-09-30 | $24.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months2025-01-01 to 2025-09-30 | $5.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | At period end2025-09-30 | $245.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | At period end2025-09-30 | $7.01bn | us-gaap:Assets |
| Total liabilities | At period end2025-09-30 | $6.11bn | us-gaap:Liabilities |
| Shareholders' equity | At period end2025-09-30 | $904.1m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001628280-25-050556. Last ingested by Listed: Oct 24, 2026, 15:04 ET. Listed shows no prices and gives no investment advice.