HFWA 10-Q Quarterly Report Sept. 30, 2024

HERITAGE FINANCIAL CORP /WA/

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 000-29480

HERITAGE FINANCIAL CORP ORATION

(Exact name of registrant as specified in its charter)

Washington

91-1857900

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

201 Fifth Avenue SW,

Olympia

98501

(Address of principal executive offices)

(Zip Code)

( 360 ) 943-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	HFWA	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of October 29, 2024, there were 34,153,539 shares of the registrant's common stock, no par value per share, outstanding.

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

September 30, 2024

TABLE OF CONTENTS


			Page
GLOSSARY OF ACRONYMS, ABBREVIATIONS AND TERMS			3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			3

PART I.	FINANCIAL INFORMATION		6
ITEM 1.	FINANCIAL STATEMENTS		6
	CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF SE PTEMBER 30, 2024 AND DECEMBER 31, 2023		6
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NIN E MONTHS ENDED SEPTEMBER 30, 2024 AND 2023		7
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND NIN E MONTHS ENDED SEPTEMBER 30, 2024 AND 2023		9
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND NIN E MONTHS ENDED SEPTEMBER 30, 2024 AND 2023		10
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023		12
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		14
	NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	14
	NOTE 2.	INVESTMENT SECURITIES	15
	NOTE 3.	LOANS RECEIVABLE	18
	NOTE 4.	ALLOWANCE FOR CREDIT LOSSES ON LOANS	28

	NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	30
	NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	31
	NOTE 7.	STOCKHOLDERS’ EQUITY	31
	NOTE 8.	FAIR VALUE MEASUREMENTS	32

	NOTE 9.	INCOME TAXES	36
	NOTE 10.	COMMITMENTS AND CONTINGENCIES	37

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		37
	OVERVIEW		37
	RESULTS OF OPERATIONS		38
		NET INCOME OVERVIEW	38
		NET INTEREST INCOME AND MARGIN OVERVIEW	39
		PROVISION FOR CREDIT LOSSES OVERVIEW	42
		NONINTEREST INCOME OVERVIEW	43
		NONINTEREST EXPENSE OVERVIEW	44
		INCOME TAX EXPENSE OVERVIEW	45
	FINANCIAL CONDITION OVERVIEW		46
		INVESTMENT ACTIVITIES OVERVIEW	46
		LOAN PORTFOLIO OVERVIEW	47
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	49
		DEPOSITS OVERVIEW	50
		BORROWINGS OVERVIEW	50
		STOCKHOLDERS' EQUITY OVERVIEW	51
	REGULATORY REQUIREMENTS OVERVIEW		51
	LIQUIDITY AND CAPITAL RESOURCES		52
	CRITICAL ACCOUNTING ESTIMATES		53

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		53
ITEM 4.	CONTROLS AND PROCEDURES		54

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PART II.	OTHER INFORMATION	54
ITEM 1.	LEGAL PROCEEDINGS	54
ITEM 1A.	RISK FACTORS	54
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	55
ITEM 4.	MINE SAFETY DISCLOSURES	55
ITEM 5.	OTHER INFORMATION	55
ITEM 6.	EXHIBITS	55
	SIGNATURES	56

GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms "Heritage," “we,” “our,” “us” or the "Company" refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.


2023 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, 2023
ACL			Allowance for Credit Losses
AOCI			Accumulated Other Comprehensive Income (loss), net

ASU			Accounting Standards Update
Bank			Heritage Bank
BOLI			Bank Owned Life Insurance
BTFP			Bank Term Funding Program
CECL			Current Expected Credit Loss
CMO			Collateralized Mortgage Obligations
CRA			Community Reinvestment Act
CRE			Commercial Real Estate
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
Federal Reserve			Board of Governors of the Federal Reserve System
FHLB			Federal Home Loan Bank of Des Moines
FRB			Federal Reserve Bank of San Francisco
GAAP			U.S. Generally Accepted Accounting Principles
LIBOR			London Interbank Offering Rate
LIHTC			Low-Income Housing Tax Credit
MBS			Mortgage-Backed Securities
SEC			Securities and Exchange Commission
SM			Special Mention
SS			Substandard

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These statements relate to our financial condition, results of operations, beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance or business. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements whether as a result of new information, future events or otherwise. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could

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cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating results and stock price performance. These risks include, but are not limited to:

• potential adverse impacts to economic conditions nationally or in our local market areas, other markets where we have lending relationships, or other aspects of our business operations or financial markets including, without limitation, as a result of credit quality deterioration, pronounced and sustained reductions in real estate market values, employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth;

• changes in interest rates which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;

• the level and impact of inflation and the current and future monetary policies of the Federal Reserve in response thereto;

• the impact of bank failures or adverse developments at other banks and related negative publicity about the banking industry in general on investor and depositor sentiment regarding the stability and liquidity of banks; legislative or regulatory changes that adversely affect our business, including changes in banking, securities, and tax law, regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of the upcoming 2024 presidential election;

• credit and interest rate risks associated with our business, customers, borrowings, repayment, investment, and deposit practices;

• fluctuations in deposits and deposit concentrations;

• liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;

• fluctuations in the value of our investment securities;

• credit risks and risks from concentrations (by type of geographic area and industry) within our loan portfolio;

• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions for our business, including as a result of sophisticated attacks using artificial intelligence and similar tools;

• rapid technological change in the financial services industry;

• increased competition in the financial services industry from non-banks such as credit unions and Fintech companies, including digital asset service providers;

• our ability to adapt successfully to technological changes to compete effectively in the marketplace, including as a result of competition from other commercial banks, mortgage banking firms, credit unions, securities brokerage firms, insurance companies, and financial technology companies;

• the credit risks of lending activities, including changes in the level and trend of loan delinquencies write-offs and changes in our ACL on loans and provision for credit losses on loans that may be affected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;

• the impact of continuing elevated inflation and the current and future monetary policies of the Federal Reserve in response thereto;

• the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

• the impact of repricing and competitors' pricing initiatives on loan and deposit products;

• fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

• the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in a number of bank failures;

• the extensive regulatory framework that applies to us;

• results of examinations by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;

• the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets;

• the concentration of large deposits from certain clients, who have balances above current FDIC insurance limits;

• our ability to attract and retain deposits;

• the overall health of local and national real estate markets;

• the level of nonperforming assets on our balance sheet;

• effects of critical accounting policies and judgments, including the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

• the commencement, outcome and costs of litigation and other legal proceedings and regulatory actions against us or to which we may become subject, including settlements and judgments;

• the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business and the businesses of our clients;

• the composition of our executive management team and our ability to attract and retain key personnel;

• our ability to control operating costs and expenses;

• the effectiveness of our risk management framework;

• difficulties in reducing risk associated with our loans;

• staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

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• our ability to implement our business strategies and manage our growth;

• future goodwill impairment due to changes in our business, market conditions, or other factors;

• our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;

• risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar;

• changes in consumer spending, borrowing and savings habits;

• our ability to pay dividends on our common stock;

• other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services;

• our success at managing the risks involved in the foregoing items; and

• other factors described in our 2023 Annual Form 10-K, this Quarterly Report on Form 10-Q and other documents filed with or furnished to the SEC, which are available on our website at www.hf-wa.com and on the SEC's website at www.sec.gov.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollars in thousands, except share data)


	September 30, 2024		December 31, 2023
ASSETS
Cash on hand and in banks	$	78,068	$	55,851
Interest earning deposits	97,504		169,122
Cash and cash equivalents	175,572		224,973
Investment securities available for sale, at fair value, net (amortized cost of $ 909,023 and $ 1,227,787 , respectively)	852,779		1,134,353
Investment securities held to maturity, at amortized cost, net (fair value of $ 661,696 and $ 662,450 , respectively)	719,400		739,442
Total investment securities	1,572,179		1,873,795

Loans receivable	4,679,479		4,335,627
Allowance for credit losses on loans	( 51,391 )		( 47,999 )
Loans receivable, net	4,628,088		4,287,628

Premises and equipment, net	72,500		74,899
Federal Home Loan Bank stock, at cost	16,993		4,186
Bank owned life insurance	127,248		125,655
Accrued interest receivable	20,102		19,518
Prepaid expenses and other assets	296,190		318,571
Other intangible assets, net	3,552		4,793
Goodwill	240,939		240,939
Total assets	$	7,153,363	$	7,174,957
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits	$	1,682,219	$	1,715,847
Interest bearing deposits	4,026,273		3,884,025
Total deposits	5,708,492		5,599,872
Borrowings	382,000		500,000
Junior subordinated debentures	21,985		21,765

Accrued expenses and other liabilities	166,372		200,059
Total liabilities	6,278,849		6,321,696
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively	—		—
Common stock, no par value, 50,000,000 shares authorized; 34,153,539 and 34,906,233 shares issued and outstanding, respectively	534,917		549,748
Retained earnings	383,127		375,989
Accumulated other comprehensive loss, net	( 43,530 )		( 72,476 )
Total stockholders’ equity	874,514		853,261
Total liabilities and stockholders’ equity	$	7,153,363	$	7,174,957

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except shares and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
INTEREST INCOME:
Interest and fees on loans	$	64,138	$	56,119	$	182,608	$	160,192
Taxable interest on investment securities	13,472		14,590		42,462		44,021
Nontaxable interest on investment securities	159		448		505		1,554
Interest on interest earning deposits	2,048		2,310		5,177		4,436
Total interest income	79,817		73,467		230,752		210,203
INTEREST EXPENSE:
Deposits	20,256		11,877		55,097		25,012
Junior subordinated debentures	541		540		1,627		1,521
Securities sold under agreement to repurchase	—		38		—		148
Borrowings	6,062		5,394		18,427		12,238
Total interest expense	26,859		17,849		75,151		38,919
Net interest income	52,958		55,618		155,601		171,284
Provision for (reversal of) credit losses	2,439		( 878 )		5,099		2,856
Net interest income after provision for (reversal of) credit losses	50,519		56,496		150,502		168,428
NONINTEREST INCOME:
Service charges and other fees	2,788		2,856		8,393		8,162
Card revenue	2,134		2,273		5,903		6,396
Loss on sale of investment securities, net	( 6,945 )		( 1,940 )		( 18,839 )		( 2,226 )
Gain on sale of loans, net	—		157		26		307
Interest rate swap fees	—		62		52		230
Bank owned life insurance income	860		734		2,711		2,280
Gain on sale of other assets, net	1,480		—		1,529		2
Other income	1,520		2,129		4,408		6,659
Total noninterest income	1,837		6,271		4,183		21,810
NONINTEREST EXPENSE:
Compensation and employee benefits	24,367		25,008		74,291		75,325
Occupancy and equipment	4,850		4,814		14,547		14,372
Data processing	3,915		4,116		10,732		12,427
Marketing	128		389		583		1,232
Professional services	490		582		1,852		1,961
State/municipal business and use taxes	1,249		1,088		3,709		3,150
Federal deposit insurance premium	824		818		2,431		2,465

Amortization of intangible assets	399		595		1,241		1,841
Other expense	3,068		3,560		9,370		11,127
Total noninterest expense	39,290		40,970		118,756		123,900
Income before income taxes	13,066		21,797		35,929		66,338
Income tax expense	1,643		3,578		4,599		10,816
Net income	$	11,423	$	18,219	$	31,330	$	55,522

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Basic earnings per share	$	0.33	$	0.52	$	0.91	$	1.58
Diluted earnings per share	$	0.33	$	0.51	$	0.90	$	1.57
Dividends declared per share	$	0.23	$	0.22	$	0.69	$	0.66
Average number of basic shares outstanding	34,322,069		35,022,676		34,584,851		35,062,760
Average number of diluted shares outstanding	34,658,674		35,115,165		35,002,375		35,305,456

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net Income	$	11,423	$	18,219	$	31,330	$	55,522
Change in fair value of investment securities available for sale, net of tax of $ 6,146 , $( 4,673 ), $ 3,884 , and $( 4,258 ) respectively	21,627		( 16,627 )		14,466		( 14,332 )
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $( 18 ), $( 17 ), $( 53 ), and $( 51 ) respectively	( 64 )		( 60 )		( 190 )		( 183 )
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax benefit of $ 1,537 , $ 426 , $ 4,169 , and $ 489 respectively	5,408		1,514		14,670		1,737
Other comprehensive income (loss)	26,971		( 15,173 )		28,946		( 12,778 )
Comprehensive income	$	38,394	$	3,046	$	60,276	$	42,744

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(Dollars in thousands, except shares and per share data)


	Three Months Ended September 30, 2024
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at June 30, 2024	34,496,197	$	541,294	$	379,714	$	( 70,501 )	$	850,507
Restricted stock units vested	5,723							—
Stock-based compensation expense		1,153						1,153
Common stock repurchased	( 348,381 )	( 7,530 )						( 7,530 )
Net income				11,423				11,423
Other comprehensive income, net of tax						26,971		26,971
Cash dividends declared on common stock ($ 0.23 per share)				( 8,010 )				( 8,010 )
Balance at September 30, 2024	34,153,539	$	534,917	$	383,127	$	( 43,530 )	$	874,514


	Nine Months Ended September 30, 2024
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2023	34,906,233	$	549,748	$	375,989	$	( 72,476 )	$	853,261
Restricted stock units vested	165,418							—
Stock-based compensation expense		3,223						3,223
Common stock repurchased	( 918,112 )	( 18,054 )						( 18,054 )
Net income				31,330				31,330
Other comprehensive income, net of tax						28,946		28,946
Cash dividends declared on common stock ($ 0.69 per share)				( 24,192 )				( 24,192 )
Balance at September 30, 2024	34,153,539	$	534,917	$	383,127	$	( 43,530 )	$	874,514


	Three Months Ended September 30, 2023
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at June 30, 2023	35,047,800	$	550,103	$	367,085	$	( 97,455 )	$	819,733
Restricted stock units vested	1,730							—
Stock-based compensation expense		1,120						1,120
Common stock repurchased	( 148,454 )	( 2,571 )						( 2,571 )
Net income				18,219				18,219
Other comprehensive loss, net of tax						( 15,173 )		( 15,173 )
Cash dividends declared on common stock ($ 0.22 per share)				( 7,782 )				( 7,782 )
Balance at September 30, 2023	34,901,076	$	548,652	$	377,522	$	( 112,628 )	$	813,546

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	Nine Months Ended September 30, 2023
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2022	35,106,697	$	552,397	$	345,346	$	( 99,850 )	$	797,893
Restricted stock units vested	156,370							—
Stock-based compensation expense		3,204						3,204
Common stock repurchased	( 361,991 )	( 6,949 )						( 6,949 )
Net income				55,522				55,522
Other comprehensive loss, net of tax						( 12,778 )		( 12,778 )
Cash dividends declared on common stock ($ 0.66 per share)				( 23,346 )				( 23,346 )
Balance at September 30, 2023	34,901,076	$	548,652	$	377,522	$	( 112,628 )	$	813,546

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,
	2024		2023
Cash flows from operating activities:
Net income	$	31,330	$	55,522
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	1,136		2,370
Provision for credit losses	5,099		2,856
Stock-based compensation expense	3,223		3,204
Amortization of intangible assets	1,241		1,841
Origination of mortgage loans held for sale	( 1,318 )		( 13,685 )
Proceeds from sale of mortgage loans held for sale	1,344		13,729
Bank owned life insurance income	( 2,711 )		( 2,280 )

Gain on sale of mortgage loans held for sale, net	( 26 )		( 307 )
Loss on sale of investment securities available for sale, net	18,839		2,226

Gain on sale of premises and equipment	( 1,480 )		—
Gain on sale of branch	—		( 610 )
Other	( 12,813 )		13,698
Net cash provided by operating activities	43,864		78,564
Cash flows from investing activities:
Loan originations and purchases, net of payments	( 342,880 )		( 212,222 )
Maturities and repayments of investment securities available for sale	92,146		135,084
Maturities and repayments of investment securities held to maturity	19,393		18,876
Purchase of investment securities available for sale	( 33,132 )		( 37,724 )

Purchase of premises and equipment	( 2,657 )		( 9,250 )
Purchase of bank owned life insurance	( 39 )		—
Proceeds from bank owned life insurance death benefit	1,157		—
Purchases of Federal Home Loan Bank stock	( 58,829 )		( 45,588 )


Proceeds from sales of investment securities available for sale	241,968		67,900
Proceeds from redemption of Federal Home Loan Bank stock	46,022		46,131
Proceeds from sales of assets held for sale	7,459		—
Proceeds from sales of premises and equipment	50		2
Capital contributions to LIHTC investments	( 12,568 )		( 32,517 )
Net cash paid related to branch divestiture	—		( 13,826 )
Net cash used by investing activities	( 41,910 )		( 83,134 )
Cash flows from financing activities:
Net increase (decrease) in deposits	108,620		( 274,988 )
Proceeds from borrowings	1,319,710		1,789,700
Repayment of borrowings	( 1,437,710 )		( 1,339,700 )
Common stock cash dividends paid	( 23,921 )		( 23,141 )
Net decrease in securities sold under agreement to repurchase	—		( 23,439 )
Repurchase of common stock	( 18,054 )		( 6,949 )
Net cash (used) provided by financing activities	( 51,355 )		121,483
Net (decrease) increase in cash and cash equivalents	( 49,401 )		116,913
Cash and cash equivalents at beginning of period	224,973		103,590
Cash and cash equivalents at end of period	$	175,572	$	220,503

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	Nine Months Ended September 30,
	2024		2023

Supplemental disclosures of cash flow information:
Cash paid for interest	$	84,048	$	29,921
Cash paid for income taxes, net of refunds	1,345		1,634

Supplemental non-cash disclosures of cash flow information:


Investment in LIHTC partnership and related funding commitment	100		37,042
Right of use assets obtained in exchange for new operating lease liabilities	3,214		6,663
Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued	—		700
Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net	—		5,074

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements

(a) Description of Business

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 50 branch offices located throughout Washington state, the greater Portland, Oregon area, Eugene, Oregon and Boise, Idaho. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, consumer loans and originates home equity loans on residential properties primarily located in its market areas. The Bank's deposits are insured by the FDIC subject to limitations.

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2023 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

The accompanying Condensed Consolidated Financial Statements presented for the year end December 31, 2023 were derived from audited financial statements and do not include all disclosures required by GAAP.

To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes the judgments, estimates and assumptions used in the preparation of the unaudited Condensed Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of the ACL on investment securities, management's estimate of the ACL on loans, management's estimate of the ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation. There have been reclassifications in certain prior year amounts in the unaudited Condensed Consolidated Statements of Income. Reclassifications had no effect on the prior year's net income or stockholders' equity.

The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the 2023 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies during the nine months ended September 30, 2024 from those contained in the 2023 Annual Form 10-K.

(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU 2020-04 , Reference Rate Reform (Topic 848) , as amended by ASU 2021-01, and ASU 2022-06 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, 2020. In December 2022, FASB amended this ASU and deferred the sunset date of Topic 848 from December 31, 2022, to December 31, 2024. The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. The Company’s instruments indexed to LIBOR have been transferred to another index.

FASB ASU 2023-02 , Investments - Equity Method and Joint Ventures (Topic 323 ): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), was issued in February 2023. The amendments in this ASU permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the statement of operations as a component of income tax expense (benefit). The amendments also require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understand the investments that generate income tax credits and other income tax benefits from a tax credit program. The ASU

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is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The amendments in the ASU can be applied either on a modified retrospective or a retrospective basis. The Company had already applied proportional amortization to its LIHTC investments prior to January 1, 2024. The amendments in this ASU allow the Company to expand the use of proportional amortization to other types of qualifying tax credit investments. The Company has chosen not to expand the use of proportional amortization beyond its LIHTC investment portfolio. Thus, at this time, this ASU only impacts disclosure requirements.

FASB ASU 2023-09 , Income Taxes (Topic 740): Improvements to Income Tax Disclosures, was issued in December 2023. The amendments in this ASU require a public business entity to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all periods presented. The Company expects this ASU to only impact its disclosure requirements and does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

(2) Investment Securities

The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.

There were no investment securities classified as trading at September 30, 2024 or December 31, 2023.

(a) Investment Securities by Classification, Type and Maturity

The following tables present the amortized cost and fair value of investment securities, and the corresponding amounts of gross unrealized and unrecognized gains and losses including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI, at the dates indicated:


	September 30, 2024
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities	$	14,939	$	—	$	( 1,885 )	$	13,054
Municipal securities	70,210		9		( 8,956 )		61,263
Residential CMO and MBS (1)	455,633		2,560		( 31,145 )		427,048
Commercial CMO and MBS (1)	345,751		205		( 17,095 )		328,861
Corporate obligations	11,686		122		( 102 )		11,706
Other asset-backed securities	10,804		51		( 8 )		10,847
Total	$	909,023	$	2,947	$	( 59,191 )	$	852,779

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	September 30, 2024
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(Dollars in thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	151,181	$	—	$	( 23,108 )	$	128,073
Residential CMO and MBS (1)	249,589		333		( 9,056 )		240,866
Commercial CMO and MBS (1)	318,630		12		( 25,885 )		292,757
Total	$	719,400	$	345	$	( 58,049 )	$	661,696

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

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	December 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities	$	16,047	$	—	$	( 2,297 )	$	13,750
Municipal securities	92,231		9		( 12,715 )		79,525
Residential CMO and MBS (1)	555,518		2,656		( 46,125 )		512,049
Commercial CMO and MBS (1)	538,910		88		( 34,740 )		504,258
Corporate obligations	7,745		2		( 134 )		7,613
Other asset-backed securities	17,336		31		( 209 )		17,158
Total	$	1,227,787	$	2,786	$	( 96,220 )	$	1,134,353

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2023
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(Dollars in thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	151,075	$	—	$	( 27,701 )	$	123,374
Residential CMO and MBS (1)	267,204		—		( 14,101 )		253,103
Commercial CMO and MBS (1)	321,163		—		( 35,190 )		285,973
Total	$	739,442	$	—	$	( 76,992 )	$	662,450

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

The following table presents the amortized cost and fair value of investment securities by contractual maturity at the date indicated. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2024
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	6,508		6,320		—		—
Due after five years through ten years	36,916		34,635		93,285		81,365
Due after ten years	53,411		45,068		57,896		46,708
Total investment securities due at a single maturity date	96,835		86,023		151,181		128,073
MBS (1)	812,188		766,756		568,219		533,623
Total investment securities	$	909,023	$	852,779	$	719,400	$	661,696

(1) MBS, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.

There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at September 30, 2024 and December 31, 2023.

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(b) Unrealized Losses on Investment Securities Available for Sale

The following tables present the gross unrealized losses and fair value of the Company’s investment securities available for sale for which an ACL on investment securities available for sale has not been recorded, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at the dates indicated:


	September 30, 2024
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. government and agency securities	$	—	$	—	$	13,054	$	( 1,885 )	$	13,054	$	( 1,885 )
Municipal securities	—		—		56,744		( 8,956 )		56,744		( 8,956 )
Residential CMO and MBS (1)	3,150		( 5 )		261,630		( 31,140 )		264,780		( 31,145 )
Commercial CMO and MBS (1)	4,419		( 54 )		284,072		( 17,041 )		288,491		( 17,095 )
Corporate obligations	3,864		( 47 )		3,945		( 55 )		7,809		( 102 )
Other asset-backed securities	1,617		( 7 )		196		( 1 )		1,813		( 8 )
Total	$	13,050	$	( 113 )	$	619,641	$	( 59,078 )	$	632,691	$	( 59,191 )

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2023
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. government and agency securities	$	—	$	—	$	13,750	$	( 2,297 )	$	13,750	$	( 2,297 )
Municipal securities	3,548		( 18 )		71,458		( 12,697 )		75,006		( 12,715 )
Residential CMO and MBS (1)	—		—		358,316		( 46,125 )		358,316		( 46,125 )
Commercial CMO and MBS (1)	37,899		( 228 )		448,197		( 34,512 )		486,096		( 34,740 )
Corporate obligations	911		( 20 )		3,887		( 114 )		4,798		( 134 )
Other asset-backed securities	4,338		( 22 )		7,291		( 187 )		11,629		( 209 )
Total	$	46,696	$	( 288 )	$	902,899	$	( 95,932 )	$	949,595	$	( 96,220 )

(1) U.S. government agency and government-sponsored enterprise CMO and MBS .

The Company evaluated investment securities available for sale as of September 30, 2024 and December 31, 2023, and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of either September 30, 2024 or December 31, 2023. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of September 30, 2024 and December 31, 2023.

The Company also evaluated investment securities held to maturity for current expected credit losses as of September 30, 2024 and December 31, 2023. There were no investment securities held to maturity classified as nonaccrual or past due as of September 30, 2024 and December 31, 2023, and all were issued by the U.S. government and its agencies and either explicitly or implicitly guaranteed by the U.S. government, highly rated by major credit rating agencies and had a long history of no credit losses. Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Therefore, no ACL on investment securities held to maturity was recorded as of September 30, 2024 or December 31, 2023.

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(d) Realized Gains and Losses

The following table presents the gross realized gains and losses on the sale of investment securities available for sale determined using the specific identification method for the dates indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Gross realized gains	$	—	$	—	$	—	$	36
Gross realized losses	( 6,945 )		( 1,940 )		( 18,839 )		( 2,262 )
Net realized losses	$	( 6,945 )	$	( 1,940 )	$	( 18,839 )	$	( 2,226 )

(e) Pledged Securities

The following table summarizes the amortized cost and fair value of investment securities that were pledged as collateral for the following obligations at the dates indicated:


	September 30, 2024				December 31, 2023
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
State and local governments public deposits	$	232,915	$	225,360	$	238,060	$	224,879
FRB	437,490		391,119		845,098		742,197
Other securities pledged	53,841		49,773		54,636		49,032
Total	$	724,246	$	666,252	$	1,137,794	$	1,016,108

(f) Accrued Interest Receivable

Accrued interest receivable excluded from the amortized cost of investment securities available for sale totaled $ 3.0 million and $ 3.8 million at September 30, 2024 and December 31, 2023, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $ 2.2 million and $2.3 million at September 30, 2024 and December 31, 2023, respectively.

No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities during the nine months ended September 30, 2024 and 2023.

(3) Loans Receivable

The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Company's amortized cost of loans receivable as it was deemed insignificant. In addition to originating loans, the Company may also purchase loans through pool purchases, participation purchases and syndicated loan purchases.

(a) Loan Origination/Risk Management

The Company categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; real estate construction and land development; and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the 2023 Annual Form 10-K.

The Company has certain lending policies and guidelines in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and guidelines on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans. The Company also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel.

The amortized cost of loans receivable, net of ACL on loans, consisted of the following portfolio segments and classes at the dates indicated:

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	September 30, 2024		December 31, 2023
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	824,134	$	718,291
Owner-occupied CRE	987,084		958,620
Non-owner occupied CRE	1,835,609		1,697,574
Total commercial business	3,646,827		3,374,485
Residential real estate	408,982		375,342
Real estate construction and land development:
Residential	79,325		78,610
Commercial and multifamily	378,322		335,819
Total real estate construction and land development	457,647		414,429
Consumer	166,023		171,371
Loans receivable	4,679,479		4,335,627
ACL on loans	( 51,391 )		( 47,999 )
Loans receivable, net	$	4,628,088	$	4,287,628

Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans	$	( 1,182 )	$	( 1,923 )
Unamortized net deferred fee	$	( 9,613 )	$	( 11,063 )

(b) Concentrations of Credit

Most of the Company’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County, Washington to Lane County, Oregon, as well as in Yakima County, Washington and Ada County, Idaho. Additionally, the Company's loan portfolio is concentrated in commercial business loans, which include commercial and industrial, owner-occupied and nonowner-occupied CRE, and commercial and multifamily real estate construction and land development loans. Commercial business loans and commercial and multifamily real estate construction and land development loans are generally considered as having a more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis .

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, (v) past due status, and (vi) the general economic conditions of the United States of America, and specifically the states of Washington, Oregon and Idaho.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the 2023 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Company follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.

Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a Pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The SM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of any potential loss. The likelihood of loss for SM graded loans, however, is greater than Pass graded loans because there has been measurable credit deterioration. Loans with a SS grade have further credit deterioration and include both accrual loans and nonaccrual loans. For Doubtful and Loss graded loans, the Company is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value. There were no loans graded Doubtful or Loss as of September 30, 2024 and December 31, 2023.

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The following tables present the amortized cost of loans receivable by risk grade and origination year at the dates indicated:


	September 30, 2024
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2024		2023		2022		2021		2020		Prior
	(Dollars in thousands)
Commercial business:
Commercial and industrial
Pass	$	147,830	$	133,134	$	130,593	$	56,034	$	58,485	$	89,182	$	153,789	$	556	$	769,603
SM	—		—		6,508		245		1,152		5,350		18,738		—		31,993
SS	—		235		882		456		3,397		6,255		8,089		3,224		22,538
Total	147,830		133,369		137,983		56,735		63,034		100,787		180,616		3,780		824,134
Owner-occupied CRE
Pass	88,176		87,012		138,532		149,002		80,640		414,842		—		—		958,204
SM	—		—		—		2,400		879		10,535		—		—		13,814
SS	—		—		—		2,957		641		11,468		—		—		15,066
Total	88,176		87,012		138,532		154,359		82,160		436,845		—		—		987,084
Non-owner occupied CRE
Pass	94,285		173,846		318,395		242,336		154,332		801,586		—		105		1,784,885
SM	—		—		—		8,035		—		33,245		—		—		41,280
SS	—		—		588		—		—		8,856		—		—		9,444
Total	94,285		173,846		318,983		250,371		154,332		843,687		—		105		1,835,609
Total commercial business
Pass	330,291		393,992		587,520		447,372		293,457		1,305,610		153,789		661		3,512,692
SM	—		—		6,508		10,680		2,031		49,130		18,738		—		87,087
SS	—		235		1,470		3,413		4,038		26,579		8,089		3,224		47,048
Total	330,291		394,227		595,498		461,465		299,526		1,381,319		180,616		3,885		3,646,827
Residential real estate
Pass	34,334		52,628		137,906		133,643		22,050		27,479		—		—		408,040

SS	—		—		—		788		—		154		—		—		942
Total	34,334		52,628		137,906		134,431		22,050		27,633		—		—		408,982
Real estate construction and land development:
Residential
Pass	26,604		35,564		8,425		—		1,001		980		1		—		72,575

SS	—		1,000		—		5,750		—		—		—		—		6,750
Total	26,604		36,564		8,425		5,750		1,001		980		1		—		79,325
Commercial and multifamily
Pass	18,476		153,295		165,558		9,931		—		3,446		—		—		350,706
SM	—		—		893		—		5,175		5,923		—		—		11,991
SS	—		—		—		15,625		—		—		—		—		15,625
Total	18,476		153,295		166,451		25,556		5,175		9,369		—		—		378,322
Total real estate construction and land development
Pass	45,080		188,859		173,983		9,931		1,001		4,426		1		—		423,281
SM	—		—		893		—		5,175		5,923		—		—		11,991
SS	—		1,000		—		21,375		—		—		—		—		22,375
Total	45,080		189,859		174,876		31,306		6,176		10,349		1		—		457,647
Consumer
Pass	1,751		1,588		1,695		364		3,861		23,989		130,514		649		164,411

SS	—		—		25		—		107		689		310		481		1,612
Total	1,751		1,588		1,720		364		3,968		24,678		130,824		1,130		166,023

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	September 30, 2024
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2024		2023		2022		2021		2020		Prior
	(Dollars in thousands)
Loans receivable
Pass	411,456		637,067		901,104		591,310		320,369		1,361,504		284,304		1,310		4,508,424
SM	—		—		7,401		10,680		7,206		55,053		18,738		—		99,078
SS	—		1,235		1,495		25,576		4,145		27,422		8,399		3,705		71,977
Total	$	411,456	$	638,302	$	910,000	$	627,566	$	331,720	$	1,443,979	$	311,441	$	5,015	$	4,679,479

(1) Represents the loans receivable balance at September 30, 2024 which was converted from a revolving loan to a non-revolving amortizing loan during the nine months ended September 30, 2024.


	December 31, 2023
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2023		2022		2021		2020		2019		Prior
	(Dollars in thousands)
Commercial business:
Commercial and industrial
Pass	$	120,973	$	150,854	$	74,231	$	66,364	$	40,307	$	76,924	$	141,740	$	188	$	671,581
SM	—		2,495		104		292		4,556		1,458		9,124		—		18,029
SS	—		1,215		2,734		3,548		1,076		7,875		12,168		65		28,681
Total	120,973		154,564		77,069		70,204		45,939		86,257		163,032		253		718,291
Owner-occupied CRE
Pass	90,775		138,505		159,490		82,296		146,869		299,609		—		—		917,544
SM	—		—		2,219		2,775		705		16,266		—		—		21,965
SS	—		—		4,908		654		—		13,549		—		—		19,111
Total	90,775		138,505		166,617		85,725		147,574		329,424		—		—		958,620
Non-owner-occupied CRE
Pass	153,239		260,431		216,811		157,424		239,928		628,489		—		—		1,656,322
SM	—		—		8,172		—		570		19,300		—		—		28,042
SS	—		598		—		—		—		12,612		—		—		13,210
Total	153,239		261,029		224,983		157,424		240,498		660,401		—		—		1,697,574
Total commercial business
Pass	364,987		549,790		450,532		306,084		427,104		1,005,022		141,740		188		3,245,447
SM	—		2,495		10,495		3,067		5,831		37,024		9,124		—		68,036
SS	—		1,813		7,642		4,202		1,076		34,036		12,168		65		61,002
Total	364,987		554,098		468,669		313,353		434,011		1,076,082		163,032		253		3,374,485
Residential real estate
Pass	36,321		141,201		141,430		24,108		15,022		16,297		—		—		374,379

SS	—		—		801		—		—		162		—		—		963
Total	36,321		141,201		142,231		24,108		15,022		16,459		—		—		375,342
Real estate construction and land development:
Residential
Pass	41,663		24,760		1,050		1,289		804		719		1		—		70,286
SM	—		—		2,139		—		—		—		—		—		2,139
SS	1,000		319		4,866		—		—		—		—		—		6,185
Total	42,663		25,079		8,055		1,289		804		719		1		—		78,610

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	December 31, 2023
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2023		2022		2021		2020		2019		Prior
	(Dollars in thousands)
Commercial and multifamily
Pass	42,499		187,827		91,460		337		749		3,145		—		—		326,017
SM	—		—		—		3,777		5,660		365		—		—		9,802
SS	—		—		—		—		—		—		—		—		—
Total	42,499		187,827		91,460		4,114		6,409		3,510		—		—		335,819
Total real estate construction and land development
Pass	84,162		212,587		92,510		1,626		1,553		3,864		1		—		396,303
SM	—		—		2,139		3,777		5,660		365		—		—		11,941
SS	1,000		319		4,866		—		—		—		—		—		6,185
Total	85,162		212,906		99,515		5,403		7,213		4,229		1		—		414,429
Consumer
Pass	1,897		1,980		293		6,221		15,841		20,402		122,007		1,123		169,764

SS	—		—		—		134		207		893		333		40		1,607
Total	1,897		1,980		293		6,355		16,048		21,295		122,340		1,163		171,371
Loans receivable
Pass	487,367		905,558		684,765		338,039		459,520		1,045,585		263,748		1,311		4,185,893
SM	—		2,495		12,634		6,844		11,491		37,389		9,124		—		79,977
SS	1,000		2,132		13,309		4,336		1,283		35,091		12,501		105		69,757
Total	$	488,367	$	910,185	$	710,708	$	349,219	$	472,294	$	1,118,065	$	285,373	$	1,416	$	4,335,627

(1) Represents the loans receivable balance at December 31, 2023 which was converted from a revolving loan to non-revolving amortizing loan during the year ended December 31, 2023.

The following tables present the gross charge-offs by loan class and origination year, for the periods indicated:


	Nine Months Ended September 30, 2024
	Current Period Gross Charge-offs by Origination Year												Revolving Loans		Total Gross Charge-Offs
	2024		2023		2022		2021		2020		Prior
	(Dollars in thousands)
Commercial business	$	—	$	313	$	—	$	—	$	—	$	2,636	$	—	$	2,949


Consumer	—		6		22		—		11		139		268		446
Total	$	—	$	319	$	22	$	—	$	11	$	2,775	$	268	$	3,395


	Nine Months Ended September 30, 2023
	Current Period Gross Charge-offs by Origination Year												Revolving Loans		Total Gross Charge-Offs
	2023		2022		2021		2020		2019		Prior
	(Dollars in thousands)
Commercial business	$	—	$	—	$	15	$	61	$	—	$	100	$	—	$	176


Consumer	7		10		12		21		54		122		194		420
Total	$	7	$	10	$	27	$	82	$	54	$	222	$	194	$	596

(d) Nonaccrual Loans

The following tables present the amortized cost of nonaccrual loans at the dates indicated:


	September 30, 2024
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	1,134	$	718	$	1,852

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	September 30, 2024
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(Dollars in thousands)
Owner-occupied CRE	2,449		—		2,449








Total	$	3,583	$	718	$	4,301


	December 31, 2023
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	1,706	$	2,557	$	4,263
Owner-occupied CRE	—		205		205








Total	$	1,706	$	2,762	$	4,468

The following tables present the reversal of interest income on loans due to the write-off of accrued interest receivable upon the initial classification of loans as nonaccrual loans and the interest income recognized due to payment in full or sale of previously classified nonaccrual loans during the periods indicated:


	Three Months Ended September 30,
	2024				2023
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	—	$	126	$	( 10 )	$	18
Owner-occupied CRE	( 28 )		—		—		—








Total	$	( 28 )	$	126	$	( 10 )	$	18


	Nine Months Ended September 30,
	2024				2023
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	( 27 )	$	339	$	( 24 )	$	48
Owner-occupied CRE	( 28 )		144		—		—








Total	$	( 55 )	$	483	$	( 24 )	$	48

For the three and nine months ended September 30, 2024 and 2023, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.

(e) Past due loans

The Company performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The following tables present the amortized cost of past due loans at the dates indicated:


	September 30, 2024
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	1,496	$	6,132	$	7,628	$	816,506	$	824,134
Owner-occupied CRE	—		—		—		987,084		987,084

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	September 30, 2024
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(Dollars in thousands)
Non-owner occupied CRE	—		—		—		1,835,609		1,835,609
Total commercial business	1,496		6,132		7,628		3,639,199		3,646,827
Residential real estate	—		—		—		408,982		408,982
Real estate construction and land development:
Residential	—		—		—		79,325		79,325
Commercial and multifamily	—		—		—		378,322		378,322
Total real estate construction and land development	—		—		—		457,647		457,647
Consumer	461		352		813		165,210		166,023
Total	$	1,957	$	6,484	$	8,441	$	4,671,038	$	4,679,479


	December 31, 2023
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	2,289	$	3,857	$	6,146	$	712,145	$	718,291
Owner-occupied CRE	—		189		189		958,431		958,620
Non-owner occupied CRE	1,489		—		1,489		1,696,085		1,697,574
Total commercial business	3,778		4,046		7,824		3,366,661		3,374,485
Residential real estate	162		—		162		375,180		375,342
Real estate construction and land development:
Residential	—		319		319		78,291		78,610
Commercial and multifamily	—		—		—		335,819		335,819
Total real estate construction and land development	—		319		319		414,110		414,429
Consumer	615		87		702		170,669		171,371
Total	$	4,555	$	4,452	$	9,007	$	4,326,620	$	4,335,627

Loans 90 days or more past due and still accruing interest were $ 5.3 million and $ 1.3 million as of September 30, 2024 and December 31, 2023, respectively. Loans 90 days past due and still accruing interest as of September 30, 2024 were comprised of $5.0 million in commercial and industrial loans $0.3 million in consumer loans.

(f) Collateral-dependent Loans

The following tables present the type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral at the dates indicated, with b alances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan :


	September 30, 2024
	CRE		Farmland		Residential Real Estate		Equipment		Total
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	—	$	389	$	613	$	—	$	1,002
Owner-occupied CRE	2,449		—		—		—		2,449








Total	$	2,449	$	389	$	613	$	—	$	3,451

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	December 31, 2023
	CRE		Farmland		Residential Real Estate		Equipment		Total
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	260	$	389	$	621	$	304	$	1,574
Owner-occupied CRE	189		—		—		—		189








Total	$	449	$	389	$	621	$	304	$	1,763

There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the nine months ended September 30, 2024, except changes due to additions or removals of loans in this classification.

(g) Modification of Loans

Occasionally, the Company modifies loans to borrowers in financial distress by providing modifications of loans which may include interest rate reductions, principal or interest forgiveness, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. In some cases, the Company provides multiple types of concessions on one loan. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

The following tables present the amortized cost of loans that were experiencing both financial difficulty and modified during the periods indicated:


	Three Months Ended September 30, 2024
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable, net
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	7,041	$	7,041	0.85	%

Non-owner occupied CRE	2,657		2,657		0.14
Total commercial business	9,698		9,698		0.27

Real estate construction and land development:
Residential	6,750		6,750		8.51

Total real estate construction and land development	6,750		6,750		1.47
Consumer	10		10		0.01
Total	$	16,458	$	16,458	0.35	%


	Three Months Ended September 30, 2023
		Term Extension		Combination Term Extension and Interest Rate Reduction (1)		Total Modified Loans		% of Modified Loans to Loans Receivable, net
	(Dollars in thousands)
Commercial business:
Commercial and industrial		$	313	$	—	$	313	0.05	%

Non-owner occupied CRE		—		239		239		0.01
Total commercial business		313		239		552		0.02






Total		$	313	$	239	$	552	0.01	%

Table of Contents


	Nine Months Ended September 30, 2024
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable, net

	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	20,611	$	20,611	2.50	%

Non-owner occupied CRE	2,658		2,658		0.14
Total commercial business	23,269		23,269		0.64

Real estate construction and land development:
Residential	6,750		6,750		8.51	%
Commercial and multifamily	20,800		20,800		5.50	%
Total real estate construction and land development	27,550		27,550		6.02	%
Consumer	39		39		0.02	%
Total	$	50,858	$	50,858	1.09	%


	Nine Months Ended September 30, 2023
	Term Extension		Term Extension & Int. Rate Reduction		Total Modified Loans		% of Modified Loans to Loans Receivable, net

	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	6,516	$	—	$	6,516	0.94	%

Non-owner occupied CRE	2,716		239		2,955		0.17
Total commercial business	9,232		239		9,471		0.28

Real estate construction and land development:

Commercial and multifamily	3,452		—		3,452		1.11	%
Total real estate construction and land development	3,452		—		3,452		0.91	%
Consumer	28		17		45		0.03	%
Total	$	12,712	$	256	$	12,968	0.30	%

The following tables present the financial effects of the loan modifications presented in the preceding tables during the periods indicated:

Three Months Ended
September 30, 2024

Weighted Average Years of Term Extensions

Commercial business:

Commercial and industrial

0.59

Non-owner occupied CRE

0.83

Total commercial business

0.66

Real estate construction and land development:

Residential

0.17

Total real estate construction and land development

0.17

Consumer

2.17

Total

0.46

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	Three Months Ended September 30, 2023
	Weighted Average % of Interest Rate Reductions		Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial	—	%	1.82

Non-owner occupied CRE	3.00		2.00







Total	3.00	%	1.90


															Nine Months Ended September 30, 2024
															Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial															0.76

Non-owner occupied CRE															0.83
Total commercial business															0.77

Real estate construction and land development:
Residential															0.17
Commercial and multifamily															0.69
Total real estate construction and land development															0.56
Consumer															1.52
Total															0.66


	Nine Months Ended September 30, 2023
	Weighted Average % of Interest Rate Reductions		Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial	—	%	0.58

Non-owner occupied CRE	3.00		1.09
Total commercial business	3.00		0.74

Real estate construction and land development:

Commercial and multifamily	—		0.42
Total real estate construction and land development	—		0.42
Consumer	1.00		2.62
Total	3.00	%	0.66

At September 30, 2024, there were $ 5.4 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms have been modified during the nine months ended September 30, 2024. At December 31, 2023, there were $ 6.6 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms have been modified during the year ended December 31, 2023.

The Company closely monitors the performance of loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The Company considers a modified loan as a payment default if the borrower is 90 or more days past due. There were no loans 90 days past due or in default that have been modified in the past 12 months.

(h) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled $ 14.8 million and $ 13.3 million at September 30, 2024 and December 31, 2023, respectively, and is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.

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(i) Foreclosure proceedings in process

At September 30, 2024, there was one home equity loan valued at $ 160,000 , secured by residential real estate for which formal foreclosure proceedings were in process. At December 31, 2023, there were no home equity loans secured by residential real estate for which formal foreclosure proceedings were in process.

(4) Allowance for Credit Losses on Loans

The Company's methodology for determining the ACL on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. For a description of the Company's ACL policy, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2023 Annual Form 10-K.

GAAP requires the Company to develop reasonable and supportable forecasts of future conditions, and estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Company and the ultimate collectability of future cash flows over the life of a loan. Management has adopted a historic loss, open pool CECL methodology to calculate the ACL on loans. Under this methodology, loans are either collectively evaluated if they share similar risk characteristics, including performing modified loans, or individually evaluated if they do not share similar risk characteristics, including nonaccrual loans.

The allowance for individually evaluated loans is calculated using either the collateral value method, which considers the likely source of repayment as the value of the collateral less estimated costs to sell, or the net present value method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt.

The allowance for collectively evaluated loans is comprised of the baseline loss allowance, the macroeconomic allowance and the qualitative allowance. The baseline loss allowance begins with the baseline loss rates calculated using the Company's average quarterly historical loss information for an economic cycle. The Company evaluates the historical period on a quarterly basis with the assumption that economic cycles have historically lasted between 10 and 15 years. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan under the remaining life method to determine the baseline loss estimate for each loan. Estimated cash flows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments. Contractual cash flows are based on the amortized cost and are adjusted for balances guaranteed by governmental entities, such as Small Business Administration or USDA, resulting in the unguaranteed amortized cost. The contractual term excludes expected extensions, renewals and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Prepayments are established for each segment based on historical averages for the segment, which management believes is an accurate representation of future prepayment activity. Management reviews the adequacy of the prepayment assumption on a quarterly basis.

The macroeconomic allowance includes consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. The Company uses macroeconomic scenarios from an independent third party. These scenarios are based on past events, current conditions, the likelihood of future events occurring and include consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets certain forecasted macroeconomic factors, such as unemployment rate, gross domestic product, housing price index, commercial real estate price index, and certain rate and market indices. Macroeconomic factor multipliers are determined through regression analysis and applied to loss rates for each segment of loans with similar risk characteristics. Each of the forecasted segment balances is impacted by a mix of these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year. A macroeconomic sensitive model is developed for each segment given the current and forecasted conditions and a macroeconomic multiplier is calculated for each forecast period considering the forecasted losses as compared to the long-term average actual losses of the dataset. The impact of those macroeconomic factors on each segment, both positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss allowance. After the reasonable and supportable period, forecasted loss rates revert to historical baseline loss levels over the predetermined reversion period on a straight-lined basis.

The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Since historical information (such as historical net losses and economic cycles) may not always, by themselves, provide a sufficient basis for determining future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as those identified through back-testing, underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.

As of September 30, 2024, qualitative adjustments primarily related to segments of the loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have

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fully captured the associated impact to the ACL. Qualitative adjustments also related to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.

In general, management's estimate of the ACL on loans uses relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The evaluation of ACL on loans is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management utilizes its best judgment and information available to recognize estimated losses on loans, future additions to the ACL may be necessary based on further declines in local and national economic conditions. 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 to adjust the ACL based on their judgments about information available to them at the time of their examinations. The Company believes the ACL on loans was appropriate as of September 30, 2024 given all the above considerations.

During the nine months ended September 30, 2024, the ACL on loans increased $ 3.4 million to $ 51.4 million from $ 48.0 million at December 31, 2023 due primarily to growth in loans receivable, net.

The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:


	Three Months Ended September 30, 2024
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	11,134	$	( 50 )	$	72	$	( 472 )	$	10,684
Owner-occupied CRE	9,850		( 2,510 )		—		4,819		12,159
Non-owner occupied CRE	13,483		—		—		841		14,324
Total commercial business	34,467		( 2,560 )		72		5,188		37,167
Residential real estate	3,735		—		—		( 131 )		3,604
Real estate construction and land development:
Residential	910		—		—		( 118 )		792
Commercial and multifamily	9,908		—		—		( 2,235 )		7,673
Total real estate construction and land development	10,818		—		—		( 2,353 )		8,465
Consumer	2,199		( 85 )		40		1		2,155
Total	$	51,219	$	( 2,645 )	$	112	$	2,705	$	51,391


	Nine Months Ended September 30, 2024
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	11,128	$	( 439 )	$	448	$	( 453 )	$	10,684
Owner-occupied CRE	8,999		( 2,510 )		359		5,311		12,159
Non-owner occupied CRE	11,176		—		—		3,148		14,324
Total commercial business	31,303		( 2,949 )		807		8,006		37,167
Residential real estate	3,473		—		—		131		3,604
Real estate construction and land development:
Residential	1,643		—		—		( 851 )		792
Commercial and multifamily	9,233		—		—		( 1,560 )		7,673
Total real estate construction and land development	10,876		—		—		( 2,411 )		8,465
Consumer	2,347		( 446 )		101		153		2,155
Total	$	47,999	$	( 3,395 )	$	908	$	5,879	$	51,391

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	Three Months Ended September 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	13,288	$	( 15 )	$	1,253	$	( 2,781 )	$	11,745
Owner-occupied CRE	8,503		—		—		191		8,694
Non-owner occupied CRE	9,482		—		—		1,184		10,666
Total commercial business	31,273		( 15 )		1,253		( 1,406 )		31,105
Residential real estate	2,865		—		—		684		3,549
Real estate construction and land development:
Residential	1,671		—		—		( 163 )		1,508
Commercial and multifamily	8,014		—		—		437		8,451
Total real estate construction and land development	9,685		—		—		274		9,959
Consumer	2,585		( 123 )		59		( 187 )		2,334
Total	$	46,408	$	( 138 )	$	1,312	$	( 635 )	$	46,947


	Nine Months Ended September 30, 2023
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	13,962	$	( 176 )	$	1,342	$	( 3,383 )	$	11,745
Owner-occupied CRE	7,480		—		—		1,214		8,694
Non-owner occupied CRE	9,276		—		—		1,390		10,666
Total commercial business	30,718		( 176 )		1,342		( 779 )		31,105
Residential real estate	2,872		—		—		677		3,549
Real estate construction and land development:
Residential	1,654		—		—		( 146 )		1,508
Commercial and multifamily	5,409		—		—		3,042		8,451
Total real estate construction and land development	7,063		—		—		2,896		9,959
Consumer	2,333		( 420 )		149		272		2,334
Total	$	42,986	$	( 596 )	$	1,491	$	3,066	$	46,947

The following table details the activity in the ACL on unfunded commitments during the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Balance, beginning of period	$	774	$	1,777	$	1,288	$	1,744
(Reversal of) provision for credit losses on unfunded commitments	( 266 )		( 243 )		( 780 )		( 210 )
Balance, end of period	$	508	$	1,534	$	508	$	1,534

(5) Goodwill and Other Intangible Assets

(a) Goodwill

There were no additions to goodwill during the nine months ended September 30, 2024 and 2023. Additionally, management analyzes its goodwill on an annual basis on December 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent the carrying

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amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2023 and concluded that there was no impairment as of that date.

(b) Other Intangible Assets

Other intangible assets represent core deposit intangibles acquired in business combinations with estimated useful lives of ten years . There were no additions to other intangible assets during the nine months ended September 30, 2024 and 2023.

(6) Derivative Financial Instruments

The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate loan, or a fixed rate loan to a variable rate loan, and the Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third-party. These interest rate swaps are not designated as hedging instruments.

The Company is exposed to interest rate risk as part of the transaction. However, the Company acts as an intermediary for its customer; therefore, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

Fee income related to interest rate swap derivative contract transactions is recorded in Interest rate swap fees on the unaudited Condensed Consolidated Statements of Income. The fair value of derivative positions outstanding is included in Prepaid expenses and other assets and Accrued expenses and other liabilities in the unaudited Condensed Consolidated Statements of Financial Condition. The gains and losses due to changes in fair value and all cash flows are included in Other income in the unaudited Condensed Consolidated Statements of Income, but typically net to zero based on the identical back-to-back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at the dates indicated:


	September 30, 2024			December 31, 2023
	Notional Amounts		Estimated Fair Value	Notional Amounts		Estimated Fair Value
	(Dollars in thousands)
Non-hedging interest rate derivatives
Interest rate swap asset (1)	$	280,570	17,366	$	291,740	$	23,195
Interest rate swap liability (1)	280,570		( 17,366 )	291,740		( 23,195 )

(1) The estimated fair value of derivatives with customers was $( 16.4 ) million and $( 22.5 ) million as of September 30, 2024 and December 31, 2023, respectively. The estimated fair value of derivatives with third-parties was $ 16.4 million and $ 22.5 million as of September 30, 2024 and December 31, 2023, respectively.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk for derivatives with the customer is controlled through the credit approval process, amount limits, and monitoring procedures and is concentrated within our primary market areas. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.

(7) Stockholders’ Equity

(a) Earnings Per Common Share

The following table illustrates the calculation of weighted average shares used for earnings per common share computations for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
	(Dollars in thousands, except shares)
Net income allocated to common shareholders	$	11,423	$	18,219	$	31,330	$	55,522

Basic:
Weighted average common shares outstanding	34,322,069		35,022,676		34,584,851		35,062,760

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	Three Months Ended September 30,		Nine Months Ended September 30,
	2024	2023	2024	2023
	(Dollars in thousands, except shares)
Diluted:
Basic weighted average common shares outstanding	34,322,069	35,022,676	34,584,851	35,062,760
Effect of potentially dilutive common shares (1)	336,605	92,489	417,524	242,696
Total diluted weighted average common shares outstanding	34,658,674	35,115,165	35,002,375	35,305,456
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)	131,152	312,539	45,341	163,860

(1) Represents the effect of the vesting of restricted stock units.

(2) Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock unit exceeds the market price of the Company’s stock.

(b) Dividends

The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.

The following table summarizes the dividend activity during the nine months ended September 30, 2024 and the calendar year 2023:

Declared

Cash Dividend per Share

Record Date

Paid Date

January 25, 2023

$ 0.22

February 8, 2023

February 22, 2023

April 19, 2023

$ 0.22

May 4, 2023

May 18, 2023

July 19, 2023

$ 0.22

August 2, 2023

August 16, 2023

October 18, 2023

$ 0.22

November 1, 2023

November 15, 2023

January 24, 2024

$ 0.23

February 8, 2024

February 22, 2024

April 24, 2024

$ 0.23

May 8, 2024

May 22, 2024

July 24, 2024

$ 0.23

August 7, 2024

August 21, 2024

The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.

The Company has had various stock repurchase programs since March 1999. On April 24, 2024, the Company's Board of Directors announced the repurchase of up to 5 % of the Company's outstanding common shares or 1,734,492 shares in total, under a new repurchase program, with 1,155,452 shares remaining available for repurchase as of September 30, 2024. 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 do so. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds, and other factors, including opportunities to deploy the Company's capital. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any prior notice. The new repurchase program 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.

(8) Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 : Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.

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Level 2 : Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.

Level 3 : Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

(a) Recurring and Nonrecurring Basis

The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:

Investment Securities :

The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third-party pricing services.

Collateral-Dependent Loans :

Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Company also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.

Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Derivative Financial Instruments:

The Company obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Company has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2024 and December 31, 2023, the Company assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Company has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.

Recurring Basis

The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:


	September 30, 2024
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities	$	13,054	$	—	$	13,054	$	—
Municipal securities	61,263		—		61,263		—
Residential CMO and MBS (1)	427,048		—		427,048		—
Commercial CMO and MBS (1)	328,861		—		328,861		—

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	September 30, 2024
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Corporate obligations	11,706		—		11,706		—
Other asset-backed securities	10,847		—		10,847		—
Total investment securities available for sale	852,779		—		852,779		—
Equity security	287		287		—		—
Derivative assets - interest rate swaps	17,366		—		17,366		—
Liabilities
Derivative liabilities - interest rate swaps	$	17,366	$	—	$	17,366	$	—

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2023
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities	$	13,750	$	—	$	13,750	$	—
Municipal securities	79,525		—		79,525		—
Residential CMO and MBS (1)	512,049		—		512,049		—
Commercial CMO and MBS (1)	504,258		—		504,258		—
Corporate obligations	7,613		—		7,613		—
Other asset-backed securities	17,158		—		17,158		—
Total investment securities available for sale	1,134,353		—		1,134,353		—
Equity security	314		314		—		—
Derivative assets - interest rate swaps	23,195		—		23,195		—
Liabilities
Derivative liabilities - interest rate swaps	$	23,195	$	—	$	23,195	$	—

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

Nonrecurring Basis

The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following tables present assets measured at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023:


	Fair Value at September 30, 2024
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Collateral-dependent loans:
Commercial business:

Owner-occupied CRE	$	2,449	$	—	$	—	$	2,449











Total assets measured at fair value on a nonrecurring basis	$	2,449	$	—	$	—	$	2,449


	Fair Value at December 31, 2023
	Total		Level 1		Level 2		Level 3

Collateral-dependent loans:


Owner-occupied CRE	$	173	$	—	$	—	$	173











Total assets measured at fair value on a nonrecurring basis	$	173	$	—	$	—	$	173

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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the date indicated:

September 30, 2024

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs

Weighted

Average (1)

(Dollars in thousands)

Collateral-dependent loans

2,449

Market approach

Adjustments to reflect current conditions and selling costs

10.0 % - 10.0 %

10.0 %

December 31, 2023

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs

Weighted

Average (1)

(Dollars in thousands)

Collateral-dependent loans

173

Market approach

Adjustments to reflect current conditions and selling costs

16.5 % - 16.5 %

16.5 %

(1) Weighted by net discount to net appraisal fair value

(b) Fair Value of Financial Instruments

Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.

The following tables present the carrying value of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated:


	September 30, 2024
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	175,572	$	175,572	$	175,572	$	—	$	—
Investment securities available for sale	852,779		852,779		—		852,779		—
Investment securities held to maturity	719,400		661,696		—		661,696		—

Loans receivable, net	4,628,088		4,598,146		—		—		4,598,146
Accrued interest receivable	20,102		20,102		209		5,138		14,755
Derivative assets - interest rate swaps	17,366		17,366		—		17,366		—
Equity security	287		287		287		—		—
Financial Liabilities:
Non-maturity deposits	$	4,762,932	$	4,762,932	$	4,762,932	$	—	$	—
Certificates of deposit	945,560		956,950		—		956,950		—
Borrowings	382,000		382,457		—		382,457		—

Junior subordinated debentures	21,985		19,677		—		—		19,677
Accrued interest payable	3,909		3,909		58		3,778		73
Derivative liabilities - interest rate swaps	17,366		17,366		—		17,366		—

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	December 31, 2023
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	224,973	$	224,973	$	224,973	$	—	$	—
Investment securities available for sale	1,134,353		1,134,353		—		1,134,353		—
Investment securities held to maturity	739,442		662,450		—		662,450		—

Loans receivable, net	4,287,628		4,159,513		—		—		4,159,513
Accrued interest receivable	19,518		19,518		96		6,127		13,295
Derivative assets - interest rate swaps	23,195		23,195		—		23,195		—
Equity security	314		314		314		—		—
Financial Liabilities:
Non-maturity deposits	$	4,906,899	$	4,906,899	$	4,906,899	$	—	$	—
Certificates of deposit	692,973		701,029		—		701,029		—
Borrowings	500,000		499,861		—		499,861		—

Junior subordinated debentures	21,765		19,750		—		—		19,750
Accrued interest payable	13,026		13,026		63		12,880		83
Derivative liabilities - interest rate swaps	23,195		23,195		—		23,195		—

(9) Income Taxes

The following table presents the reconciliation of income taxes computed at the Federal statutory income tax rate of 21 % to the actual effective rate for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Income tax expense at Federal statutory rate	$	2,744	$	4,577	$	7,545	$	13,931
State tax, net of Federal tax benefit	118		196		326		597
Tax-exempt instruments	( 240 )		( 344 )		( 710 )		( 961 )
LIHTC	( 991 )		( 615 )		( 2,975 )		( 2,115 )
Effects of BOLI	( 168 )		( 169 )		( 534 )		( 442 )
Restricted stock unit excess liability	—		2		267		106
Other, net	180		( 69 )		680		( 300 )
Income tax expense	$	1,643	$	3,578	$	4,599	$	10,816

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LIHTC Investments

The CRA encourages banks to meet the credit needs of their communities, particularly low- and moderate-income individuals and neighborhoods. The Company invests in certain affordable housing projects in the form of ownership interests in limited partnerships or limited liability companies that qualify for CRA consideration and tax credits. These entities are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the U.S. To fully utilize the available tax credits, each of these entities must meet the regulatory affordable housing requirements for a 15-year minimum compliance period. For the Company’s accounting policies on tax credit investments, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2023 Annual Form 10-K.

Tax credit investments are reported in " Prepaid expenses and other assets " and the unfunded contingent commitments related to these investments as "Accrued expenses and other liabilities" on the Company’s Condensed Consolidated Statements of Financial Condition. The Company accounts for LIHTC investments using the proportional amortization method. Under the proportional amortization method, such investment is amortized in proportion to the allocation of tax benefits received in each period, and the investment amortization and the tax benefits are presented on a net basis within “ Income tax expense ” on our Condensed Consolidated Statements of Income and as a component within " Other " cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows.

The carrying values of LIHTC investments were $ 192.3 million and $ 207.3 million as of September 30, 2024 and December 31, 2023, respectively. The proportional amortization for LIHTC during the three months ended September 30, 2024 and 2023 was $ 4.9 million and $ 4.2 million, respectively, and during the nine months ended September 30, 2024 and 2023 was $ 14.9 million and $ 12.3 million, respectively.

There were no significant modifications or events that resulted in a change in the nature or change in the underlying project for LIHTC investments at September 30, 2024 or December 31, 2023.

(10) Commitments and Contingencies

In the ordinary course of business, the Company may enter into various types of transactions that include commitments to extend credit that are not included in its unaudited Condensed Consolidated Financial Statements. The Company applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The majority of the commitments presented below are variable rate. Loan commitments can be either revolving or non-revolving. The Company’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.

The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:


	September 30, 2024		December 31, 2023
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	577,763	$	542,975
Owner-occupied CRE	3,352		8,731
Non-owner occupied CRE	14,851		26,534
Total commercial business	595,966		578,240

Real estate construction and land development:
Residential	31,699		46,924
Commercial and multifamily	167,561		308,206
Total real estate construction and land development	199,260		355,130
Consumer	347,134		335,729
Total outstanding commitments	$	1,142,360	$	1,269,099

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three and nine months ended September 30, 2024. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Cautionary Note Regarding Forward-Looking Statements included herein and the December 31, 2023 audited Consolidated Financial Statements, and the accompanying Notes included in our 2023 Annual Form 10-K.

Overview

Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our local communities with an ongoing strategic

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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 Quarterly Report on Form 10-Q relates primarily to the Bank’s operations.

Our business consists primarily of commercial lending and deposit relationships with small- and medium-sized businesses and their owners in our market areas and 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, comprised 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, including more recently significant changes as a result of inflation, 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 our methodology.

Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of gains or losses on sale of investment securities, service charges and other fees, card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services. 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 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 consist 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. 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 Overview

Comparison of the quarter ended September 30, 2024 to the comparable quarter in the prior year

Net income decreased $6.8 million, or 37.3%, to $11.4 million, or $0.33 per diluted common share, for the three months ended September 30, 2024, compared to $18.2 million, or $0.51 per diluted common share, for the same period in 2023.

The decrease in net income was primarily due to a $9.0 million increase in interest expense from higher funding costs and a pre-tax loss of $6.9 million on the sale of investment securities in connection with management's strategic repositioning of the Company's balance sheet during the three months ended September 30, 2024,

The decline in net income was partially offset by a $6.4 million increase in income due to increased yields earned on interest earning assets as a result of higher market interest rates and a $1.7 million decrease in noninterest expense due to management's expense management initiatives which included a reduction in full-time equivalent employees ("FTE") to 749 at September 30, 2024 compared to 821 at September 30, 2023 and technology-related contract renewals and terminations.

Comparison of the nine months ended September 30, 2024 to the comparable period in the prior year.

Net income decrease d $24.2 million , or 43.6% , to $31.3 million, or $0.90 per diluted common share, for the nine months ended September 30, 2024 compared t o $55.5 million, or $1.57 per diluted common share, for the same period in 2023 .

The decrease in net income was due primarily to a $36.2 million increase in interest expense from higher funding costs and a pre-tax loss of $18.8 million on the sale of investment securities incurred during the nine months ended September 30, 2024 in connection with management's strategic repositioning of the Company's balance sheet. The Company sold investment securities with an amortized cost of $260.8 million and an estimated weighted average book yield of 2.27% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05% during the nine months ended September 30, 2024 . The remaining proceeds from investment sales were invested in loans.

The decline in net income was partially offset by a $20.5 million increase in interest income due to an increase in yields earned on interest earning assets as a result of higher market interest rates and a decrease in noninterest expense of $5.1 million due to

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management's expense management initiatives, which included a reduction in FTE and technology-related contract renewals and terminations.

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.

Comparison of the quarter ended September 30, 2024 to the comparable quarter in the prior year

The following table provides relevant net interest income information for the periods indicated:


	Three Months Ended September 30,
	2024						2023						Change
	Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate (1)
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2)(3)	$	4,555,090	$	64,138	5.60	%	$	4,201,554	$	56,119	5.30	%	$	353,536	$	8,019	0.30	%
Taxable securities	1,604,529		13,472		3.34		1,931,649		14,590		3.00		(327,120)		(1,118)		0.34
Nontaxable securities (3)	17,482		159		3.62		60,654		448		2.93		(43,172)		(289)		0.69
Interest earning deposits	150,384		2,048		5.42		169,186		2,310		5.42		(18,802)		(262)		—
Total interest earning assets	6,327,485		79,817		5.02	%	6,363,043		73,467		4.58	%	(35,558)		6,350		0.44	%
Noninterest earning assets	855,436						849,689						5,747
Total assets	$	7,182,921					$	7,212,732					$	(29,811)
Interest Bearing Liabilities:
Certificates of deposit	$	906,743	$	10,052	4.41	%	$	553,015	$	4,585	3.29	%	$	353,728	$	5,467	1.12	%
Savings accounts	445,926		220		0.20		523,882		172		0.13		(77,956)		48		0.07
Interest bearing demand and money market accounts	2,644,827		9,984		1.50		2,764,251		7,120		1.02		(119,424)		2,864		0.48
Total interest bearing deposits	3,997,496		20,256		2.02		3,841,148		11,877		1.23		156,348		8,379		0.79
Junior subordinated debentures	21,946		541		9.81		21,649		540		9.90		297		1		(0.09)
Securities sold under agreement to repurchase	—		—		—		31,729		38		0.48		(31,729)		(38)		(0.48)
Borrowings	452,364		6,062		5.33		451,032		5,394		4.74		1,332		668		0.59
Total interest bearing liabilities	4,471,806		26,859		2.39	%	4,345,558		17,849		1.63	%	126,248		9,010		0.76	%
Noninterest bearing demand deposits	1,677,984						1,859,374						(181,390)
Other noninterest bearing liabilities	175,332						186,306						(10,974)
Stockholders’ equity	857,799						821,494						36,305
Total liabilities and stock-holders’ equity	$	7,182,921					$	7,212,732					$	(29,811)
Net interest income and spread			$	52,958	2.63	%			$	55,618	2.95	%			$	(2,660)	(0.32)	%
Net interest margin					3.33	%					3.47	%					(0.14)	%

(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 $938,000 and $940,000 for the three months ended September 30, 2024 and 2023, respectively.

(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.

The following table provides the changes in net interest income for the three months ended September 30, 2024 compared to the same period in 2023, 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:

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	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net	$	4,878	$	3,141	$	8,019
Taxable securities	(2,637)		1,519		(1,118)
Nontaxable securities	(375)		86		(289)
Interest earning deposits	(256)		(6)		(262)
Total interest income	$	1,610	$	4,740	$	6,350
Interest Bearing Liabilities:
Certificates of deposit	$	3,580	$	1,887	$	5,467
Savings accounts	(29)		77		48
Interest bearing demand and money market accounts	(320)		3,184		2,864
Total interest bearing deposits	3,231		5,148		8,379
Junior subordinated debentures	7		(6)		1
Securities sold under agreement to repurchase	(19)		(19)		(38)
Borrowings	16		652		668
Total interest expense	$	3,235	$	5,775	$	9,010
Net interest income	$	(1,625)	$	(1,035)	$	(2,660)

Net interest income decreased $2.7 million, or 4.8%, to $53.0 million for the three months ended September 30, 2024, compared to $55.6 million for the same period in 2023 due primarily to a $9.0 million increase in total interest expense, offset partially by a $6.4 million increase in total interest income.

Total interest income increased to $79.8 million for the three months ended September 30, 2024, compared to $73.5 million for the same period in 2023. The increase was primarily due to a $8.0 million increase in interest income on loans receivable, net, offset partially by a $1.4 million decrease in interest income on investment securities during the three months ended September 30, 2024 as compared to the same period in 2023. Interest income on loans receivable, net, increased due to increases in both the average yield earned on and the average outstanding balance of those assets. The yield earned on loans receivable, net, increased 30 basis points to 5.60% and the average balance of loans receivable, net, increased $353.5 million to $4.56 billion during the three months ended September 30, 2024, as compared to the same period in 2023.

Interest income on investment securities decreased $1.4 million due to a decrease in the average balance of investment securities, offset partially by an increase in the yield earned on these securities due primarily to rising interest rates and sales of lower yielding securities. The yield on taxable securities increased 34 basis points to 3.34% and average balances decreased $327.1 million to $1.60 billion during the three months ended September 30, 2024 compared to 3.00% and average balances of $1.93 billion during the same period in 2023.

Total interest expense increased to $26.9 million during the three months ended September 30, 2024 compared to $17.8 million for the same period in 2023. The increase was due primarily to a $8.4 million increase in interest expense on interest bearing deposits and a $0.7 million increase in interest expense on borrowings during the three months ended September 30, 2024, as compared to the same period in 2023. The increase in interest expense on interest bearing deposits was due primarily to a 79 basis point increase in the average rate to 2.02% for the three months ended September 30, 2024, as compared to 1.23% for the same period in 2023 due to competitive rate pressures, and to a lesser extent, a $353.7 million increase in the average balance of certificates of deposit which are generally at higher rates than other deposit products.

Net interest margin decreased 14 basis points to 3.33% for the three months ended September 30, 2024 compared to 3.47% for the same period in 2023.

Comparison of nine months ended September 30, 2024 to the comparable period in the prior year

The following table provides relevant net interest income information for the periods indicated:


	Nine Months Ended September 30,
	2024						2023						Change
	Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate (1)		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)	$	4,425,234	$	182,608	5.51	%	$	4,129,429	$	160,192	5.19	%	$	295,805	$	22,416	0.32	%
Taxable securities	1,699,995		42,462		3.34		1,975,818		44,021		2.98		(275,823)		(1,559)		0.36

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	Nine Months Ended September 30,
	2024						2023						Change
	Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Nontaxable securities (3)	19,193		505		3.51		71,702		1,554		2.90		(52,509)		(1,049)		0.61
Interest earning deposits	126,970		5,177		5.45		114,753		4,436		5.17		12,217		741		0.28
Total interest earning assets	6,271,392		230,752		4.91	%	6,291,702		210,203		4.47	%	(20,310)		20,549		0.44	%
Noninterest earning assets	856,198						848,035						8,163
Total assets	$	7,127,590					$	7,139,737					$	(12,147)
Interest Bearing Liabilities:
Certificates of Deposit	$	826,575	$	26,852	4.34	%	$	442,301	$	8,292	2.51	%	$	384,274	$	18,560	1.83	%
Savings accounts	457,989		640		0.19		558,467		471		0.11		(100,478)		169		0.08
Interest bearing demand and money market accounts	2,643,478		27,605		1.39		2,791,695		16,249		0.78		(148,217)		11,356		0.61
Total interest bearing deposits	3,928,042		55,097		1.87		3,792,463		25,012		0.88		135,579		30,085		0.99
Junior subordinated debentures	21,874		1,627		9.94		21,576		1,521		9.43		298		106		0.51
Securities sold under agreement to repurchase	—		—		—		38,187		148		0.52		(38,187)		(148)		(0.52)
Borrowings	484,300		18,427		5.08		339,296		12,238		4.82	%	145,004		6,189		0.26
Total interest bearing liabilities	4,434,216		75,151		2.26	%	4,191,522		38,919		1.24	%	242,694		36,232		1.02	%
Noninterest bearing demand deposits	1,657,867						1,942,134						(284,267)
Other noninterest bearing liabilities	186,081						186,469						(388)
Stockholders’ equity	849,426						819,612						29,814
Total liabilities and stock-holders’ equity	$	7,127,590					$	7,139,737					$	(12,147)
Net interest income and spread			$	155,601	2.65	%			$	171,284	3.23	%			$	(15,683)	(0.58)	%
Net interest margin					3.31	%					3.64	%					(0.33)	%

(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 $2.7 million and $2.4 million for the nine months ended September 30, 2024 and 2023, respectively.

(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.

The following table provides the changes in net interest income for the nine months ended September 30, 2024 compared to the same period in 2023, 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:


	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net	$	11,862	$	10,554	$	22,416
Taxable securities	(6,543)		4,984		(1,559)
Nontaxable securities	(1,327)		278		(1,049)
Interest earning deposits	489		252		741
Total interest income	$	4,481	$	16,068	$	20,549
Interest Bearing Liabilities:
Certificates of deposit	$	10,067	$	8,493	$	18,560
Savings accounts	(97)		266		169
Interest bearing demand and money market accounts	(906)		12,262		11,356
Total interest bearing deposits	9,064		21,021		30,085
Junior subordinated debentures	21		85		106
Securities sold under agreement to repurchase	(74)		(74)		(148)

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	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total
	(Dollars in thousands)
Borrowings	5,484		705		6,189
Total interest expense	$	14,495	$	21,737	$	36,232
Net interest income	$	(10,014)	$	(5,669)	$	(15,683)

Net interest income decreased $15.7 million, or 9.2%, to $155.6 million for the nine months ended September 30, 2024, as compared to $171.3 million for the same period in 2023, due primarily to an increase in total interest expense offset partially by an increase in total interest income.

Total interest income increased $20.5 million, or 9.8%, to $230.8 million for the nine months ended September 30, 2024, compared to $210.2 million for the same period in 2023. The increase was primarily due to a $22.4 million increase in interest income on loans receivable, net, and a $0.7 million increase in interest income on interest earning deposits, offset partially by a $2.6 million decrease in interest income on investment securities during the nine months ended September 30, 2024 as compared to the same period in 2023. Interest income on loans receivable, net, and interest earning deposits increased due to increases in both the average yield earned on and the average outstanding balance of those assets. The yield earned on loans receivable, net increased 32 basis points to 5.51% and the average balance of loans receivable, net, increased $295.8 million to $4.43 billion during the nine months ended September 30, 2024, as compared to the same period in 2023. Similarly, the yield earned on interest earning deposits increased 28 basis points to 5.45% and the average balance of those deposits increased $12.2 million to $127.0 million during nine months ended September 30, 2024, as compared to the same period in 2023.

Interest income on investment securities decreased $2.6 million due to a decrease in the average balance of investment securities, offset partially by an increase in the yield earned on these securities due primarily to rising interest rates and sales of lower yielding securities. The yield on taxable securities increased 36 basis points to 3.34% and average balances decreased $275.8 million to $1.70 billion during the nine months ended September 30, 2024 compared to 2.98% and average balances of $1.98 billion during the same period in 2023.

Total interest expense increased $36.2 million, or 93.1%, to $75.2 million during the nine months ended September 30, 2024, compared to $38.9 million for the same period in 2023. The increase was due primarily to a $30.1 million increase in interest expense on interest bearing deposits and a $6.2 million increase in interest expense on borrowings during the nine months ended September 30, 2024, as compared to the same period in 2023. The increase in interest expense on deposits was due primarily to a 99 basis point increase in the average rate of interest bearing deposits to 1.87% for the nine months ended September 30, 2024, as compared to 0.88% for the same period in 2023, due to competitive rate pressures, and to a lesser extent, a $384.3 million increase in the average balance of certificates of deposit which are generally at higher rates than other deposit products. The increase of interest expense on borrowings was due primarily to a $145.0 million increase in average balances.

Net interest margin decreased 33 basis points to 3.31% for the nine months ended September 30, 2024, compared to 3.64% for the same period in 2023.

Provision for Credit Losses Overview

The aggregate of the provision for (reversal of) credit losses on loans and on unfunded commitments is presented on the unaudited Condensed Consolidated Statements of Income as the provision for credit losses. The ACL on unfunded commitments is included on the unaudited Condensed Consolidated Statements of Financial Condition within accrued expenses and other liabilities.

Comparison of the quarter ended September 30, 2024 to the comparable quarter in the prior year

The following table presents the provision for (reversal of) credit losses for the periods indicated:


	Three Months Ended September 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Provision for (reversal of) credit losses on loans	$	2,705	$	(635)	$	3,340	526.0	%
Reversal of provision for credit losses on unfunded commitments	(266)		(243)		(23)		(9.5)
Provision for credit losses	$	2,439	$	(878)	$	3,317	377.8	%

The provision for credit losses on loans reflects the amount required to maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves and is impacted by quarterly charge-offs and recoveries. The provision for credit losses on loans was $2.7 million during the three months ended September 30, 2024 and was primarily driven by $2.5 million in net charge-offs recognized and loan growth during the quarter. The net charge-offs of $2.5 million resulted primarily from one owner-occupied commercial real estate loan that migrated to nonaccrual status during

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the quarter. This loan was rated Substandard at the time of the charge-off and has been managed by our Special Assets Departments since December 2022.

Future assessments of the expected credit losses will be impacted not only by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but also by an updated assessment of qualitative factors, as well as consideration of any changes in the reasonable and supportable forecast reversion period. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended September 30, 2024 was due primarily to a decrease in the unfunded exposure on construction loans.

The reversal of provision for credit losses on loans was $635,000 during the three months ended September 30, 2023 due primarily to net recoveries of $1.2 million in connection with the payoff of one nonaccrual loan. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended September 30, 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.

Comparison of the nine months ended September 30, 2024 to the comparable period in the prior year

The following table presents the provision for (reversal of) credit losses for the periods indicated:


	Nine Months Ended September 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Provision for credit losses on loans	$	5,879	$	3,066	$	2,813	91.7	%
Reversal of provision for credit losses on unfunded commitments	(780)		(210)		(570)		271.4
Provision for credit losses	$	5,099	$	2,856	$	2,243	78.5	%

The $5.9 million provision for credit losse s on loans during the nine months ended September 30, 2024 was due primarily to $2.5 million in net charge-offs and an increase in loans receivable as well as a change in mix of loans. The $780,000 reversal of provision for credit losses on unfunded commitments during the nine months ended September 30, 2024 was due primarily to a $110.4 million decrease in the unfunded exposure on construction loans which reduced the unfunded exposure and secondarily due to an increase in loan utilization rates.

The $3.1 million provision for credit losse s recognized during the nine months ended September 30, 2023 was due primarily to an increase in loans receivable as well as a change in mix of loans offset partially by net recoveries of $895,000. The $210,000 reversal of provision for credit losses on unfunded commitments recognized during the nine months ended September 30, 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.

Noninterest Income Overview

Comparison of the three months ended September 30, 2024 to the comparable period in the prior year

The following table presents the change in the key components of noninterest income for the periods indicated:


	Three Months Ended September 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Service charges and other fees	$	2,788	$	2,856	$	(68)	(2.4)	%
Card revenue	2,134		2,273		(139)		(6.1)
Loss on sale of investment securities, net	(6,945)		(1,940)		(5,005)		258.0
Gain on sale of loans, net	—		157		(157)		(100.0)
Interest rate swap fees	—		62		(62)		(100.0)
Bank owned life insurance income	860		734		126		17.2
Gain on sale of other assets, net	1,480		—		1,480		100.0
Other income	1,520		2,129		(609)		(28.6)
Total noninterest income	$	1,837	$	6,271	$	(4,434)	(70.7)	%

Noninterest income decreased $4.4 million from the same period in 2023, due primarily to a $6.9 million pre-tax loss on the sale of investment securities during the three months ended September 30, 2024, as compared to a $1.9 million pre-tax loss on the sale of investment securities recognized in the same period in 2023, both as part of the Company's strategic balance sheet repositioning efforts. Other income declined due to a $610,000 gain on sale of the Ellensburg, WA branch deposits recognized during the three months ended September 30, 2023. The decrease was partially offset by an increase in gain on sale of other

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assets, net which was due to a $1.5 million gain on the sale of an administrative building recognized during the three months ended September 30, 2024.

Comparison of nine months ended September 30, 2024 to the comparable period in the prior year

The following table presents the change in the key components of noninterest income for the periods indicated:


	Nine Months Ended September 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Service charges and other fees	$	8,393	$	8,162	$	231	2.8	%
Card revenue	5,903		6,396		(493)		(7.7)
Loss on sale of investment securities, net	(18,839)		(2,226)		(16,613)		746.3
Gain on sale of loans, net	26		307		(281)		(91.5)
Interest rate swap fees	52		230		(178)		(77.4)
Bank owned life insurance income	2,711		2,280		431		18.9
Gain on sale of other assets, net	1,529		2		1,527		76,350.0
Other income	4,408		6,659		(2,251)		(33.8)
Total noninterest income	$	4,183	$	21,810	$	(17,627)	(80.8)	%

Nonintere st income decreased $17.6 million, or 80.8%, during the nine months ended September 30, 2024 compared to the same period in 2023, due primarily to a pre-tax loss on sale of investment securities of $18.8 million recognized during the nine months ended September 30, 2024 as a result of the sale of investment securities with an amortized cost of $260.8 million in connection with the Company's strategic balance sheet repositioning efforts. Other income decreased due primarily to a one-time $1.6 million gain on sale of Visa Inc. Class B common stock and a $610,000 gain on the sale of the Ellensburg, WA branch deposits recognized during the nine months ended September 30, 2023. Card revenue declined modestly due to a reduction in card activity as non-maturity deposit balances have declined. The decrease was partially offset by an increase in gain on sale of other assets, net which was due to a $1.5 million gain on the sale of an administrative building recognized during the nine months ended September 30, 2024.

Noninterest Expense Overview

Comparison of three months ended September 30, 2024 to the comparable period in the prior year

The following table presents changes in the key components of noninterest expense for the periods indicated:


	Three Months Ended September 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Compensation and employee benefits	$	24,367	$	25,008	$	(641)	(2.6)	%
Occupancy and equipment	4,850		4,814		36		0.7
Data processing	3,915		4,116		(201)		(4.9)
Marketing	128		389		(261)		(67.1)
Professional services	490		582		(92)		(15.8)
State/municipal business and use taxes	1,249		1,088		161		14.8
Federal deposit insurance premium	824		818		6		0.7

Amortization of intangible assets	399		595		(196)		(32.9)
Other expense	3,068		3,560		(492)		(13.8)
Total noninterest expense	$	39,290	$	40,970	$	(1,680)	(4.1)	%

Noninterest expense decreased $1.7 million, or 4.1%, during the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a decrease in compensation and employee benefits expense as a result of a reduction in full-time equivalent employees to 749 at September 30, 2024 from 821 at September 30, 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.

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Comparison of the nine months ended September 30, 2024 to the comparable period in the prior year

The following table presents changes in the key components of noninterest expense for the periods indicated:


	Nine Months Ended September 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Compensation and employee benefits	$	74,291	$	75,325	$	(1,034)	(1.4)	%
Occupancy and equipment	14,547		14,372		175		1.2
Data processing	10,732		12,427		(1,695)		(13.6)
Marketing	583		1,232		(649)		(52.7)
Professional services	1,852		1,961		(109)		(5.6)
State/municipal business and use taxes	3,709		3,150		559		17.7
Federal deposit insurance premium	2,431		2,465		(34)		(1.4)

Amortization of intangible assets	1,241		1,841		(600)		(32.6)
Other expense	9,370		11,127		(1,757)		(15.8)
Total noninterest expense	$	118,756	$	123,900	$	(5,144)	(4.2)	%

Noninterest expense decreased $5.1 million, or 4.2%, during the nine months ended September 30, 2024 compared to the same period in 2023 due primarily to a decrease in data processing and other expense. Data processing expense decreased primarily due to a decline in ongoing costs resulting from technology-related contract renewals and terminations. Other expense decreased primarily due to a decline in customer deposit loss expense and employee related expense, which included additional expenses related to calling efforts for the newly added teams, as well as a general increase in operating costs incurred during the nine months ended September 30, 2023. Amortization of intangible assets decreased due to the full amortization of the core deposit intangible from one acquisition. Compensation and employee benefits expense decreased due primarily to a decline in the average number of full-time equivalent employees as a result of expense management initiatives during the nine months ended September 30, 2024. 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

Comparison of the three months ended September 30, 2024 to the comparable period in the prior year

The following table presents the income tax expense, and related metrics and change for the periods indicated:


	Three Months Ended September 30,						Change
	2024			2023			$			%
	(Dollars in thousands)
Income before income taxes	$	13,066		$	21,797		$	(8,731)		(40.1)	%
Income tax expense	$	1,643		$	3,578		$	(1,935)		(54.1)	%
Effective income tax rate	12.6		%	16.4		%	(3.8)		%	(23.2)	%

Income tax expense and the effective income tax rate both decreased due primarily to lower estimated pre-tax income, which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in BOLI and LIHTC investments during the three months ended September 30, 2024 compared to the same period in 2023.

Comparison of the nine months ended September 30, 2024 to the comparable period in the prior year.

The following table presents the income tax expense and related metrics and the change for the periods indicated:


	Nine Months Ended September 30,						Change
	2024			2023			$			%
	(Dollars in thousands)
Income before income taxes	$	35,929		$	66,338		$	(30,409)		(45.8)	%
Income tax expense	$	4,599		$	10,816		$	(6,217)		(57.5)	%
Effective income tax rate	12.8		%	16.3		%	(3.5)		%	(21.5)	%

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Income tax expense and the effective income tax rate both decreased due primarily to lower estimated pre-tax income during the nine months ended September 30, 2024 compared to the same period in 2023 which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in BOLI and LIHTC investments.

Financial Condition Overview

The following table provides a comparison of the changes in the Company's financial condition at the periods indicated:


	September 30, 2024		December 31, 2023		Change
					$		%
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	175,572	$	224,973	$	(49,401)	(22.0)	%
Investment securities available for sale, at fair value, net	852,779		1,134,353		(281,574)		(24.8)
Investment securities held to maturity, at amortized cost, net	719,400		739,442		(20,042)		(2.7)

Loans receivable, net	4,628,088		4,287,628		340,460		7.9

Premises and equipment, net	72,500		74,899		(2,399)		(3.2)
Federal Home Loan Bank stock, at cost	16,993		4,186		12,807		305.9
Bank owned life insurance	127,248		125,655		1,593		1.3
Accrued interest receivable	20,102		19,518		584		3.0
Prepaid expenses and other assets	296,190		318,571		(22,381)		(7.0)
Other intangible assets, net	3,552		4,793		(1,241)		(25.9)
Goodwill	240,939		240,939		—		—
Total assets	$	7,153,363	$	7,174,957	$	(21,594)	(0.3)	%

Liabilities and Stockholders' Equity
Total deposits	$	5,708,492	$	5,599,872	$	108,620	1.9	%
Borrowings	382,000		500,000		(118,000)		(23.6)
Junior subordinated debentures	21,985		21,765		220		1.0

Accrued expenses and other liabilities	166,372		200,059		(33,687)		(16.8)
Total liabilities	6,278,849		6,321,696		(42,847)		(0.7)
Common stock	534,917		549,748		(14,831)		(2.7)
Retained earnings	383,127		375,989		7,138		1.9
Accumulated other comprehensive loss, net	(43,530)		(72,476)		28,946		39.9
Total stockholders' equity	874,514		853,261		21,253		2.5
Total liabilities and stockholders' equity	$	7,153,363	$	7,174,957	$	(21,594)	(0.3)	%

Total assets decreased due primarily to sales of investment securities available for sale as part of the Company's strategic balance sheet repositioning discussed above, and a decline in cash and cash equivalents. The decrease was offset partially by an increase in loans receivable, net due to loan growth. Total liabilities and stockholders' equity decreased due primarily to a decrease in borrowings, accrued expenses and other liabilities, offset partially by an increase in deposits due to deposit growth and an increase in stockholders' equity due to a decline in accumulated other comprehensive loss, net.

Investment Activities Overview

Our investment policy is established by the Company's Board of Directors and monitored by the Risk Committee of the Board of Directors. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Investments in non-investment grade bonds and stripped mortgage-backed securities are not permitted under the policy.

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The following table provides information regarding our investment securities at the dates indicated:


	September 30, 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	$	13,054	0.8	%	$	13,750	0.7	%	$	(696)	(5.1)	%
Municipal securities	61,263		3.9		79,525		4.2		(18,262)		(23.0)
Residential CMO and MBS (1)	427,048		27.2		512,049		27.3		(85,001)		(16.6)
Commercial CMO and MBS (1)	328,861		20.9		504,258		27.0		(175,397)		(34.8)
Corporate obligations	11,706		0.7		7,613		0.4		4,093		53.8
Other asset-backed securities	10,847		0.7		17,158		0.9		(6,311)		(36.8)
Total	$	852,779	54.2	%	$	1,134,353	60.5	%	$	(281,574)	(24.8)	%

Investment securities held to maturity, at amortized cost:
U.S. government and agency securities	$	151,181	9.6	%	$	151,075	8.1	%	$	106	0.1	%
Residential CMO and MBS (1)	249,589		15.9		267,204		14.3		(17,615)		(6.6)
Commercial CMO and MBS (1)	318,630		20.3		321,163		17.1		(2,533)		(0.8)
Total	$	719,400	45.8	%	$	739,442	39.5	%	$	(20,042)	(2.7)	%

Total investment securities	$	1,572,179	100.0	%	$	1,873,795	100.0	%	$	(301,616)	(16.1)	%

(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.

Total investment securities decreased $301.6 million, or 16.1%, to $1.57 billion at September 30, 2024 from $1.87 billion at December 31, 2023, due primarily to the sale of investment securities with an amortized cost of $260.8 million at a pre-tax loss of $18.8 million during the nine months ended September 30, 2024, and offset partially by investment purchases of $33.1 million as part of the Company's strategic balance sheet repositioning discussed above. Additionally, there were investment maturities and repayments of $111.5 million during the nine months ended September 30, 2024.

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:


	September 30, 2024				December 31, 2023				Change
	Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		$		%
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	824,134	17.6	%	$	718,291	16.6	%	$	105,843	14.7	%
Owner-occupied CRE	987,084		21.1		958,620		22.1		28,464		3.0
Non-owner occupied CRE	1,835,609		39.3		1,697,574		39.1		138,035		8.1
Total commercial business	3,646,827		78.0		3,374,485		77.8		272,342		8.1
Residential real estate	408,982		8.7		375,342		8.7		33,640		9.0
Real estate construction and land development:
Residential	79,325		1.7		78,610		1.8		715		0.9
Commercial and multifamily	378,322		8.1		335,819		7.7		42,503		12.7
Total real estate construction and land development	457,647		9.8		414,429		9.5		43,218		10.4

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	September 30, 2024				December 31, 2023				Change
	Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		$		%
	(Dollars in thousands)
Consumer	166,023		3.5		171,371		4.0		(5,348)		(3.1)
Total	$	4,679,479	100.0	%	$	4,335,627	100.0	%	$	343,852	7.9	%

Loans receivable increased $343.9 million, or 7.9%, to $4.68 billion at September 30, 2024 from $4.34 billion at December 31, 2023. New loans funded in the nine months ended September 30, 2024 totaled $445.3 million and loan prepayments were $132.4 million.

Non-owner occupied CRE loans increased $138.0 million, or 8.1%, due primarily to new loan production of $98.1 million during the nine months ended September 30, 2024 and advances on outstanding commitments. Commercial and industrial loans increased $105.8 million, or 14.7%, due primarily to new loan production of $176.2 million during the nine months ended September 30, 2024, offset by pay downs on outstanding balances. Commercial and multifamily construction loans increased $42.5 million, or 12.7%, due primarily to advances on outstanding commitments. Residential real estate loans increased $33.6 million, or 9.0%, due primarily to loan purchases during the nine months ended September 30, 2024.

The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:


	September 30, 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	$	554,449	19.6	%	$	555,822	20.9	%	$	(1,373)	(0.2)	%
Industrial	467,926		16.6		418,651		15.8		49,275		11.8
Multi-family	412,201		14.6		305,499		11.5		106,702		34.9
Retail store / shopping center	298,010		10.6		285,926		10.8		12,084		4.2
Mini-storage	162,075		5.7		171,778		6.5		(9,703)		(5.6)
Mixed use property	156,161		5.5		154,674		5.8		1,487		1.0
Motel / hotel	154,091		5.5		142,172		5.4		11,919		8.4
Warehouse	139,575		4.9		149,176		5.6		(9,601)		(6.4)
Single purpose	115,810		4.1		123,344		4.6		(7,534)		(6.1)
Recreational / school	69,117		2.4		67,791		2.6		1,326		2.0
Other	293,278		10.5		281,361		10.5		11,917		4.2
Total	$	2,822,693	100.0	%	$	2,656,194	100.0	%	$	166,499	6.3	%

Office loans represented the l argest segment of owner-occupied and non-owner occupied CRE loans, totaling $554.4 million, or 19.6% of total CRE loans, at September 30, 2024. Of this total, $282.4 million, or 50.9%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile than non-owner occupied CRE loans as there is less tenant rollover risk and they generally have guarantees from the company occupying the space as well as the owners of the company. Multi-family loans increased $106.7 million to $412.2 million or 14.6% of total CRE loans, due primarily to completion of $69.4 million in commercial constructions converting to term CRE loans. The average loan balance of CRE loans was $1.3 million at September 30, 2024.

Loans classified as nonaccrual and nonperforming assets

The following table provides information about our nonaccrual loans and nonperforming assets for the dates indicated:


	September 30, 2024		December 31, 2023		Change
					$		%
	(Dollars in thousands)
Nonaccrual loans: (1)
Commercial business	$	4,301	$	4,468	$	(167)	(3.7)	%



Total nonaccrual loans	4,301		4,468		(167)		(3.7)

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	September 30, 2024			December 31, 2023			Change
							$		%
Accruing loans past due 90 days or more	$	5,347		$	1,293		$	4,054	313.5	%
Total nonperforming loans	9,648			5,761			3,887		67.5
Other real estate owned	—			—			—		—
Total nonperforming assets	$	9,648		$	5,761		$	3,887	67.5	%

Credit quality ratios:
Nonaccrual loans to loans receivable	0.09		%	0.10		%	(0.01)		(10.0)
Nonperforming loans to loans receivable	0.21			0.13			0.08		61.5
Nonperforming assets to total assets	0.13			0.08			0.05		62.5

(1) At September 30, 2024 and December 31, 2023, $1.2 million and $3.2 million, respectively, of nonaccrual loans, were guaranteed by government agencies.

Nonaccrual loans decreased $167,000 to $4.3 million at September 30, 2024 as compared to $4.5 million at December 31, 2023 Additions during the nine months ended September 30, 2024 were due primarily to one $5.0 million owner occupied CRE loan of which $2.5 million was charged off. Payoffs during the nine months ended September 30, 2024 were due primarily to the payoff of one commercial and industrial loan relationship. The following table provides the changes in nonaccrual loans during the nine months ended September 30, 2024:


(Dollars in thousands)
Balance, beginning of period	$	4,468
Additions	6,132
Net principal payments, sales and transfers to accruing status	(925)
Payoffs	(2,601)
Charge-offs	(2,773)

Balance, end of period	$	4,301

Allowance for Credit Losses on Loans Overview

The following table provides information regarding our ACL on loans for the periods indicated:


	At or For the Nine Months Ended September 30,
	2024			2023			Change
	(Dollars in thousands)
ACL on loans at the end of period	$	51,391		$	46,947		$	4,444

Credit quality ratios:
ACL on loans to loans receivable	1.10		%	1.10		%	—		%
ACL on loans to nonaccrual loans	1,194.86			1,531.71			(336.85)

Net charge-offs (recoveries)	$	2,487		$	(895)		$	3,382
Average balance of loans receivable, net during the period (1)	4,425,234			4,129,429			295,805
Net charge-offs (recoveries) on loans to average loans receivable, net (2)	0.08		%	(0.03)		%	0.11		%

(1) Average balance of loans receivable, net includes loans held for sale.

(2) Annualized.

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The ACL on l oans increased $3.4 million, or 7.1%, to $51.4 million at September 30, 2024, compared to $48.0 million at December 31, 2023, due primarily to an increase in loans receivable, net and the change in mix of loans. The following table presents the ACL on loans by loan portfolio segment at the dates indicated:


	September 30, 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	$	37,167	1.02	%	78.0	%	$	31,303	0.93	%	77.8	%
Residential real estate	3,604		0.88		8.7		3,473		0.93		8.7
Real estate construction and land development	8,465		1.85		9.8		10,876		2.62		9.5
Consumer	2,155		1.30		3.5		2,347		1.37		4.0
Total ACL on loans	$	51,391	1.10	%	100.0	%	$	47,999	1.11	%	100.0	%

Deposits Overview

The following table summarizes the Company's deposits at the dates indicated:


	September 30, 2024				December 31, 2023				Change
	Balance		% of Total Deposits		Balance		% of Total Deposits		$		%
	(Dollars in thousands)
Noninterest demand deposits	$	1,682,219	29.5	%	$	1,715,847	30.6	%	$	(33,628)	(2.0)	%
Interest bearing demand deposits	1,489,316		26.1		1,608,745		28.7		(119,429)		(7.4)
Money market accounts	1,148,720		20.1		1,094,351		19.5		54,369		5.0
Savings accounts	442,677		7.8		487,956		8.7		(45,279)		(9.3)
Total non-maturity deposits	4,762,932		83.5		4,906,899		87.5		(143,967)		(2.9)
Certificates of deposit	945,560		16.5		692,973		12.5		252,587		36.4
Total deposits	$	5,708,492	100.0	%	$	5,599,872	100.0	%	$	108,620	1.9	%

Total deposits increased $108.6 million, or 1.9%, to $5.71 billion at September 30, 2024, compared to $5.60 billion at December 31, 2023. Certificates of deposit increased $252.6 million, or 36.4%, to $945.6 million from $693.0 million and money market accounts increased $54.4 million, or 5.0%, to $1.15 billion from $1.09 billion primarily due to transfers from lower yielding non-maturity deposit accounts as customers moved balances to higher yielding accounts.

Borrowings Overview

The FHLB functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB’s assessment of the institution’s creditworthiness. At September 30, 2024, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.35 billion. The Bank had $282.0 million FHLB advances outstanding at September 30, 2024, and no FHLB advances outstanding at December 31, 2023. Advances from the FHLB may be collateralized by FHLB stock owned by the Bank, deposits at the FHLB, certain commercial and residential real estate loans, investment securities or other assets. All FHLB advances at September 30, 2024 are short-term and mature in less than one year.

The Bank maintains a credit facility with the FRB through the Discount Window with available borrowing capacity of $287.7 million at September 30, 2024. The Bank had $100.0 million in BTFP borrowings outstanding at September 30, 2024, and $500.0 million at December 31, 2023. The remaining BTFP borrowings of $100.0 million mature in January 2025.

In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and the related junior subordinated debentures as part of a prior acquisition. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital. The junior subordinated debentures outstanding were $22.0 million as of September 30, 2024, and $21.8 million as of December 31, 2023, net of unaccreted discount.

The Bank maintains available unsecured federal funds lines with four correspondent banks totaling $145.0 million, with no outstanding borrowings at September 30, 2024.

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Stockholders' Equity Overview

Total stockholders' equity increased $21.3 million, or 2.5%, to $874.5 million at September 30, 2024, compared to $853.3 million at December 31, 2023, due primarily to $31.3 million of net income recognized for the nine months ended September 30, 2024 and a $28.9 million decrease in accumulated other comprehensive loss, net, offset partially by $24.2 million in dividends paid to common shareholders and $18.1 million in common stock repurchases. The Company’s stockholders' equity to assets ratio was 12.2% at September 30, 2024, compared to 11.9% at December 31, 2023.

The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. On October 23, 2024, the Company’s Board of Directors declared a regular quarterly dividend of $0.23 per common share payable on November 20, 2024 to shareholders of record on November 6, 2024.

On April 24, 2024, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares or 1,734,492 shares, in total, under the 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 do so. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds and other factors, including opportunities to deploy the Company's capital. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any prior notice. The new stock repurchase program 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.

Regulatory Requirements Overview

The Company is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the unaudited Condensed Consolidated Financial Statements and the Company's results of operations. Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Management believes that, as of September 30, 2024, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of September 30, 2024 and December 31, 2023, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.

The following table summarizes the Company's consolidated and the Bank's capital actual ratios compared to the regulatory "adequately capitalized" capital ratio and the regulatory minimum capital ratio needed to qualify as a "well capitalized" institution, as calculated under regulatory guideline at the dates presented:


	Actual				Adequately Capitalized				Well-Capitalized (1)
	(Dollars in thousands)
September 30, 2024
Total capital ratio
Company	$	747,694	13.6	%	$	440,140	8.0	%	$	550,175	10.0	%
Bank	742,092		13.5		439,736		8.0		549,669		10.0
Tier 1 capital ratio
Company	697,408		12.7		330,105		6.0		440,140		8.0
Bank	691,806		12.6		329,802		6.0		439,736		8.0
Common equity Tier 1 capital ratio
Company	675,423		12.3		247,579		4.5		357,614		6.5
Bank	691,806		12.6		247,351		4.5		357,285		6.5
Leverage ratio
Company	697,408		9.9		280,769		4.0		350,961		5.0
Bank	691,806		9.9		280,578		4.0		350,722		5.0

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	Actual				Adequately Capitalized				Well-Capitalized (1)
	(Dollars in thousands)
December 31, 2023
Total capital ratio
Company	$	750,945	14.1	%	$	425,084	8.0	%	$	531,355	10.0	%
Bank	732,379		13.8		424,808		8.0		531,009		10.0
Tier 1 capital ratio
Company	704,839		13.3		318,813		6.0		425,084		8.0
Bank	686,273		12.9		318,606		6.0		424,808		8.0
Common equity Tier 1 capital ratio
Company	683,074		12.9		239,110		4.5		345,381		6.5
Bank	686,273		12.9		238,954		4.5		345,156		6.5
Leverage ratio
Company	704,839		10.0		281,673		4.0		352,092		5.0
Bank	686,273		9.8		281,539		4.0		351,923		5.0

(1) The ratios to meet the requirements to be deemed “well-capitalized” under prompt corrective action regulations are only applicable to the Bank. However, the Company manages its capital position as if the requirements apply to the consolidated Company and has presented the ratios as if they also applied on a consolidated basis.

As of both September 30, 2024 and December 31, 2023, the capital measures reflected the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that provided banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.

Liquidity and Capital Resources

We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has been to focus on acquiring non-maturity deposits from our retail accounts, and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. Our liquidity policy permits the purchase of brokered deposits in an amount not to exceed 15% of the Company's total deposits as a secondary source for funding. The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $2.24 billion, or 39.3% of total deposits, at September 30, 2024 and $2.10 billion or 37.5% of total deposits, at December 31, 2023. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. At September 30, 2024, we had $135.0 million in brokered deposits, or 2.36% of total deposits, compared to $115.0 million, or 2.05% of total deposits, at December 31, 2023. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.

The following table summarizes the Company's available liquidity as of the dates indicated:


	September 30, 2024		December 31, 2023
	(Dollars in thousands)
On-balance sheet liquidity
Cash and cash equivalents	175,572		224,973
Unencumbered investment securities available for sale (1)	848,224		756,258
Total on-balance sheet liquidity	$	1,023,796	$	981,231
Off-balance sheet liquidity
FRB borrowing availability	$	287,739	$	319,492
FHLB borrowing availability (2)	1,068,085		1,417,518

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	September 30, 2024		December 31, 2023
	(Dollars in thousands)
Fed funds line borrowing availability with correspondent banks	145,000		145,000
Total off-balance sheet liquidity	$	1,500,824	$	1,882,010
Total available liquidity	$	2,524,620	$	2,863,241

(1) Investment securities available for sale at fair value.

(2) Includes FHLB borrowing availability of $1.35 billion at September 30, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.17 billion.

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our capital resources since the information disclosed in our 2023 Annual Form 10-K. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

Critical Accounting Estimates

Our critical accounting estimates are described in detail in the "Critical Accounting Estimates" section within Item 7 of our 2023 Annual Form 10-K. The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's critical accounting estimates include estimates of the ACL on loans, the ACL on unfunded commitments and goodwill. There have been no material changes in these estimates during the nine months ended September 30, 2024.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through our exposure to market interest rates, equity prices and credit spreads. Our primary market risk is interest rate risk, which is the risk of loss of net interest income or net interest margin resulting from changes in market interest rates. Interest rate risk results primarily from the traditional banking activities in which the Company engages, such as collecting deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on our assets and the interest paid on our liabilities.

Our Asset/Liability Management Committee is responsible for developing, monitoring and reviewing asset/liability processes, interest rate risk exposures, strategies and tactics and reporting to the Board of Directors' Risk and Technology Committee. It is the responsibility of the Board of Directors to establish policies and interest rate limits, and to review and approve these policies and interest rate limits annually. It is the responsibility of management to execute the approved policies, develop and implement risk management strategies and to report to the Board of Directors on a regular basis. We maintain an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk. The policy guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. These guidelines establish limits for interest rate risk sensitivity.

Net interest income simulation

We use an income simulation model as the primary tool to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Modeling the sensitivity of net interest income is highly dependent on numerous assumptions incorporated into the modeling process. Key assumptions in the model include prepayment speeds on loans and investment securities, repricing betas on non-maturity deposits, and repricing on investment securities, loans, and borrowings. In order to measure the interest rate risk sensitivity as of September 30, 2024, this simulation model uses a “static balance sheet” assumption, meaning the size and mix of the balance sheet remains the same as maturing cash flows from assets and liabilities are reinvested into the same categories at the current level of interest rates. The simulation also assumes an instantaneous and sustained uniform change in market interest rates at all maturities.

The following table summarizes the estimated effect on net interest income over a 12 month period measured against a flat rate (no interest rate change) scenario for the periods indicated:


	September 30, 2024				December 31, 2023
	$ Change in Net Interest Income		% Change in Net Interest Income		$ Change in Net Interest Income		% Change in Net Interest Income
Change in Interest Rates (Basis Points)	(Dollars in thousands)
+300(shock)	$	(5,371)	(2.4)	%	$	(6,343)	(2.8)	%
+200(shock)	1,722		0.8		1,438		0.6
+100(shock)	1,723		0.8		1,644		0.7
+0(flat)	—		—		—		—

Table of Contents


	September 30, 2024		December 31, 2023
	$ Change in Net Interest Income	% Change in Net Interest Income	$ Change in Net Interest Income	% Change in Net Interest Income
Change in Interest Rates (Basis Points)	(Dollars in thousands)
-100(shock)	972	0.4	1,861	0.8
-200(shock)	(698)	(0.3)	1,549	0.7
-300(shock)	(5,198)	(2.3)	(1,233)	(0.6)

The Company’s balance sheet sensitivity to changes in market rates shows a somewhat neutral position in all rate scenarios, meaning results in comparable up and down scenarios are significantly different. The small changes in the sensitivity of the balance sheet compared to December 31, 2023, seen in the larger -300(shock) scenario is due primarily to balance sheet changes that include a reduction in short-term wholesale funding and a reduction in fixed rate securities.

The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of interest rate deviations. In addition, the simulation results noted above contain various assumptions such as a static balance sheet, and that deposit interest rates change as market interest rates change. Therefore, they do not reflect likely actual results, but serve as estimates of interest rate risk.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding table. For example, although certain of the Company’s assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates. Further, the interest rates on certain of the Company’s asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in the preceding tables. A change in U.S. Treasury rates accompanied by a change in the shape of the treasury yield curve could also result in different estimations from those presented herein. Accordingly, the results in the preceding table should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Exchange Act was carried out under the supervision and with the participation of the Company’s Chief Executive Officer (principal executive officer), Chief Financial Officer (principal financial officer) and the Company’s management as of the end of the period covered by this quarterly report. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2024 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act was (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors set forth in Item 1A of the Company’s 2023 Annual Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

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The following table provides information about repurchases of common stock by the Company during the three months ended September 30, 2024:


Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share (1)		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may be purchased at period end under the program
July 1, 2024—July 31, 2024	—	$	—	—	1,502,444
August 1, 2024— August 31, 2024	301,992	21.54		301,992	1,200,452
September 1, 2024—September 30, 2024	46,389	22.06		45,000	1,155,452
Total	348,381	$	21.61

(1) Of the common shares repurchased by the Company between July 1, 2024 and September 30, 2024, a total of 1,389 shares represented the cancellation of stock to pay withholding taxes on vested restricted stock units and were not repurchased pursuant to the publicly announced stock repurchase program.

On April 24, 2024, the Company's Board of Directors approved the repurchase of up to 5% of the Company's outstanding common shares or approximately 1,734,492 shares. The new stock repurchase program supersedes 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

(a) None

(b) None

(c) During the three months ended September 30, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5-1(c) or any non-Rule 10b5-1 trading arrangement.

ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

3.1

Amended and Restated Articles of Incorporation of Heritage Financial Corporation

8-K

3.1(B)

05/18/2010

3.2

Amendment to Amended and Restated Articles of Incorporation of Heritage Financial Corporation

S-14A

03/18/2011

3.3

Amended and restated Bylaws of Heritage Financial Corporation

8-K

3.3

06/30/2020

10.32*

Transitional Employment Agreement between Heritage Financial Corporation and Jeffrey J. Deuel dated July 1, 2024

8-K

10.1

07/01/2024

10.33*

Employment Agreement between Heritage Financial Corporation and Bryan D. McDonald dated July 1, 2024

8-K

10.2

07/01/2024

10.34*

Employment Agreement between Heritage Financial Corporation and Nicholas Bley, dated July 23, 2024

8-K

10.3

10/23/2024

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

Table of Contents

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

101.INS

XBRL Instance Document (1)

101.SCH

XBRL Taxonomy Extension Schema Document (1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

* Indicates management contract or compensatory plan or arrangement.

(1) Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						HERITAGE FINANCIAL CORPORATION
Date:
November 6, 2024						/S/ JEFFREY J. DEUEL
						Jeffrey J. Deuel
						Chief Executive Officer
						(Principal Executive Officer)
Date:
November 6, 2024						/S/ DONALD J. HINSON
						Donald J. Hinson
						Executive Vice President and Chief Financial Officer
						(Principal Financial Officer)

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

3.1 Amended and Restated Articles of Incorporation of Heritage Financial Corporation 8-K 3.1(B) 05/18/2010 3.2 Amendment to Amended and Restated Articles of Incorporation of Heritage Financial Corporation S-14A _ 03/18/2011 3.3 Amended and restated Bylaws of Heritage Financial Corporation 8-K 3.3 06/30/2020 10.32* Transitional Employment Agreement between Heritage Financial Corporation and Jeffrey J. Deuel dated July 1, 2024 8-K 10.1 07/01/2024 10.33* Employment Agreement between Heritage Financial Corporation and Bryan D. McDonald dated July 1, 2024 8-K 10.2 07/01/2024 10.34* Employment Agreement between Heritage Financial Corporation and Nicholas Bley, dated July 23, 2024 8-K 10.3 10/23/2024 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1) 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1) 32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

HFWA 10-Q Quarter ended Sept. 30, 2024

Exhibits