Home Bancorp Inc.

05/06/2026 | Press release | Distributed by Public on 05/06/2026 13:49

Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.
The purpose of this discussion and analysis is to focus on significant changes in the financial condition of the Company and the Bank from December 31, 2025 through March 31, 2026 and on its results of operations for the three months ended March 31, 2026 and 2025. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated financial statements and related notes appearing in Item 1.
Forward-Looking Statements
To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company or Bank, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management's current information, estimates and assumptions and the current economic environment, are generally identified by the use of words such as "plan", "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions, or by future or conditional terms such as "will", "would", "should", "could", "may", "likely", "probably", or "possibly". The Company's or the Bank's actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. Certain risks, uncertainties and other factors, including those set forth under the heading "Risk Factors" in the Company's Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2025 and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis and may include factors such as, but not limited to, our lending activities, our use of municipal deposits as a source of funds, credit quality and risk, industry and technological changes, cyber incidents or other failures, disruptions or security breaches, interest rates, commercial and residential real estate values, economic and market conditions in the markets we operate in or generally in the United States, funds availability, accounting estimates and risk management processes, legislative and regulatory changes, the fair values of our acquired assets and our investment securities portfolio, business strategy execution, key personnel, competition, mortgage markets, fraud, environmental liability and severe weather, natural disasters, acts of war or terrorism or other external events. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
EXECUTIVE OVERVIEW
The Company reported net income for the first quarter of 2026 of $11.4 million, or $1.45 diluted EPS, up $396,000, or 3.6%, compared to the first quarter of 2025. Net income for the first quarter of 2025 totaled $11.0 million, or $1.37 diluted EPS.
Key components of the Company's performance during the three months ended March 31, 2026 include:
•Assets increased $62.0 million, or 1.8%, from December 31, 2025 to $3.6 billion at March 31, 2026.
•Total loans were $2.7 billion at March 31, 2026, down $15.9 million, or 0.6%, from December 31, 2025.
•During the three months ended March 31, 2026, the Company provisioned $922,000 to the allowance for loan losses, primarily due an increase in individually impaired loan reserves, partially offset by loan reduction. During the three months ended March 31, 2025, the Company provisioned $394,000 to the allowance for loan losses.
•The ALL totaled $33.7 million, or 1.23% of total loans, at March 31, 2026 compared to $33.1 million, or 1.21% of total loans, at December 31, 2025. The ACL, which is comprised of the allowance for loan losses plus the allowance for unfunded lending commitments, totaled $35.3 million, or 1.29% of total loans, at March 31, 2026 compared to $34.8 million, or 1.27% of total loans, at December 31, 2025.
•Nonperforming assets increased $3.8 million, or 10.5%, from $36.1 million, or 1.03% of total assets, at December 31, 2025 to $39.9 million, or 1.12% of total assets, at March 31, 2026. The increase in nonperforming assets during the first quarter of 2026 was primarily attributable to several loan relationships, including one relationship with an outstanding balance of $1.4 million, which were placed on nonaccrual status during the quarter, partially offset by loan paydowns and payoffs.
•Total deposits amounted to $3.0 billion at March 31, 2026, an increase of $54.0 million, or 1.8%, from December 31, 2025.
•The net interest margin was 4.16% for the three months ended March 31, 2026, up 25 bps from the three months ended March 31, 2025. The increase was primarily due to a decline in the average cost of interest-bearing liabilities.
•The average rate paid on total interest-bearing deposits was 2.29% for the first quarter of 2026, which was down 22 bps from the first quarter of 2025.
•Total interest expense for the first quarter of 2026 was $13.3 million, down $2.2 million, or 14.2%, compared to the first quarter of 2025, primarily due to a decrease in FHLB borrowing interest.
•Noninterest income for the first quarter of 2026 was $3.7 million, down $271,000, or 6.8%, compared to the first quarter of 2025, primarily due to decreases in other income (down $266,000) and gain on sale of loans (down $147,000), which were partially offset by an increase in service fees and charges (up $128,000).
•Noninterest expense for the first quarter of 2026 was $22.9 million, up $1.4 million, or 6.3%, compared to the first quarter of 2025, primarily due to increases in compensation and benefits (up $1.1 million) and other expenses (up $786,000), which were partially offset by decreases in foreclosed assets (down $173,000), franchise and shares tax (down $136,000), and occupancy expense (down $132,000).
FINANCIAL CONDITION
Loans, Allowance for Credit Losses and Asset Quality
Loans
Total loans at March 31, 2026 were $2.7 billion, down $15.9 million, or 0.6%, from December 31, 2025.
The following table summarizes the composition of the Company's loan portfolio as of the dates indicated.
(dollars in thousands) March 31, 2026 December 31, 2025 Increase/(Decrease)
Real estate loans:
One-to four-family first mortgage
$ 476,079 $ 493,446 $ (17,367) (3.5) %
Home equity loans and lines 91,550 92,574 (1,024) (1.1)
Commercial real estate 1,182,501 1,190,388 (7,887) (0.7)
Construction and land 340,057 329,227 10,830 3.3
Multi-family residential 179,982 177,825 2,157 1.2
Total real estate loans 2,270,169 2,283,460 (13,291) (0.6) %
Other loans:
Commercial and industrial 428,075 430,517 (2,442) (0.6)
Consumer 29,902 30,046 (144) (0.5)
Total other loans 457,977 460,563 (2,586) (0.6)
Total loans $ 2,728,146 $ 2,744,023 $ (15,877) (0.6) %
Allowance for Credit Losses
The ACL which equals the sum of the ALL and the ACL on unfunded lending commitments, is established through provisions for credit losses. Management recalculates the ACL at least quarterly to reassess the estimate of credit losses for the total portfolio at the relevant reporting date. Under ASC Topic 326, the ACL is measured on a pool basis when similar risk characteristics exist. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated ACL based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and industry loan concentrations, changes in the volume and severity of NPAs, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis.
The ACL policy described above is supplemented by periodic reviews and validations performed by independent loan reviewers. The results of the reviews are reported to the Audit Committee of the Board of Directors. The establishment of the ACL is significantly affected by management judgment. There is likelihood that different amounts would be reported under different conditions or assumptions. Federal regulatory agencies, as an integral part of their examination process, periodically
review our ACL. Such agencies may require management to make additional provisions for estimated losses based upon judgments different from those of management.
We continue to monitor and modify our ACL as conditions warrant. No assurance can be given that our level of ACL will cover all of the losses on our loans or that future adjustments to the ACL will not be necessary if economic and other conditions differ substantially from the assumptions used by management to determine the current level of the ACL.
At March 31, 2026, the ALL totaled $33.7 million, or 1.23% of total loans, up $538,000 from $33.1 million, or 1.21% of total loans, at December 31, 2025. During the three months ended March 31, 2026, the Company provisioned $922,000 to the allowance loan losses primarily due to an increase in individually impaired loan reserves, partially offset by loan reduction. Net loan charge-offs totaled $384,000 for the three months ended March 31, 2026.
Asset Quality
One of management's key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new loan originations, we proactively monitor loans and collection and workout processes of delinquent or problem loans. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made within 10 days after the date payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are designated as "special mention," classified or which are delinquent 90 days or more are reported to the Board of Directors of the Bank monthly. For loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases. It is our policy, with certain limited exceptions, to discontinue accruing interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to their ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower's financial condition and payment record demonstrate an ability to service the debt.
Under our allowance policy, credit losses are measured on a pool basis when similar risk characteristics exist. Loans that do not share similar risk characteristics are individually evaluated for credit losses and are excluded from the pooled loan analysis. At least quarterly, management evaluates the loan portfolio to determine which loans should be individually evaluated for credit losses. Management's evaluation involves an analysis of larger (i.e., credit relationships with aggregate balances of $500,000 or greater) commercial real estate loans, multi-family residential loans, construction and land loans and commercial and industrial loans. Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of becoming a problem loan, updated valuations may be ordered to determine if a short-fall exists, which may lead to a recommendation for partial charge off or appropriate allowance allocation. Property valuations are ordered through, and are reviewed by, an appraisal officer at the Bank. The Company typically orders an "as is" valuation for collateral property if a loan is in a criticized loan classification. Loans individually evaluated for credit losses are reported to the Board of Directors monthly.
At March 31, 2026 and December 31, 2025, loans identified as credit deteriorated loans and individually evaluated for expected losses were $10.0 million and $6.2 million, respectively. The following tables provide a summary of loans individually evaluated for credit losses as of the dates indicated.
March 31, 2026
(dollars in thousands)
Recorded Investment
Allowance for Loan Losses Allowance to Total Loans
Loans Individually Evaluated
One- to four-family first mortgage
$ 2,876 $ 411 14.29 %
Home equity loans and lines - - -
Commercial real estate 2,154 522 24.23
Construction and land 2,982 170 5.70
Multi-family residential 603 136 22.55
Commercial and industrial 1,409 985 69.91
Consumer - - -
Total $ 10,024 $ 2,224 22.19 %
December 31, 2025
(dollars in thousands)
Recorded Investment
Allowance for Loan Losses Allowance to Total Loans
Loans Individually Evaluated
One- to four-family first mortgage
$ 2,304 $ 411 17.84 %
Home equity loans and lines - - -
Commercial real estate 2,162 362 16.74
Construction and land 520 - -
Multi-family residential 603 136 22.55
Commercial and industrial 617 356 57.70
Consumer - - -
Total $ 6,206 $ 1,265 20.38 %
Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
At March 31, 2026 and December 31, 2025, loans classified as substandard totaled $61.5 million and $61.1 million, respectively. There were no assets classified as doubtful at either date. For additional information, refer to Note 5 to the Consolidated Financial Statements.
The following tables provide a summary of loans classified as special mention and substandard as of the dates indicated.
(dollars in thousands) March 31, 2026 December 31, 2025 Increase/(Decrease)
Special Mention Loans
One- to four-family first mortgage
$ - $ - $ - - %
Home equity loans and lines 807 811 (4) (0.5)
Commercial real estate 9,478 2,947 6,531 221.6
Construction and land 863 866 (3) (0.3)
Multi-family residential - - - -
Commercial and industrial - - - -
Consumer - - - -
Total special mention loans $ 11,148 $ 4,624 $ 6,524 141.1 %
(dollars in thousands) March 31, 2026 December 31, 2025 Increase/(Decrease)
Substandard Loans
One- to four-family first mortgage
$ 9,391 $ 6,993 $ 2,398 34.3 %
Home equity loans and lines 542 531 11 2.1
Commercial real estate 33,678 32,344 1,334 4.1
Construction and land 12,812 15,367 (2,555) (16.6)
Multi-family residential 1,594 1,598 (4) (0.3)
Commercial and industrial 3,442 4,252 (810) (19.0)
Consumer 41 46 (5) (10.9)
Total substandard loans $ 61,500 $ 61,131 $ 369 0.6 %
Total nonperforming loans increased by $1.6 million, or 4.8%, to $35.8 million at March 31, 2026, compared to $34.2 million at December 31, 2025. The increase was primarily attributable to several loan relationships, including one relationship with an outstanding balance of $1.4 million, which were placed on nonaccrual status during the quarter, partially offset by loan paydowns and payoffs. Based on the underlying collateral position and ongoing monitoring, management does not anticipate any material losses.
A bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management maintains, based on current and forecasted information, an ACL that reflects a current estimate of expected credit losses for the estimated life of the loan portfolio at reporting periods subsequent to the adoption date. For all reporting periods, actual losses are uncertain and dependent upon future events and, as such, further additions to the level of ACL may become necessary.
The following table sets forth the composition of the Company's nonperforming assets as of the dates indicated.
(dollars in thousands) March 31, 2026 December 31, 2025
Nonaccrual loans:(1)
Real estate loans:
One- to four-family first mortgage
$ 8,337 $ 6,531
Home equity loans and lines 542 531
Commercial real estate 10,837 9,011
Construction and land 12,812 15,367
Multi-family residential 1,281 1,281
Other loans:
Commercial and industrial 1,945 1,344
Consumer 41 46
Total nonaccrual loans 35,795 34,111
Accruing loans 90 days or more past due 14 65
Total nonperforming loans
35,809 34,176
Foreclosed assets and ORE 4,093 1,929
Total nonperforming assets 39,902 36,105
(dollars in thousands) March 31, 2026 December 31, 2025
Nonperforming loans to total loans 1.31 % 1.25 %
Nonperforming loans to total assets 1.01 % 0.98 %
Nonperforming assets to total assets 1.12 % 1.03 %
(1)Nonaccrual acquired loans include PCD loans of $1.1 million and $1.2 million at March 31, 2026 and December 31, 2025, respectively.
Foreclosed assets and ORE includes real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets and ORE are classified as such until sold or disposed. Foreclosed assets are recorded at fair value less estimated selling costs based on third party property valuations which are obtained at the time the asset is repossessed and periodically until the property is liquidated. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. Foreclosed assets and ORE holding costs are charged to expense. Gains and losses on the sale of foreclosed assets and ORE are charged to operations, as incurred. Costs associated with acquiring and improving a foreclosed property or ORE are capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs.
Investment Securities
The Company's investment securities portfolio totaled $386.3 million as of March 31, 2026, a decrease of $6.3 million, or 1.6%, from December 31, 2025. During the first quarters of 2026 and 2025, the Company had no gains or losses related to the sale of available for sale investment securities. At March 31, 2026, the Company had a net unrealized loss on its available for sale investment securities portfolio of $24.0 million, compared to a net unrealized loss of $23.4 million at December 31, 2025. The Company's investment securities portfolio had an effective duration of 3.4 years and 3.3 years at March 31, 2026 and December 31, 2025, respectively.
The following table summarizes activity in the Company's investment securities portfolio during the three months ended March 31, 2026.
(dollars in thousands) Available for Sale Held to Maturity
Balance, December 31, 2025 $ 391,448 $ 1,065
Purchases 21,531 -
Sales - -
Principal maturities, prepayments and calls (26,757) (535)
Amortization of premiums and accretion of discounts 58 -
Decrease in market value (551) -
Balance, March 31, 2026 $ 385,729 $ 530
Funding Sources
Deposits
Deposits totaled $3.0 billion at March 31, 2026, an increase of $54.0 million, or 1.8%, compared to December 31, 2025. The following table summarizes the changes in the Company's deposits from December 31, 2025 to March 31, 2026.
(dollars in thousands) March 31, 2026 December 31, 2025 Increase/(Decrease)
Demand deposit $ 830,030 $ 792,951 $ 37,079 4.7 %
Savings 202,058 201,265 793 0.4
Money market 543,120 518,740 24,380 4.7
NOW 710,071 654,227 55,844 8.5
Certificates of deposit 741,502 805,623 (64,121) (8.0)
Total deposits $ 3,026,781 $ 2,972,806 $ 53,975 1.8 %
The average rate paid on interest-bearing deposits was 2.29% for the first quarter of 2026, down 22 bps compared to the first quarter of 2025. At March 31, 2026, certificates of deposit maturing within the next 12 months totaled $715.3 million.
We obtain most of our deposits from individuals, small businesses and public funds in our market areas. The following table presents our deposits per customer type for the periods indicated.
March 31, 2026 December 31, 2025
Individuals 50% 52%
Small businesses 39 39
Public funds 8 6
Broker 3 3
Total 100% 100%
The total amounts of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) were $919.7 million at March 31, 2026 and $885.4 million at December 31, 2025. Public funds in excess of the FDIC insurance limits are fully collateralized.
Subordinated Debt
On June 30, 2022, the Company issued $55.0 million in aggregate principal amount of its 5.75% Fixed-to-Floating Rate Subordinated Notes due 2032 (the "Notes"). The Notes were issued at a price equal to 100% of the aggregate principal amount. The Notes have a stated maturity date of June 30, 2032 and bear interest at a fixed rate of 5.75% per year from and including the issue date to but excluding June 30, 2027. From June 30, 2027, the Notes will bear interest at a floating rate equal to the then current three-month term secured overnight financing rate ("SOFR"), plus 282 basis points. The Notes may be redeemed by the Company, in whole or in part, on or after June 30, 2027. The Notes are intended to qualify as Tier 2 capital for regulatory purposes.
The carrying value of the Notes was $54.7 million and $54.7 million at March 31, 2026 and December 31, 2025, respectively. The subordinated debt was recorded net of issuance costs and amortized using the straight-line method over five years.
Federal Home Loan Bank Advances
The average balance of total FHLB advances was $1.9 million for the first quarter of 2026, down $178.8 million compared to the first quarter of 2025.
The Company had no short-term FHLB advances as of March 31, 2026 and December 31, 2025. At March 31, 2026 and December 31, 2025, the Company had $0.0 million and $3.0 million in long-term FHLB advances, respectively, and $1.3 billion and $1.3 billion in additional FHLB advances available, respectively.
Shareholders' Equity
Total shareholders' equity increased $9.3 million, or 2.1%, from $435.1 million at December 31, 2025 to $444.4 million at March 31, 2026. Shareholders' equity increased primarily due to net income of $11.4 million, which was partially offset by an increase in the accumulated other comprehensive loss on available for sale investment securities and cash dividends paid on the common stock during the three months ended March 31, 2026.
At March 31, 2026, the Company and the Bank had regulatory capital amounts that were well in excess of regulatory requirements. The following table presents actual and required capital ratios for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2026 based on the required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
Actual Minimum Capital Required - Basel III Fully Phased-In To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Company:
Tier 1 risk-based capital $ 379,011 13.01 % $ 247,695 8.50 % N/A N/A
Total risk-based capital 468,845 16.09 305,976 10.50 N/A N/A
Tier 1 leverage capital 379,011 10.92 138,806 4.00 N/A N/A
Bank:
Common equity Tier 1 capital (to risk-weighted assets) $ 419,061 14.44 % $ 203,204 7.00 % $ 188,689 6.50 %
Tier 1 risk-based capital 419,061 14.44 246,747 8.50 232,233 8.00
Total risk-based capital 454,166 15.65 304,805 10.50 290,291 10.00
Tier 1 leverage capital 419,061 12.11 138,379 4.00 172,973 5.00
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity Management
Liquidity management encompasses our ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring adequate cash flow exists to meet the Company's needs, including operating, strategic and capital. The Company develops its liquidity management strategies as part of its overall asset/liability management process. Our primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, investment securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and investment securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. The Company also maintains excess funds in short-term, interest-bearing assets that provide additional liquidity.
The Company uses its liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. At March 31, 2026, certificates of deposit maturing within the next 12 months totaled $715.3 million. Based upon historical experience, the Company anticipates that a significant portion of the maturing certificates of deposit will be redeposited with us.
In addition to cash flow from loan and securities payments and prepayments as well as from sales of securities available for sale, the Company has significant borrowing capacity available to fund liquidity needs. In recent years, the Company has utilized borrowings as a cost efficient addition to deposits as a source of funds. Borrowings consist of advances from the FHLB of Dallas, of which the Company is a member. Under terms of the collateral agreement with the FHLB, the Company pledges residential mortgage loans and investment securities as well as the Company's stock in the FHLB as collateral for such advances. For the three months ended March 31, 2026, the average balance of outstanding FHLB advances was $1.9 million. At March 31, 2026, the Company had $0.0 million in total outstanding FHLB advances.
Asset/Liability Management
The objective of asset/liability management is to implement strategies for the funding and deployment of the Company's financial resources that are expected to maximize soundness and profitability over time at acceptable levels of risk. Interest rate sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. The Company measures its interest rate sensitivity over the near term primarily by running net interest income simulations. Our interest rate sensitivity also is monitored by management through the use of a model which generates estimates of the change in its net interest income over a range of interest rate scenarios. Based on the Company's interest rate risk model, the table below sets forth the results of immediate and sustained changes in interest rates as of March 31, 2026.
Shift in Interest Rates (in bps) % Change in Projected Net Interest Income
+200 6.8%
+100 3.5%
-100 (3.8)%
-200 (7.2)%
The actual impact of changes in interest rates will depend on many factors. These factors include the Company's ability to achieve expected growth in earning assets and maintain a desired mix of earning assets and interest-bearing liabilities, the actual timing of asset and liability repricing, the magnitude of interest rate changes and corresponding movement in interest rate spreads and the level of success of asset/liability management strategies.
The Company periodically has entered into interest rate swap agreements as part of its interest rate risk management strategy. The Company's objectives in using interest rate derivatives are to manage its exposure to interest rate movements. During 2026 and 2025, such derivatives were used to hedge the variable cost associated with existing variable rate liabilities. Refer to Note 6 of the Consolidated Financial Statements for more information on the effects of the derivative financial instruments on the consolidated financial statements.
To meet the financing needs of its customers, the Company issues financial instruments which represent conditional obligations that are not recognized, wholly or in part, in the statements of financial condition. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments expose the Company to varying degrees of credit and interest rate risk in much the same way as funded loans. The same credit policies are used in these commitments as for on-balance sheet instruments. At both March 31, 2026 and December 31, 2025, the Company's allowance for credit losses on unfunded commitments totaled $1.6 million and $1.6 million, respectively.
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans as of the periods indicated.
Contract Amount
(dollars in thousands) March 31, 2026 December 31, 2025
Standby letters of credit $ 10,021 $ 8,724
Available portion of lines of credit 505,199 498,442
Undisbursed portion of loans in process 80,905 69,223
Commitments to originate loans 199,377 165,251
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
The Company is subject to certain claims and litigation arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the financial condition or results of operations of the Company.
RESULTS OF OPERATIONS
Net income for the first quarter of 2026 was $11.4 million, up $396,000, or 3.6%, compared to the first quarter of 2025. Diluted EPS for the first quarter of 2026 was $1.45, up $0.08 compared to the first quarter of 2025.
During the three months ended March 31, 2026, the Company provisioned $922,000 to the allowance for loan losses, primarily due to an increase in individually impaired loan reserves, partially offset by loan reduction. During the three months ended March 31, 2025, the Company provisioned $394,000 to the allowance for loan losses, primarily due to loan growth.
Net Interest Income
Net interest income is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. The Company's net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's tax-equivalent net interest spread was 3.40% and 3.10% for the quarters ended March 31, 2026 and 2025, respectively.
Net interest income totaled $34.5 million for the first quarter of 2026, up $2.7 million, or 8.6%, compared to the first quarter of 2025.
The Company's tax-equivalent net interest margin, which is net interest income as a percentage of average interest-earning assets, was 4.16% and 3.91% for the quarters ended March 31, 2026 and 2025, respectively. For the same periods, the average loan yield was 6.41% and 6.43%, respectively.
Acquired loan discount accretion included in interest income totaled $189,000 and $356,000 for the quarters ended March 31, 2026 and 2025, respectively.
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) net interest spread; and (v) net interest margin. Information is based on average monthly balances during the indicated periods. Taxable equivalent yields are calculated using a marginal tax rate of 21%.
Three Months Ended March 31,
2026 2025
(dollars in thousands) Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Interest-earning assets:
Loans receivable(1)
$ 2,734,651 $ 43,717 6.41 % $ 2,745,212 $ 44,032 6.43 %
Investment securities
Taxable 391,705 2,491 2.54 423,412 2,592 2.45
Tax-exempt (TE)
15,603 69 2.26 16,144 72 2.26
Total investment securities 407,308 2,560 2.53 439,556 2,664 2.44
Other interest-earning assets 168,715 1,463 3.52 55,851 505 3.67
Total interest-earning assets (TE)
3,310,674 $ 47,740 5.78 3,240,619 $ 47,201 5.84
Noninterest-earning assets 221,507 208,853
Total assets $ 3,532,181 $ 3,449,472
Interest-bearing liabilities:
Deposits:
Savings, checking and money market $ 1,431,639 $ 5,809 1.65 % $ 1,306,602 $ 5,401 1.68 %
Certificates of deposit 764,900 6,597 3.50 732,079 7,221 4.00
Total interest-bearing deposits 2,196,539 12,406 2.29 2,038,681 12,622 2.51
Other borrowings - - - 5,539 53 3.89
Subordinated debt 54,702 845 6.18 54,485 845 6.20
Short-term FHLB advances - - - 149,043 1,655 4.44
Long-term FHLB advances
1,908 7 1.49 31,615 277 3.51
Total interest-bearing liabilities 2,253,149 $ 13,258 2.38 2,279,363 $ 15,452 2.74
Noninterest-bearing liabilities 836,422 766,605
Total liabilities 3,089,571 3,045,968
Shareholders' equity 442,610 403,504
Total liabilities and shareholders' equity $ 3,532,181 $ 3,449,472
Net interest-earning assets $ 1,057,525 $ 961,256
Net interest spread (TE)
$ 34,482 3.40 % $ 31,749 3.10 %
Net interest margin (TE)
4.16 % 3.91 %
(1)Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process.
The following table displays the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in average volume between periods times prior year rate), (ii) changes attributable to rate (changes in average rate between periods times prior year volume) and (iii) total increase (decrease).
Three Months Ended March 31,
2026 Compared to 2025
Change Attributable To
(dollars in thousands) Rate Volume Increase/ (Decrease)
Interest income:
Loans receivable $ (146) $ (169) $ (315)
Investment securities 97 (201) (104)
Other interest-earning assets (42) 1,000 958
Total interest income (91) 630 539
Interest expense:
Savings, checking and money market accounts (272) 680 408
Certificates of deposit (928) 304 (624)
Other borrowings (27) (26) (53)
Subordinated debt (3) 3 -
FHLB advances (912) (1,013) (1,925)
Total interest expense (2,142) (52) (2,194)
Increase in net interest income
$ 2,051 $ 682 $ 2,733
Noninterest Income
Noninterest income for the first quarter of 2026 totaled $3.7 million, down $271,000, or 6.8%, from $4.0 million earned for the same period in 2025. Noninterest income decreased over the comparable period primarily due to decreases in other income (down $266,000) and gain on sale of loans (down $147,000), which were partially offset by an increase in service fees and charges (up $128,000).
Noninterest Expense
Noninterest expense for the first quarter of 2026 totaled $22.9 million, up $1.4 million, or 6.3%, from the first quarter of 2025. Noninterest expense increased over the comparable quarter primarily due to increases in compensation and benefits (up $1.1 million) and other expenses (up $786,000), which were partially offset by decreases in foreclosed assets (down $173,000), franchise and shares tax (down $136,000), and occupancy expense (down $132,000).
Income Taxes
Income tax expense for the three months ended March 31, 2026 totaled $3.0 million, compared to $2.8 million for the three months ended March 31, 2025. Income tax expense increased over the prior comparable quarter primarily due to increased taxable earnings. The Company's effective tax rates for the first quarters of 2026 and 2025 were 20.9% and 20.5%, respectively.
CRITICAL ACCOUNTING ESTIMATES
SEC guidance requires disclosure of "critical accounting estimates." The SEC defines "critical accounting estimates" as 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 financial condition or results of operations of the registrant.
We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. Our accounting policies are discussed in detail in Note 1 - Basis of Presentation in the accompanying notes to the consolidated financial statements included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2025. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, management believes the policy noted below meets the SEC's definition of a critical accounting policy.
Allowance for Credit Losses
Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management's continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and industry loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis.
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