Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and results of operations and should be read in conjunction with our financial statements and notes thereto included in Item 8 Financial Statements and Supplementary Data of this Form 10-K. In addition to historical information, this discussion contains forward‑looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections of this Form 10-K entitled “Cautionary Note Regarding Forward Looking Statements” and Item 1A. Risk Factors.
Management’s discussion focuses on 2024 results compared to 2023 results. For a discussion of 2023 results compared to 2022 results, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 27, 2024.
Overview
Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our customers in our market areas with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.
Our business consists primarily of commercial lending and deposit relationships with small- to medium-sized businesses and their owners in our market areas, as well as attracting deposits from the general public. We also make real estate construction and land development loans, consumer loans and residential real estate loans on single family properties located primarily in our markets.
Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, consisting primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits and borrowings. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.
Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio, as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on the CECL methodology.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of gains or losses on the sale of investment securities, service charges and other fees, card revenue and other income. Noninterest expense primarily consists of compensation and employee benefits, occupancy and equipment, data processing and professional services expense. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consist primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing expense consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services expense consists primarily of third-party service providers such as auditors, consultants and lawyers.
Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from inflation and the governmental actions taken to address this issue, as well as changes in policies driven by the new presidential administration. Net income is also impacted by growth of operations through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."
Results of Operations
Net income was $43.3 million, or $1.24 per diluted common share, for the year ended December 31, 2024 down from $61.8 million, or $1.75 per diluted common share, for the year ended December 31, 2023. Net income decreased $18.5 million, or 30.0%, compared to the year ended December 31, 2023 due primarily to a decrease in net interest income of $15.8 million to $209.4 million from $225.2 million and an increase in losses on sales of investment securities of $10.5 million to $22.7 million from $12.2 million, largely as a result of investment portfolio repositioning, which decreased noninterest income. These decreases were partially offset by a decrease in noninterest expense of $8.3 million. During the year ended December 31, 2024, the company also restructured its BOLI portfolio, incurring additional tax expense of $2.4 million and other costs of $508,000 related to the surrender of certain BOLI policies.
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Net Interest Income and Margin Overview
One of the Company's key sources of revenue is net interest income. Several factors affect net interest income, including, but not limited to: the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.
Market rates impact the results of the Company's net interest income, including the significant changes in the federal funds target rate that have been made by the Federal Reserve since 2022 in response to inflationary pressures. The following table provides the federal funds target rate history and changes since December 31, 2021 :
Change Date Rate (%) Rate Change (%)
December 31, 2021 0.00% - 0.25% N/A
March 17, 2022 0.25% - 0.50% 0.25 %
May 5, 2022 0.75% - 1.00% 0.50 %
June 16, 2022 1.50% - 1.75% 0.75 %
July 28, 2022 2.25% - 2.50% 0.75 %
September 22, 2022 3.00% - 3.25% 0.75 %
November 3, 2022 3.75% - 4.00% 0.75 %
December 15, 2022 4.25% - 4.50% 0.50 %
February 2, 2023 4.50% - 4.75% 0.25 %
March 23, 2023 4.75% - 5.00% 0.25 %
May 4, 2023 5.00% - 5.25% 0.25 %
July 27, 2023 5.25% - 5.50% 0.25 %
September 19, 2024 4.75% - 5.00% (0.50) %
November 8, 2024 4.50% - 4.75% (0.25) %
December 19, 2024 4.25% - 4.50% (0.25) %
Average Balances, Yields and Rates Paid
The following table provides relevant net interest income information for the periods indicated:
Year Ended December 31,
2024 2023 2022
Average
Balance (1)
Interest
Earned/
Paid Average
Yield/
Rate Average
Balance (1)
Interest
Earned/
Paid Average
Yield/
Rate Average
Balance (1)
Interest
Earned/
Paid Average
Yield/
Rate
(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2)(3)
$ 4,485,531 $ 247,472 5.52 % $ 4,155,722 $ 217,284 5.23 % $ 3,852,604 $ 174,275 4.52 %
Taxable securities 1,653,295 54,972 3.32 1,937,603 58,509 3.02 1,646,058 40,627 2.47
Nontaxable securities (3)
18,425 651 3.53 63,051 1,854 2.94 135,004 3,488 2.58
Interest earning deposits 125,036 6,617 5.29 129,807 6,818 5.25 913,374 9,067 0.99
Total interest earning assets 6,282,287 309,712 4.93 % 6,286,183 284,465 4.53 % 6,547,040 227,457 3.47 %
Noninterest earning assets 850,759 853,841 774,415
Total assets $ 7,133,046 $ 7,140,024 $ 7,321,455
Interest Bearing Liabilities:
Certificates of Deposit $ 857,079 $ 36,922 4.31 % $ 491,653 $ 14,554 2.96 % $ 313,712 $ 1,407 0.45 %
Savings accounts 451,528 920 0.20 543,096 701 0.13 646,565 381 0.06
Interest bearing demand and money market accounts 2,640,487 37,227 1.41 2,771,981 24,095 0.87 3,036,031 4,984 0.16
Total interest bearing deposits 3,949,094 75,069 1.90 3,806,730 39,350 1.03 3,996,308 6,772 0.17
Junior subordinated debentures 21,910 2,139 9.76 21,615 2,074 9.60 21,322 1,156 5.42
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Year Ended December 31,
2024 2023 2022
Average
Balance (1)
Interest
Earned/
Paid Average
Yield/
Rate Average
Balance (1)
Interest
Earned/
Paid Average
Yield/
Rate Average
Balance (1)
Interest
Earned/
Paid Average
Yield/
Rate
(Dollars in thousands)
Securities sold under agreement to repurchase — — — 32,976 153 0.46 46,209 138 0.30
Borrowings 456,448 23,140 5.07 369,665 17,733 4.80 137 6 4.38
Total interest bearing liabilities 4,427,452 100,348 2.27 % 4,230,986 59,310 1.40 % 4,063,976 8,072 0.20 %
Noninterest bearing demand deposits 1,669,301 1,899,317 2,326,178
Other noninterest bearing liabilities 182,121 191,679 119,359
Stockholders’ equity 854,172 818,042 811,942
Total liabilities and stock-holders’ equity $ 7,133,046 $ 7,140,024 $ 7,321,455
Net interest income and spread $ 209,364 2.66 % $ 225,155 3.13 % $ 219,385 3.27 %
Net interest margin 3.33 % 3.58 % 3.35 %
(1) Average balances are calculated using daily balances. Average yield/rate is annualized.
(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $3.6 million, $3.3 million and $7.4 million for the years ended December 31, 2024, 2023 and 2022, respectively.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
The following tables provide the changes in net interest income for the periods indicated due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:
Year Ended December 31,
2024 Compared to 2023
Increase (Decrease) Due to changes in
Volume Yield/Rate Total
(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net $ 17,806 $ 12,382 $ 30,188
Taxable securities (9,099) 5,562 (3,537)
Nontaxable securities (1,518) 315 (1,203)
Interest earning deposits (252) 51 (201)
Total interest income 6,937 18,310 25,247
Interest Bearing Liabilities:
Certificates of deposit 13,871 8,497 22,368
Savings accounts (134) 353 219
Interest bearing demand and money market accounts (1,193) 14,325 13,132
Total interest bearing deposits 12,544 23,175 35,719
Junior subordinated debentures 28 37 65
Securities sold under agreement to repurchase (77) (76) (153)
Borrowings 4,354 1,053 5,407
Total interest expense 16,849 24,189 41,038
Net interest income $ (9,912) $ (5,879) $ (15,791)
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Year Ended December 31,
2023 Compared to 2022
Increase (Decrease) Due to changes in
Volume Yield/Rate Total
(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net $ 14,429 $ 28,580 $ 43,009
Taxable securities 7,907 9,975 17,882
Nontaxable securities (2,063) 429 (1,634)
Interest earning deposits (13,339) 11,090 (2,249)
Total interest income 6,934 50,074 57,008
Interest Bearing Liabilities:
Certificates of deposit 1,209 11,938 13,147
Savings accounts (70) 390 320
Interest bearing demand and money market accounts (470) 19,581 19,111
Total interest bearing deposits 669 31,909 32,578
Junior subordinated debentures 16 902 918
Securities sold under agreement to repurchase (46) 61 15
Borrowings 17,727 — 17,727
Total interest expense 18,366 32,872 51,238
Net interest income $ (11,432) $ 17,202 $ 5,770
Total interest income increased $25.2 million, or 8.9%, to $309.7 million for the year ended December 31, 2024 compared to $284.5 million for the year ended December 31, 2023. The increase was primarily due to a 40 basis point increase in the yield on interest earning assets to 4.93% for the year ended December 31, 2024, compared to 4.53% for the year ended December 31, 2023 following increases in market interest rates and secondarily due to a change in the mix of earning assets to higher yielding loan balances.
Total interest expense increased $41.0 million, or 69.2%, to $100.3 million for the year ended December 31, 2024 compared to $59.3 million for the year ended December 31, 2023 due primarily to increased costs of interest bearing deposits resulting from competitive rate pressures as well as customers transferring balances from non-maturity deposits to higher rate certificates of deposits and an increase in borrowing balances and rates. The total cost of interest bearing liabilities increased 87 basis points to 2.27% for the year ended December 31, 2024, compared to 1.40% for the year ended December 31, 2023.
The net interest margin decreased 25 basis points to 3.33% for the year ended December 31, 2024 compared to 3.58% for the year ended December 31, 2023. The decrease in net interest margin was due primarily to increases in the average cost of interest bearing liabilities as a result of upward market pressure related to deposit rates and an increase in borrowing balances and rates. This was partially offset by increases in average yields on total interest earning assets as a result of increases in market interest rates.
Provision for Credit Losses Overview
The aggregate of the provision for (reversal of) credit losses on loans and on unfunded commitments is presented in the Consolidated Statements of Income as the "Provision for (reversal of) credit losses." The ACL on unfunded commitments is included in the Consolidated Statements of Financial Condition within "Accrued expenses and other liabilities."
The following table presents the provision for (reversal of) credit losses for the periods indicated:
Year Ended December 31, Change
2024 2023 $ %
(Dollars in thousands)
Provision for credit losses on loans $ 6,983 $ 4,736 $ 2,247 47.4 %
Reversal of provision for credit losses on unfunded commitments (701) (456) (245) 53.7
Provision for credit losses $ 6,282 $ 4,280 $ 2,002 46.8 %
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The provision for credit losses on loans recognized during the year ended December 31, 2024 was due primarily to growth in balances of collectively evaluated loans. The ACL on loans to loans receivable decreased to 1.09% at December 31, 2024, compared to 1.11% at December 31, 2023 due to changes in the loan mix as loan growth occurred in segments requiring a lower calculated reserve as a percentage of loans. The reversal of provision for credit losses on unfunded commitments recognized during the year ended December 31, 2024 was due primarily to an increase in utilization rates on lines of credit and a decrease in the unfunded exposure on construction loans.
Noninterest Income Overview
The following table presents the change in the key components of noninterest income for the periods indicated:
Year Ended December 31, Change
2024 2023 $ %
(Dollars in thousands)
Service charges and other fees $ 11,285 $ 10,966 $ 319 2.9 %
Card revenue 7,752 8,340 (588) (7.1)
Loss on sale of investment securities, net
(22,742) (12,231) (10,511) 85.9
Gain on sale of loans, net 26 343 (317) (92.4)
Interest rate swap fees 409 230 179 77.8
Bank owned life insurance income 2,967 2,934 33 1.1
Gain on sale of other assets, net 1,552 2 1,550 77,500.0
Other income 6,224 8,079 (1,855) (23.0)
Total noninterest income $ 7,473 $ 18,663 $ (11,190) (60.0) %
Nonintere st income decreased $11.2 million, or 60.0%, during the year ended December 31, 2024 compared to the same period in 2023. This decline was primarily driven by a pre-tax loss of $22.7 million incurred on the sale of investment securities available for sale during the year ended December 31, 2024, compared to a pre-tax loss of $12.2 million incurred during the same period in 2023. The loss on the sale of investment securities in 2024 was a consequence of strategically repositioning the Company's investment portfolio, involving the sale of $296.4 million in investment securities, with the aim of enhancing future earnings. Card revenue declined due to lower deposit transaction volumes. The decrease in other income during the year ended December 31, 2024 was primarily due to a one-time sale of Visa Inc. Class B common stock of $1.6 million and a $610,000 gain on sale of the Ellensburg branch recognized during the year ended December 31, 2023. Gain on sale of loans, net declined as the Company is no longer originating mortgage loans for sale.
These decreases were partially offset by an increase in the gain on sale of other assets, net due to a $1.5 million gain on the sale of an administrative building recognized during the year ended December 31, 2024 and an increase in service charges due primarily to an increase in service charge income on commercial deposit accounts.
Noninterest Expense Overview
The following table presents changes in the key components of noninterest expense for the periods indicated:
Year Ended December 31, Change
2024 2023 $ %
(Dollars in thousands)
Compensation and employee benefits $ 98,527 $ 100,083 $ (1,556) (1.6) %
Occupancy and equipment 19,289 19,156 133 0.7
Data processing 14,899 17,116 (2,217) (13.0)
Marketing 988 1,930 (942) (48.8)
Professional services 2,515 4,227 (1,712) (40.5)
State/municipal business and use tax 4,889 4,059 830 20.4
Federal deposit insurance premium 3,260 3,312 (52) (1.6)
Amortization of intangible assets 1,640 2,434 (794) (32.6)
Other expense 12,289 14,306 (2,017) (14.1)
Total noninterest expense $ 158,296 $ 166,623 $ (8,327) (5.0) %
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Noninterest expense decreased $8.3 million, or 5.0%, during the year ended December 31, 2024 compared to the same period in 2023. Compensation and employee benefits decreased $1.6 million due primarily to a decrease in the average number of full-time equivalent employees to 751 as of December 31, 2024, compared to 803 as of December 31, 2023, in connection with expense management initiatives. These expense management initiatives also impacted data processing expense, which decreased primarily due to a decline in ongoing costs resulting from prior technology-related contract renewals and terminations and decreased marketing and other expense. Professional services expense decreased during the year ended December 31, 2024 due primarily to a $1.5 million expense related to renewal of the core vendor contract recognized during the prior year. Amortization of intangible assets decreased due to the full amortization of the core deposit intangible related to a prior acquisition. This was offset partially by an increase in state/municipal business and use tax expense due primarily to an increase in gross revenue.
Income Tax Expense Overview
The following table presents the income tax expense and related metrics and the change for the periods indicated:
Year Ended December 31,
2024 Compared to 2023
Change
2024 2023 $ %
(Dollars in thousands)
Income before income taxes $ 52,259 $ 72,915 $ (20,656) (28.3) %
Income tax expense $ 9,001 $ 11,160 $ (2,159) (19.3) %
Effective income tax rate 17.2 % 15.3 % 1.9 % 12.4 %
Income tax expense decreased during the year ended December 31, 2024 primarily due to lower pre-tax income. This decrease was partially offset by additional tax expense of $2.4 million related to the surrender of certain BOLI policies as part of a BOLI restructuring which occurred in the fourth quarter of 2024. The effective income tax rate increased due primarily to the additional tax expense related to the surrender of BOLI policies.
Financial Condition Overview
The table below provides a comparison of changes in key components of the Company's financial condition for the periods indicated:
December 31, Change
2024 2023 $ %
(Dollars in thousands)
Assets
Cash and cash equivalents $ 117,100 $ 224,973 $ (107,873) (47.9) %
Investment securities available for sale, at fair value, net 764,394 1,134,353 (369,959) (32.6)
Investment securities held to maturity, at amortized cost, net 703,285 739,442 (36,157) (4.9)
Loans receivable, net 4,749,655 4,287,628 462,027 10.8
Premises and equipment, net 71,580 74,899 (3,319) (4.4)
Federal Home Loan Bank stock, at cost 21,538 4,186 17,352 414.5
Bank owned life insurance 111,699 125,655 (13,956) (11.1)
Accrued interest receivable 19,483 19,518 (35) (0.2)
Prepaid expenses and other assets 303,452 318,571 (15,119) (4.7)
Other intangible assets, net 3,153 4,793 (1,640) (34.2)
Goodwill 240,939 240,939 — —
Total assets $ 7,106,278 $ 7,174,957 $ (68,679) (1.0) %
Liabilities and Stockholders' Equity
Total deposits 5,684,613 5,599,872 $ 84,741 1.5
Borrowings 383,000 500,000 (117,000) (23.4)
Junior subordinated debentures 22,058 21,765 293 1.3
Accrued expenses and other liabilities 153,080 200,059 (46,979) (23.5)
Total liabilities 6,242,751 6,321,696 (78,945) (1.2)
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December 31, Change
2024 2023 $ %
Common stock 531,674 549,748 (18,074) (3.3)
Retained earnings 387,097 375,989 11,108 3.0
Accumulated other comprehensive loss, net (55,244) (72,476) 17,232 (23.8)
Total stockholders' equity 863,527 853,261 10,266 1.2
Total liabilities and stockholders' equity $ 7,106,278 $ 7,174,957 $ (68,679) (1.0) %
Total assets decreased due primarily to decreases in investment securities and cash and cash equivalents offset partially by an increase in loans receivable. Total liabilities decreased due primarily to a decrease in borrowings and accrued expenses and other liabilities offset partially by an increase in deposits. Total stockholders' equity increased due primarily to net income as well as an increase in AOCI as a result of a decrease in other comprehensive income (loss), net of tax, which was positively impacted by the fair value of our investment securities available for sale as well as the sale of securities at a loss. The changes are discussed in more detail in the sections below.
Investment Activities Overview
Our investment policy is established by the Board and monitored by the Risk Committee of the Board. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Investment in sub-investment grade bonds is not permitted under the policy.
The following table provides information regarding our investment securities at the dates indicated:
December 31, 2024 December 31, 2023 Change
Balance % of
Total Balance % of
Total $ %
(Dollars in thousands)
Investment securities available for sale, at fair value:
U.S. government and agency securities $ 12,544 0.9 % $ 13,750 0.7 % $ (1,206) (8.8) %
Municipal securities 50,942 3.5 79,525 4.2 (28,583) (35.9)
Residential CMO and MBS (1)
369,331 25.2 512,049 27.3 (142,718) (27.9)
Commercial CMO and MBS (1)
309,741 21.0 504,258 27.0 (194,517) (38.6)
Corporate obligations 11,770 0.8 7,613 0.4 4,157 54.6
Other asset-backed securities 10,066 0.7 17,158 0.9 (7,092) (41.3)
Total 764,394 52.1 1,134,353 60.5 (369,959) (32.6)
Investment securities held to maturity, at amortized cost:
U.S. government and agency securities $ 151,216 10.3 % $ 151,075 8.1 % $ 141 0.1
Residential CMO and MBS (1)
244,309 16.6 267,204 14.3 (22,895) (8.6)
Commercial CMO and MBS (1)
307,760 21.0 321,163 17.1 (13,403) (4.2)
Total 703,285 47.9 739,442 39.5 (36,157) (4.9)
Total investment securities $ 1,467,679 100.0 % $ 1,873,795 100.0 % $ (406,116) (21.7) %
(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.
Total investment securities decreased $406.1 million to $1.47 billion at December 31, 2024 from $1.87 billion at December 31, 2023 due to sales of investment securities available for sale in connection with a strategic repositioning of the Company's investment portfolio, as well as maturities and repayments of $165.7 million, offset partially by purchases of investment securities available for sale.
During the year ended December 31, 2024, the Company incurred a pre-tax loss of $22.7 million on the sale of investment securities available for sale due to the aforementioned strategic repositioning of its investment portfolio. The Company sold $296.4 million in investment securities with an estimated weighted average book yield of 2.23% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05%. The remaining proceeds were used for other balance sheet initiatives such as the funding of higher yielding loan growth.
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The following table provides the weighted average yield of the Company's investment portfolio at December 31, 2024 calculated based upon the fair values of our investment securities available for sale and held to maturity, and excluding any income tax benefits of tax-exempt bonds:
In one year or less After one year through five years After five years through ten years After ten years Total
Fair
Value Yield Fair
Value Yield Fair
Value Yield Fair
Value Yield Fair
Value Yield
(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities $ — — % $ 4,688 3.04 % $ 1,374 1.43 % $ 6,482 2.32 % $ 12,544 2.47 %
Municipal securities — — 1,423 4.37 18,273 3.26 31,246 2.93 50,942 3.07
Residential CMO and MBS (1)
14 1.59 530 3.14 30,452 3.98 338,335 3.51 369,331 3.54
Commercial CMO and MBS (1)
18,767 3.35 174,725 3.87 102,478 1.98 13,771 4.95 309,741 3.21
Corporate obligations — — — — 11,770 8.32 — — 11,770 8.32
Other asset-backed securities — — — — 1,435 6.44 8,631 5.92 10,066 5.99
Total $ 18,781 3.35 % $ 181,366 3.85 % $ 165,782 2.91 % $ 398,465 3.53 % $ 764,394 3.46 %
Investment securities held to maturity:
U.S. government and agency securities $ — — % $ — — % $ 78,092 2.08 % $ 44,250 2.17 % $ 122,342 2.11 %
Residential CMO and MBS (1)
— — — — 34,292 3.34 191,454 4.03 225,746 3.92
Commercial CMO and MBS (1)
— — 137,045 3.03 125,435 1.75 12,884 3.79 275,364 2.45
Total $ — — % $ 137,045 3.03 % $ 237,819 2.07 % $ 248,588 3.63 % $ 623,452 2.89 %
(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.
Loan Portfolio Overview
Changes by loan type
The Company originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases. The following table provides information about our loan portfolio by type of loan at the dates indicated:
December 31, 2024 December 31, 2023 Change
Amortized Cost % of Loans Receivable Amortized Cost % of Loans Receivable $ %
(Dollars in thousands)
Commercial business:
Commercial and industrial $ 842,672 17.5 % $ 718,291 16.6 % $ 124,381 17.3 %
Owner-occupied CRE 1,003,243 20.9 958,620 22.1 44,623 4.7
Non-owner occupied CRE 1,909,107 39.9 1,697,574 39.1 211,533 12.5
Total commercial business 3,755,022 78.3 3,374,485 77.8 380,537 11.3
Residential real estate
402,954 8.4 375,342 8.7 27,612 7.4
Real estate construction and land development:
Residential 83,890 1.7 78,610 1.8 5,280 6.7
Commercial and multifamily 395,553 8.2 335,819 7.7 59,734 17.8
Total real estate construction and land development 479,443 9.9 414,429 9.5 65,014 15.7
Consumer 164,704 3.4 171,371 4.0 (6,667) (3.9)
Total $ 4,802,123 100.0 % $ 4,335,627 100.0 % $ 466,496 10.8 %
Loans receivable increased $466.5 million, or 10.8%, to $4.80 billion at December 31, 2024 from $4.34 billion at December 31, 2023. New loans funded in the year ended December 31, 2024 totaled $626.2 million and loan prepayments were $176.7 million.
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Non-owner occupied CRE loans increased $211.5 million, or 12.5%, due primarily to new loan production during the year ended December 31, 2024 and advances on outstanding commitments. Commercial and industrial loans increased $124.4 million, or 17.3%, due primarily to new loan production of $232.5 million during the year ended December 31, 2024, offset by pay downs on outstanding balances. Commercial and multifamily construction loans increased $59.7 million, or 17.8%, during the year ended December 31, 2024 due primarily to new loan commitments of $149.3 million and advances on new and outstanding commitments. Residential real estate loans increased $27.6 million, or 7.4%, due primarily to loan purchases during the year ended December 31, 2024.
Owner-occupied CRE and non-owner occupied CRE loans increased $256.2 million to $2.91 billion at December 31, 2024 compared to $2.66 billion at December 31, 2023 . The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:
December 31, 2024 December 31, 2023 Change
Amortized Cost % of CRE Loans Amortized Cost % of CRE Loans $ %
(Dollars in thousands)
Owner occupied and non-owner occupied CRE loans by collateral type:
Office $ 565,892 19.4 % $ 555,822 20.9 % $ 10,070 1.8 %
Industrial 513,615 17.6 418,651 15.8 94,964 22.7
Multi-family 414,728 14.2 305,499 11.5 109,229 35.8
Retail store / shopping center 304,562 10.5 285,926 10.8 18,636 6.5
Mini-storage 161,390 5.5 171,778 6.5 (10,388) (6.0)
Mixed use property 156,627 5.4 154,674 5.8 1,953 1.3
Warehouse 139,341 4.8 149,176 5.6 (9,835) (6.6)
Motel / hotel 165,420 5.7 142,172 5.4 23,248 16.4
Single purpose 125,430 4.3 123,344 4.6 2,086 1.7
Recreational / school 68,416 2.3 67,791 2.6 625 0.9
Other 296,929 10.3 281,361 10.5 15,568 5.5
Total $ 2,912,350 100.0 % $ 2,656,194 100.0 % $ 256,156 9.6 %
Office loans represented the l argest segment of owner-occupied and non-owner occupied CRE loans totaling $565.9 million, or 19.4% of the total owner-occupied CRE and non-owner occupied CRE at December 31, 2024. Of this total, $291.5 million, or 51.5%, were owner-occupied CRE loans which have a lower risk profile as there is less tenant rollover risk, 81.0% have recourse to the owners and 24.6% of loans are borrowers in the health care and social assistance sectors, who are less likely to reduce office space. The average individual loan balance of owner-occupied CRE and non-owner occupied CRE was $1.3 million at December 31, 2024. See also Item 1. Business - Commercial Business Lending of this Form 10-K for CRE underwriting standards.
Composition of loans receivable by contractual maturity and interest type
The following table presents the amortized cost of the loan portfolio by segment and contractual maturity at December 31, 2024:
In one year or less After one year through five years After five years through 15 years After 15 years Total
(Dollars in thousands)
Commercial business:
Commercial and industrial $ 386,322 $ 89,566 $ 177,223 $ 189,561 $ 842,672
Owner-occupied CRE 176,517 151,374 309,289 366,063 1,003,243
Non-owner occupied CRE 429,078 421,088 528,591 530,350 1,909,107
Total commercial business 991,917 662,028 1,015,103 1,085,974 3,755,022
Residential real estate
8,500 7,361 16,333 370,760 402,954
Real estate construction and land development:
Residential 72,972 4,525 3,761 2,632 83,890
Commercial and multifamily 266,160 3,149 75,766 50,478 395,553
Total real estate construction and land development 339,132 7,674 79,527 53,110 479,443
Consumer 147,734 11,827 2,144 2,999 164,704
Total $ 1,487,283 $ 688,890 $ 1,113,107 $ 1,512,843 $ 4,802,123
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The following table presents the amortized cost of the loan portfolio by segment and interest rate type that are due after one year, at December 31, 2024:
Have predetermined interest rates (1)
Have floating or adjustable interest rates (1)
Total
(Dollars in thousands)
Commercial business:
Commercial and industrial $ 361,541 $ 94,809 $ 456,350
Owner-occupied CRE 484,091 342,635 826,726
Non-owner occupied CRE 935,642 544,387 1,480,029
Total commercial business 1,781,274 981,831 2,763,105
Residential real estate
333,827 60,627 394,454
Real estate construction and land development:
Residential 9,783 1,135 10,918
Commercial and multifamily 76,018 53,375 129,393
Total real estate construction and land development 85,801 54,510 140,311
Consumer 16,882 88 16,970
Total $ 2,217,784 $ 1,097,056 $ 3,314,840
(1) Includes $285.7 million of commercial business loans with floating or adjustable interest rates in which the Company entered into non-hedge interest rate swap contracts with the borrower and a third-party. Under these derivative contract arrangements, the Company effectively earns a variable rate of interest based on the one-month SOFR plus a margin, except for interest rate swap contracts on construction loans that earn fixed rates until the end of the construction period and the variable rate swap becomes effective.
Loans classified as nonaccrual, performing modified loans and nonperforming assets
The following tables provide information about our nonaccrual loans, performing modified loans and nonperforming assets at the dates indicated:
Change
December 31, 2024 December 31, 2023 $ %
(Dollars in thousands)
Nonaccrual loans: (1)
Commercial business $ 3,919 $ 4,468 $ (549) (12.3) %
Consumer 160 — 160 100.0
Total nonaccrual loans 4,079 4,468 (389) (8.7)
Accruing loans past due 90 days or more 1,195 1,293 (98) (7.6)
Total nonperforming loans
5,274 5,761 (487) (8.5)
Other real estate owned — — — —
Total nonperforming assets $ 5,274 $ 5,761 $ (487) (8.5) %
Credit quality ratios:
Nonaccrual loans to loans receivable 0.08 % 0.10 % (0.02) % (20.0) %
Nonperforming loans to loans receivable 0.11 0.13 (0.02) (15.4)
Nonperforming assets to total assets 0.07 0.08 (0.01) (12.5)
(1) At December 31, 2024 and December 31, 2023, $1.0 million, and $3.2 million, respectively, of nonaccrual loans were guaranteed by government agencies.
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Year Ended December 31, Change
2024 2023 $ %
(Dollars in thousands)
Modified loans:
Commercial business $ 21,162 $ 19,969 $ 1,193 6.0 %
Real estate construction and land development 28,030 9,643 18,387 190.7
Consumer 44 41 3 7.3
Total performing modified loans $ 49,236 $ 29,653 $ 19,583 66.0 %
The following table provides the changes in nonaccrual loans during the periods indicated:
Year Ended December 31, Change
2024 2023 $ %
(Dollars in thousands)
Balance, beginning of period $ 4,468 $ 5,906 $ (1,438) (24.3) %
Additions 6,292 3,057 3,235 105.8
Net principal payments, sales and transfers to accruing status (1,175) (1,508) 333 (22.1)
Payoffs (2,733) (2,987) 254 (8.5)
Charge-offs (2,773) — (2,773) 100.0
Balance, end of period $ 4,079 $ 4,468 $ (389) (8.7) %
Nonaccrual loans decreased $0.4 million, or 8.7%, due primarily to ongoing collection efforts. Additions during the year ended December 31, 2024 were due primarily to one $5.0 million owner occupied CRE loan of which $2.5 million was charged off. Payoffs during the year ended December 31, 2024 were due primarily to the payoff of one commercial and industrial loan relationship.
Allowance for Credit Losses on Loans Overview
The following table provides information regarding changes in our ACL on loans for the years indicated:
At or For the Years Ended December 31,
2024 2023 2022
(Dollars in thousands)
ACL on loans at the beginning of the period $ 47,999 $ 42,986 $ 42,361
Charge-offs:
Commercial business (2,953) (719) (316)
Residential real estate
— — (30)
Consumer (538) (586) (547)
Total charge-offs (3,491) (1,305) (893)
Recoveries:
Commercial business 855 1,372 929
Residential real estate
— — 3
Real estate construction and land development — — 384
Consumer 122 210 765
Total recoveries 977 1,582 2,081
Net (charge-offs) recoveries (2,514) 277 1,188
Provision for (reversal of) credit losses on loans 6,983 4,736 (563)
ACL on loans at the end of period $ 52,468 $ 47,999 $ 42,986
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At or For the Years Ended December 31,
2024 2023 2022
(Dollars in thousands)
Credit quality ratios:
ACL on loans to:
Loans receivable 1.09 % 1.11 % 1.06 %
Nonaccrual loans 1286.30 1074.28 727.84
Nonaccrual loans to loans receivable
0.08 % 0.10 % 0.15 %
Balances at the end of the period:
Loans receivable
$ 4,802,123 $ 4,335,627 $ 4,050,858
Nonaccrual loans
4,079 4,468 5,906
Average balances outstanding during the period: (1)
Commercial business $ 3,522,065 $ 3,289,564 $ 3,188,238
Residential real estate 399,857 369,297 250,780
Real estate construction and land development 446,713 362,919 242,528
Consumer 167,830 179,454 212,306
Total $ 4,536,465 $ 4,201,234 $ 3,893,852
Net charge-offs (recoveries) during the period to average balances outstanding during the period:
2024 2023 2022
Commercial business 0.06 % (0.02) % (0.02) %
Residential real estate — — 0.01
Real estate construction and land development — — (0.16)
Consumer 0.25 0.21 (0.10)
Total 0.06 % (0.01) % (0.03) %
(1) Average balances exclude the ACL on loans and loans held for sale, but include loans classified as nonaccrual.
The provision for credit losses on loans of $7.0 million recognized during the year ended December 31, 2024 was due primarily to growth in balances of collectively evaluated loans and secondarily to $2.5 million in charge-offs. The ACL on loans to loans receivable decreased to 1.09% as December 31, 2024, compared to 1.11% at December 31, 2023 due to changes in the loan mix as loan growth occurred in segments requiring a lower calculated reserve as a percentage of loans as well as a reduction in the baseline loss rates applied and weighted average life of the residential real estate and real estate construction and land development segments which contributed to a decrease in the ACL as a % of loans in these loan segments.
The following table presents the ACL on loans by loan portfolio segment at the indicated dates:
December 31, 2024 December 31, 2023
ACL on Loans ACL as a % of Loans in Loan Category % of Loans in Loan Category to
Total Loans ACL on Loans ACL as a % of Loans in Loan Category % of Loans in Loan Category to
Total Loans
(Dollars in thousands)
Commercial business $ 38,293 1.02 % 78.3 % $ 31,303 0.93 % 77.8 %
Residential real estate 3,464 0.86 8.4 3,473 0.93 8.7
Real estate construction and land development 8,656 1.81 9.9 10,876 2.62 9.5
Consumer 2,055 1.25 3.4 2,347 1.37 4.0
Total ACL on loans $ 52,468 1.09 % 100.0 % $ 47,999 1.11 % 100.0 %
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Deposits Overview
The following table summarizes the Company's deposits at the dates indicated:
December 31, 2024 December 31, 2023 Change
Balance % of Total Balance % of Total $ %
(Dollars in thousands)
Noninterest demand deposits $ 1,654,955 29.1 % $ 1,715,847 30.6 % $ (60,892) (3.5) %
Interest bearing demand deposits 1,464,129 25.8 1,608,745 28.7 (144,616) (9.0)
Money market accounts 1,166,901 20.5 1,094,351 19.5 72,550 6.6
Savings accounts 421,377 7.4 487,956 8.7 (66,579) (13.6)
Total non-maturity deposits 4,707,362 82.8 4,906,899 87.5 (199,537) (4.1)
Certificates of deposit 977,251 17.2 692,973 12.5 284,278 41.0
Total deposits $ 5,684,613 100.0 % $ 5,599,872 100.0 % $ 84,741 1.5 %
Total deposits increased $84.7 million, or 1.5%, to $5.68 billion at December 31, 2024, compared to $5.60 billion at December 31, 2023. Certificates of deposit increased $284.3 million, or 41.0%, to $977.3 million from $693.0 million and money market accounts increased $72.6 million, or 6.6%, to $1.17 billion from $1.09 billion primarily due to transfers from lower yielding non-maturity deposit accounts as customers moved balances to higher yielding accounts.
Total deposits include uninsured deposits of approximately $2.27 billion and $2.10 billion at December 31, 2024 and 2023, respectively, calculated in accordance with FDIC guidelines. Uninsured deposits included $267.8 million and $256.4 of fully collateralized deposits as of December 31, 2024 and December 31, 2023. The Bank does not hold any foreign deposits.
The following table provides the estimated uninsured portion of certificates of deposit that are in excess of the FDIC insurance limit, by remaining time until maturity at December 31, 2024, by account, with a maturity of:
(Dollars in thousands)
Three months or less $ 141,310
Over three months through six months 172,544
Over six months through twelve months 54,050
Over twelve months 4,880
Total $ 372,784
Stockholders' Equity Overview
The Company’s stockholders' equity to assets ratio was 12.2% and 11.9% at December 31, 2024 and 2023, respectively. The following table provides the changes to stockholders' equity during the periods indicated:
Year Ended December 31, Change
2024 2023 $ %
(Dollars in thousands)
Balance, beginning of period $ 853,261 $ 797,893 $ 55,368 6.9 %
Net income 43,258 61,755 (18,497) (30.0)
Dividends declared (32,150) (31,112) (1,038) 3.3
Other comprehensive income (loss), net of tax
17,232 27,374 (10,142) (37.0)
Common stock repurchased (22,418) (6,974) (15,444) 221.5
Stock-based compensation expense 4,344 4,325 19 0.4
Balance, end of period $ 863,527 $ 853,261 $ 10,266 1.2 %
Stockholders' equity increased for the year ended December 31, 2024 primarily as a result of net income and an increase in AOCI as a result of a decrease in other comprehensive income (loss), net of tax, which was positively impacted by the fair value of our investment securities available for sale and losses recognized on investment sales. AOCI has no effect on our regulatory capital ratios as the Company opted to exclude it from its common equity tier 1 capital. Cash dividends and stock repurchases partially offset the increase in stockholders' equity during the year ended December 31, 2024.
On April 24, 2024, the Board authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,734,492 shares in total, under a new stock repurchase program. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will make any repurchases in the future. Under the stock repurchase program, the Company may
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repurchase shares of common stock from time to time in open market or privately negotiated transactions. The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds and other factors, including opportunities to deploy the Company's capital. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the stock repurchase program’s expiration, without any prior notice. The stock repurchase program authorized in April 2024 superseded the previous stock repurchase program authorized in March 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares. At the time the April 2024 stock repurchase program was authorized, 3,910 shares remained available for purchase under the March 2020 stock repurchase program.
The Company repurchased 1,051,760 and 330,424 shares of its common stock under the Company's stock repurchase plan during the years ended December 31, 2024 and December 31, 2023, respectively. The Company also repurchased 31,850 and 32,792 shares during the years ended December 31, 2024 and December 31, 2023, respectively, which represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units. As of December 31, 2024, 990,522 shares remained available for future repurchases under the April 2024 stock repurchase program.
Liquidity and Capital Resources
Liquidity
Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either our assets or liabilities.
Asset liquidity sources consist of the repayments and maturities of loans, sales of loans, maturities of investment securities and sales of investment securities available for sale. These activities are generally included as investing activities in the Consolidated Statements of Cash Flows. Net cash used by investing activities was $85.9 million during the year ended December 31, 2024. Net increases in loan balances from both loan originations and purchases used $464.6 million of cash, while investment securities sales and maturities, net of purchases provided $406.2 million in cash.
Liquidity may also be affected by liabilities as a result of changes in deposits and borrowings. These activities are included in financing activities in the Consolidated Statements of Cash Flows. During the year ended December 31, 2024, financing activities used $86.5 million of funds resulting primarily from a decrease in short-term borrowings of $117.0 million, $31.8 million in dividend payments and $22.4 million in repurchases of common stock, offset partially by an increase in deposits of $84.7 million.
At December 31, 2024, we had outstanding loan commitments of $1.18 billion, primarily relating to undisbursed loans in process and unused credit lines as discussed in Note (18) Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Form 10-K. Loan commitments represent potential growth in the loan portfolio and lending activities. The current level of commitments is proportionally consistent with our historical experience and does not represent a departure from traditional operations. As of December 31, 2024, we had $17.8 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts. In addition, as of December 31, 2024, we had $27.6 million of commitments under operating lease agreements.
We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and also actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has been to acquire non-maturity deposits from our retail accounts, acquire noninterest bearing demand deposits from our commercial customers and use our borrowing availability to fund growth in assets. We may also acquire brokered deposits when the cost of funds is advantageous compared to other funding sources. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position.
We maintain credit facilities with the FHLB, which provide for advances that in the aggregate would equal the lesser of 45% of the Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock). At December 31, 2024, under these credit facilities based on pledged loan collateral, the Bank had $976.3 million of available credit capacity. The Bank had $383.0 million in outstanding borrowings from the FHLB at December 31, 2024, and none at December 31, 2023. In addition, the Bank has access to the FRB Discount Window and had access to the BTFP at December 31, 2023 and 2024, until the FRB ceased making new loans under the BTFP on March 11, 2024. Based on pledged investment collateral, the Bank had available lines of credit from the FRB of approximately $360.1 million as of December 31, 2024. The Bank had no outstanding borrowings from the FRB at December 31, 2024 and $500.0 million in outstanding borrowings under the BTFP at December 31, 2023. At December 31, 2024, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $145.0 million. No balances were outstanding under these agreements as of either December 31, 2024 or 2023. Availability of lines of credit is subject to federal funds balances available for loan and continued borrower eligibility. These lines of credit are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.
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The following table summarizes the Company's available liquidity as of the dates indicated:
December 31,
2024 December 31,
2023
(Dollars in thousands)
On-balance sheet liquidity
Cash and cash equivalents $ 117,100 $ 224,973
Unencumbered investment securities available for sale (1)
746,163 756,258
Total on-balance sheet liquidity
$ 863,263 $ 981,231
Off-balance sheet liquidity
FRB borrowing availability $ 360,104 $ 319,492
FHLB borrowing availability (2)
976,288 1,417,518
Fed funds line borrowing availability with correspondent banks 145,000 145,000
Total off-balance sheet liquidity
$ 1,481,392 $ 1,882,010
Total available liquidity $ 2,344,655 $ 2,863,241
(1) Investment securities available for sale at fair value.
(2) Includes FHLB borrowing availability of $1.36 billion at December 31, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.22 billion.
Capital Resources
The Company pays dividends to its shareholders. The primary source of the Company's liquidity is dividends from the Bank to the Company. The Bank is subject to strict regulatory capital ratios, and may not be able to issue dividends to the Company in an amount sufficient to maintain our current or anticipated dividend practices. We expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board's discretion to modify or terminate this practice at any time and for any reason without prior notice. No assurances can be given that any dividends will be paid on our common stock in future periods or that, if paid, such dividends will not be reduced in amount. Our current quarterly common stock dividend rate is $0.24 per share, as approved by our Board on January 22, 2025. We believe this dividend rate per share enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2025 at this rate, our average total dividend paid each quarter would be approximately $8.2 million based on the current number of our outstanding shares (assuming no increases or decreases in the number of shares).
From time to time, our Board has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such stock repurchase plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. The Company's current stock repurchase program authorizes us to repurchase up to 5% of the Company's outstanding common shares, or 1,734,492 in total, of which 990,522 shares remained available for future repurchases as of December 31, 2024. The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted under Rule 10b5-1 of the SEC, price, general business and market conditions, and alternative investment opportunities. See Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for additional information relating to stock repurchases.
Management believes that the Company's capital sources are adequate to meet all of the Company's reasonably foreseeable short-term and intermediate-term requirements.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company's financial condition or results of operations. The Company considers its critical accounting estimates to be as follows:
ACL on Loans
Management's estimate of the ACL on loans relies on the identification, stratification and separate estimates of loss for both loans individually evaluated for loss and loans collectively evaluated for loss. The estimate of loss for loans collectively evaluated for loss in particular involves a significant level of estimation uncertainty due to its complexity and the quantity of relevant inputs, including: management's determination of baseline loss rate multipliers based on a third party forecast of economic conditions, estimates of the reasonable and supportable forecast period, estimates of the baseline loss rate lookback period, estimates of the reversion period from the reasonable and supportable forecast period to the baseline loss rate and estimates of the prepayment rate and related lookback period. Additionally, management considers other qualitative risk factors to further adjust the estimated ACL on loans through a qualitative allowance.
Management's estimates for these inputs are based on past events and current conditions, are inherently subjective and are susceptible to significant revision as new or different information becomes available. While management utilizes its best judgment and information available at the time of evaluation to recognize credit losses on loans, future additions to the allowance
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may be necessary based on declines in local and national economic conditions or other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL on loans. Such agencies may require the Company make adjustments to the allowance based on their interpretation of information available to them at the time of their examinations. Unanticipated changes in any of these inputs could have a significant impact on our financial condition and results of operations.
For additional information regarding the ACL on loans, its relation to the provision for credit losses and its risk related to asset quality and lending activity, see Item 1A. Risk Factors—The Company’s allowance for credit losses may prove to be insufficient to absorb potential losses in its loan portfolio, as well as Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (4) Allowance for Credit Losses on Loans of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data of this Form 10-K.
Goodwill
Goodwill is tested for impairment at the reporting unit level on an annual basis as of December 31 each year, and more frequently if events or circumstances indicate that there may be impairment. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount. If the fair value of the reporting unit is less than its carrying value, the difference is the amount of impairment and goodwill is written down to the fair value of the reporting unit. The Company has a single reporting unit.
In testing goodwill, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In this qualitative assessment, the Company evaluates events and circumstances which may include, but are not limited to: the general economic environment; banking industry and market conditions; a significant adverse change in legal factors; significant decline in our stock price and market capitalization; unanticipated competition; the testing for recoverability of a significant asset group within the reporting unit; and an adverse action or assessment by a regulator.
If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, the Company performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The determination of the fair value of a reporting unit is a subjective process that involves the use of estimates and judgments about economic and industry factors and the growth and earnings prospects of the Bank. Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations.
The Company performed its annual goodwill impairment test during the fourth quarter of 2024 which consisted of a qualitative assessment and determined that it is more likely than not that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired for the year ended December 31, 2024. Changes in the economic environment, operations of the reporting unit or other adverse events, could result in future impairment charges which could have a material adverse impact on the Company’s operating results.
For additional information regarding goodwill, see Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (6) Goodwill and Other Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.