Table of Contents


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
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172023 or
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
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-29480
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Washington
91-1857900
Washington
91-1857900
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
201 Fifth Avenue SW, Olympia, WAOlympiaWA98501
(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 Act:
Title of each classTrading symbolName of each exchange on which registered
Common stock, no par valueHFWANASDAQ

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  ý☒    No  ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý☒    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 filerx☐
Non-accelerated filer¨☐Smaller reporting company¨☐
Emerging Growth Companygrowth 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  ý☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
As of November 1, 2017October 25, 2023, there were 29,929,10634,901,076 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
INDEX
September 30, 20172023
TABLE OF CONTENTS
Page
3
3
Part
PART I.
45
ItemITEM 1.
45
Condensed Consolidated Statements of Financial Condition as of SeptemberCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF SEPTEMBER 30, 2017 and December2023 AND DECEMBER 31, 20162022
45
Condensed Consolidated Statements of Income for the Three and Nine Months Ended SeptemberCONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 and 20162023 AND 2022
56
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended SeptemberCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 and 20162023 AND 2022
67
Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended SeptemberCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 and 20162023 AND 2022
78
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended SeptemberCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 20162023 AND 2022
810
Notes to Condensed Consolidated Financial StatementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1012
Item 2.NOTE 1.
12
NOTE 2.
INVESTMENT SECURITIES
13
NOTE 3.
LOANS RECEIVABLE
16
NOTE 4.
ALLOWANCE FOR CREDIT LOSSES ON LOANS
24
NOTE 5.
GOODWILL AND OTHER INTANGIBLE ASSETS
27
NOTE 6.
DERIVATIVE FINANCIAL INSTRUMENTS
27
NOTE 7.
STOCKHOLDERS’ EQUITY
28
NOTE 8.
FAIR VALUE MEASUREMENTS
29
NOTE 9.
CASH RESTRICTION
33
NOTE 10.
COMMITMENTS AND CONTINGENCIES
33
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
4733
Item 3.
OVERVIEW
33
RECENT DEVELOPMENTS
34
RESULTS OF OPERATIONS
35
NET INTEREST INCOME AND MARGIN OVERVIEW
35
PROVISION FOR CREDIT LOSSES OVERVIEW
39
40
NONINTEREST EXPENSE OVERVIEW
41
INCOME TAX EXPENSE OVERVIEW
42
FINANCIAL CONDITION OVERVIEW
43
INVESTMENT ACTIVITIES OVERVIEW
43
LOAN PORTFOLIO OVERVIEW
44
ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW
46
DEPOSITS OVERVIEW
47
BORROWINGS OVERVIEW
47
STOCKHOLDERS' EQUITY OVERVIEW
48
REGULATORY REQUIREMENTS OVERVIEW
48
LIQUIDITY AND CAPITAL RESOURCES
48
CRITICAL ACCOUNTING ESTIMATES
49
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
6849
ItemITEM 4.
CONTROLS AND PROCEDURES
6850
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PART II.OTHER INFORMATION
50
Part II.ITEM 1.
OTHER INFORMATIONLEGAL PROCEEDINGS
6850
Item 1.ITEM 1A.
LEGAL PROCEEDINGSRISK FACTORS
6850
Item 1A.ITEM 2.
RISK FACTORS
68
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
6950
ItemITEM 3.
DEFAULTS UPON SENIOR SECURITIES
6951
ItemITEM 4.
MINE SAFETY DISCLOSURES
6951
ItemITEM 5.
OTHER INFORMATION
6951
ItemITEM 6.
EXHIBITS
7051
SIGNATURES
7052




GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS


2
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms “we”, “our”, or “us” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.
Table of Contents
2022 Annual Form 10-KCompany's Annual Report on Form 10-K for the year ended December 31, 2022
ACLAllowance for credit losses
AOCIAccumulated other comprehensive income (loss), net
ASUAccounting Standards Update
BankHeritage Bank
BTFPBank Term Funding Program
CECLCurrent Expected Credit Loss
CMOCollateralized Mortgage Obligations
CompanyHeritage Financial Corporation
CRECommercial real estate
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
Federal ReserveBoard of Governors of the Federal Reserve System
FRBFederal Reserve Bank of San Francisco
FHLBFederal Home Loan Bank of Des Moines
GAAPU.S. Generally Accepted Accounting Principles
LIBORLondon Interbank Offering Rate
LIHTCLow-Income Housing Tax Credit
MBSMortgage-backed securities
SBASmall Business Administration
SECSecurities and Exchange Commission
SMSpecial Mention
SSSubstandard
TDRTroubled debt restructured



FORWARD LOOKING STATEMENTS:CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

“Safe Harbor” statement underThis Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking1995. Forward-looking statements that are subject to risks and uncertainties, including, but not limited to: the expected revenues, cost savings, synergies and other benefits from our pending merger with Puget Sound Bancorp, Inc., ("Puget Sound") might not be realized within the expected time frames or at all, and costs or difficulties relating to integration matters, including but not limited to, customer and employee retention might be greater than expected; the proposed Puget Sound merger may not close when expected or at all because required regulatory, shareholder or other approvals and conditions to closing are not receivedstatements 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 satisfied on a timely basissimilar expressions or at allfuture or adverse regulatory conditions may be imposed in connection with governmental approvals of the merger; the credit risks of lending activities, including changes in the levelconditional verbs such as “may,” “will,” “should,” “would” and trend of loan delinquencies and write-offs and changes in“could.” These statements relate to our allowance for loan losses and provision for loan losses that may be effected by deterioration in the housing and commercial real estate markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses no longer being adequate to cover actual losses, and require us to increase our allowance for loan losses; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;financial condition, results of examinations of us by the Board of Governors of the Federal Reserve Systemoperations, beliefs, plans, objectives, goals, expectations, assumptions and of our bank subsidiary by the Federal Deposit Insurance Corporation ("FDIC"), the Washington State Department of Financial Institutions, Division of Banksstatements about future performance or other regulatory authorities, 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 allowance for loan losses, 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; legislative or regulatory changes; our ability to control operating costs and expenses; increases in premiums for deposit insurance; 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; difficulties in reducing risk associated with the loans on our Condensed Consolidated Statements of Financial Condition; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our growth strategies; increased competitive pressures among financial service companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed from time to time in our filings with the Securities and Exchange Commission including our Annual Report on Form 10-K for the year ended December 31, 2016.
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.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 cause our actual
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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 the Company’s operating results and stock price performance. These risks include, but are not limited to:
As used throughout this report,•potential adverse impacts to economic conditions nationally or in our local market areas, other markets where the terms “we”, “our”, “us”,Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth;
•changes in the interest rate environment, including the recent increases in the Federal Reserve benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;
•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and 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 inflation and the current and future monetary policies of the Federal Reserve in response thereto;
•changes in the levels of general interest rates, and the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
•the transition away from LIBOR toward new interest rate benchmarks;
•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;
•secondary market conditions for loans and our ability to sell loans in the secondary market;
•results of examinations of us 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;
•legislative or regulatory changes that adversely affect our business, including changes in banking, securities, and tax law, regulatory policies and principles, or the “Company” referinterpretation of regulatory capital or other rules;
•our ability to Heritage Financial Corporationattract and its consolidated subsidiaries, unlessretain deposits;
•liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;
•our ability to control operating costs and expenses;
•effects of critical accounting policies and judgments, including the context otherwise requires.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 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;
•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;
•our ability to retain key members of our senior management team;
•costs and effects of litigation, including settlements and judgments;
•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;
•increased competitive pressures among financial service companies;
•changes in consumer spending, borrowing and savings habits;
•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
•our ability to pay dividends on our common stock;
•the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets, including market liquidity;
•inability of key third-party providers to perform their obligations to us;
•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;
•the impact of bank failures or adverse developments at other banks and the related negative press about the banking industry in general on investor and depositor sentiment;
•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;
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and
•other risks detailed from time to time in our reports filed with or furnished to the SEC, including our 2022 Annual Form 10-K 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 shares)
 September 30, 2017 December 31, 2016
 (Dollars in thousands)September 30,
2023		December 31
2022
ASSETS    ASSETS
Cash on hand and in banks $82,905

$77,117
Cash on hand and in banks$61,568 $74,295 
Interest earning deposits 28,353

26,628
Interest earning deposits158,935 29,295 
Cash and cash equivalents 111,258

103,745
Cash and cash equivalents220,503 103,590 
Investment securities available for sale, at fair value 800,060

794,645
Investment securities available for sale, at fair value, net (amortized cost of $1,292,500 and $1,460,033, respectively)Investment securities available for sale, at fair value, net (amortized cost of $1,292,500 and $1,460,033, respectively)1,147,547 1,331,443 
Investment securities held to maturity, at amortized cost, net (fair value of $636,257 and $673,434, respectively)Investment securities held to maturity, at amortized cost, net (fair value of $636,257 and $673,434, respectively)746,845 766,396 
Total investment securitiesTotal investment securities1,894,392 2,097,839 
Loans held for sale 5,368
 11,662
Loans held for sale263 — 
Loans receivableLoans receivable4,266,858 4,050,858 
Allowance for credit losses on loansAllowance for credit losses on loans(46,947)(42,986)
Loans receivable, net 2,797,513
 2,640,749
Loans receivable, net4,219,911 4,007,872 
Allowance for loan losses (31,400) (31,083)
Total loans receivable, net 2,766,113
 2,609,666
Other real estate owned 523

754
Premises and equipment, net 60,457

63,911
Premises and equipment, net76,436 76,930 
Federal Home Loan Bank stock, at cost 9,343

7,564
Federal Home Loan Bank stock, at cost8,373 8,916 
Bank owned life insurance 71,474
 70,355
Bank owned life insurance123,639 122,059 
Accrued interest receivable 12,295

10,925
Accrued interest receivable18,794 18,547 
Prepaid expenses and other assets 87,728

79,351
Prepaid expenses and other assets341,952 296,181 
Other intangible assets, net 6,408

7,374
Other intangible assets, net5,386 7,227 
Goodwill 119,029

119,029
Goodwill240,939 240,939 
Total assets $4,050,056

$3,878,981
Total assets$7,150,588 $6,980,100 
LIABILITIES AND STOCKHOLDERS' EQUITY    LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $3,320,818
 $3,229,648
Deposits$5,635,187 $5,907,420 
Federal Home Loan Bank advances 117,400
 79,600
Deposits held for saleDeposits held for sale— 17,420 
Total depositsTotal deposits5,635,187 5,924,840 
BorrowingsBorrowings450,000 — 
Junior subordinated debentures 19,936
 19,717
Junior subordinated debentures21,692 21,473 
Securities sold under agreement to repurchase 28,668
 22,104
Securities sold under agreement to repurchase23,158 46,597 
Accrued expenses and other liabilities 55,626
 46,149
Accrued expenses and other liabilities207,005 189,297 
Total liabilities 3,542,448
 3,397,218
Total liabilities6,337,042 6,182,207 
Commitments and contingencies (Note 10)Commitments and contingencies (Note 10)
Stockholders’ equity:    Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016 —
 —
Common stock, no par value, 50,000,000 shares authorized; 29,929,106 and 29,954,931 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively 360,113
 359,060
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectivelyPreferred 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; 34,901,076 and 35,106,697 shares issued and outstanding, respectivelyCommon stock, no par value, 50,000,000 shares authorized; 34,901,076 and 35,106,697 shares issued and outstanding, respectively548,652 552,397 
Retained earnings 145,677
 125,309
Retained earnings377,522 345,346 
Accumulated other comprehensive income (loss), net 1,818
 (2,606)
Accumulated other comprehensive loss, netAccumulated other comprehensive loss, net(112,628)(99,850)
Total stockholders’ equity 507,608
 481,763
Total stockholders’ equity813,546 797,893 
Total liabilities and stockholders’ equity $4,050,056
 $3,878,981
Total liabilities and stockholders’ equity$7,150,588 $6,980,100 

See accompanying Notes to Condensed Consolidated Financial Statements.

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 amounts)
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  (Dollars in thousands, except per share amounts)
INTEREST INCOME        
Interest and fees on loans $32,595
 $30,915
 $94,580
 $91,595
Taxable interest on investment securities 3,117
 2,888
 9,307
 8,522
Nontaxable interest on investment securities 1,354
 1,235
 3,926
 3,599
Interest and dividends on other interest earning assets 258
 76
 461
 225
Total interest income 37,324
 35,114
 108,274
 103,941
INTEREST EXPENSE        
Deposits 1,628
 1,269
 4,301
 3,765
Junior subordinated debentures 261
 221
 748
 647
Other borrowings 444
 18
 908
 78
Total interest expense 2,333
 1,508
 5,957
 4,490
Net interest income 34,991
 33,606
 102,317
 99,451
Provision for loan losses 884
 1,495
 2,882
 3,754
Net interest income after provision for loan losses 34,107
 32,111
 99,435
 95,697
NONINTEREST INCOME        
Service charges and other fees 4,769
 3,630
 13,408
 10,462
Gain on sale of investment securities, net 44
 345
 161
 1,106
Gain on sale of loans, net 1,229
 3,435
 6,562
 5,406
Interest rate swap fees 328
 742
 743
 1,105
Other income 2,024
 1,715
 5,532
 5,354
Total noninterest income 8,394
 9,867
 26,406
 23,433
NONINTEREST EXPENSE        
Compensation and employee benefits 15,823
 15,633
 48,119
 45,652
Occupancy and equipment 3,979
 3,926
 11,607
 11,873
Data processing 2,090
 1,943
 6,007
 5,564
Marketing 933
 745
 2,545
 2,254
Professional services 1,453
 830
 3,515
 2,508
State and local taxes 640
 820
 1,828
 2,031
Federal deposit insurance premium 433
 296
 1,090
 1,316
Other real estate owned, net (88) (142) (36) 330
Amortization of intangible assets 319
 359
 966
 1,057
Other expense 2,373
 2,408
 7,346
 7,079
Total noninterest expense 27,955
 26,818
 82,987
 79,664
Income before income taxes 14,546
 15,160
 42,854
 39,466
Income tax expense 3,922
 4,121
 11,086
 10,441
Net income $10,624
 $11,039
 $31,768
 $29,025
Basic earnings per common share $0.35
 $0.37
 $1.06
 $0.97
Diluted earnings per common share $0.35
 $0.37
 $1.06
 $0.97
Dividends declared per common share $0.13
 $0.12
 $0.38
 $0.35
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
INTEREST INCOME:
Interest and fees on loans$56,119 $43,847 $160,192 $125,762 
Taxable interest on investment securities14,590 12,362 44,021 25,972 
Nontaxable interest on investment securities448 892 1,554 2,645 
Interest on interest earning deposits2,310 4,009 4,436 7,057 
Total interest income73,467 61,110 210,203 161,436 
INTEREST EXPENSE:
Deposits11,877 1,478 25,012 4,315 
Junior subordinated debentures540 312 1,521 745 
Securities sold under agreement to repurchase38 34 148 98 
Borrowings5,394 — 12,238 — 
Total interest expense17,849 1,824 38,919 5,158 
Net interest income55,618 59,286 171,284 156,278 
(Reversal of) provision for credit losses(878)1,945 2,856 (2,836)
Net interest income after (reversal of) provision for credit losses56,496 57,341 168,428 159,114 
NONINTEREST INCOME:
Service charges and other fees2,856 2,688 8,162 7,739 
Card revenue2,273 2,365 6,396 6,774 
Loss on sale of investment securities, net(1,940)— (2,226)— 
Gain on sale of loans, net157 133 307 593 
Interest rate swap fees62 78 230 383 
Bank owned life insurance income734 723 2,280 3,182 
Gain on sale of other assets, net— 265 2 469 
Other income2,129 1,201 6,659 3,867 
Total noninterest income6,271 7,453 21,810 23,007 
NONINTEREST EXPENSE:
Compensation and employee benefits25,008 24,206 75,325 67,236 
Occupancy and equipment4,814 4,422 14,372 12,924 
Data processing4,366 4,185 13,208 12,431 
Marketing389 358 1,232 968 
Professional services582 639 1,961 1,867 
State/municipal business and use taxes1,088 963 3,150 2,626 
Federal deposit insurance premium818 500 2,465 1,525 
Amortization of intangible assets595 671 1,841 2,079 
Other expense3,310 3,203 10,346 8,918 
Total noninterest expense40,970 39,147 123,900 110,574 
Income before income taxes21,797 25,647 66,338 71,547 
Income tax expense3,578 4,657 10,816 12,216 
Net income$18,219 $20,990 $55,522 $59,331 
Basic earnings per share$0.52 $0.60 $1.58 $1.69 
Diluted earnings per share$0.51 $0.59 $1.57 $1.67 
Dividends declared per share$0.22 $0.21 $0.66 $0.63 
Average number of basic shares outstanding35,022,676 35,103,984 35,062,760 35,103,048 
Average number of diluted shares outstanding35,115,165 35,468,890 35,305,456 35,438,672 
See accompanying Notes to Condensed Consolidated Financial Statements.

Statements (Unaudited).
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) (Unaudited)

(Dollars in thousands thousands)

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  (Dollars in thousands)
Net income $10,624
 $11,039
 $31,768
 $29,025
Change in fair value of investment securities available for sale, net of tax of $157, $(570), $2,442 and $4,983, respectively 289
 (1,055) 4,528
 9,223
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $(16), $(121), $(57) and $(388), respectively (28) (224) (104) (718)
Other comprehensive income (loss) 261
 (1,279) 4,424
 8,505
Comprehensive income $10,885
 $9,760
 $36,192
 $37,530
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Net Income$18,219 $20,990 $55,522 $59,331 
Change in fair value of investment securities available for sale, net of tax of $(4,673), $(12,027), $(4,258) and $(31,778), respectively(16,627)(43,143)(14,332)(114,022)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(17), $(20), $(51) and $(103), respectively(60)(75)(183)(375)
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax of $426, $0, $489 and $0, respectively1,514 — 1,737 — 
Other comprehensive loss(15,173)(43,218)(12,778)(114,397)
Comprehensive income (loss)$3,046 $(22,228)$42,744 $(55,066)

See accompanying Notes to Condensed Consolidated Financial Statements.


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 amounts)

Three Months Ended September 30, 2023
Number of
common
shares		Common
stock		Retained
earnings		AOCITotal
stockholders’
equity
Balance at June 30, 202335,047,800 $550,103 $367,085 $(97,455)$819,733 
Restricted stock units vested1,730 
Stock-based compensation expense1,120 1,120 
Common stock repurchased(148,454)(2,571)(2,571)
Net income18,219 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, 202334,901,076 $548,652 $377,522 $(112,628)$813,546 

Nine Months Ended September 30, 2023
Number of
common
shares		Common
stock		Retained
earnings		AOCITotal
stockholders’
equity
Balance at December 31, 202235,106,697 $552,397 $345,346 $(99,850)$797,893 
Restricted stock units vested156,370 
Stock-based compensation expense— 3,204 3,204 
Common stock repurchased(361,991)(6,949)(6,949)
Net income55,522 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, 202334,901,076 $548,652 $377,522 $(112,628)$813,546 

Three Months Ended September 30, 2022
Number of
common
shares		Common
stock		Retained
earnings		AOCITotal
stockholders’
equity
Balance at June 30, 202235,103,929 $550,417 $316,732 $(61,783)$805,366 
Restricted stock units vested419 
Stock-based compensation expense— 1,004 1,004 
Common stock repurchased(100)(2)(2)
Net income20,990 20,990 
Other comprehensive loss, net of tax(43,218)(43,218)
Cash dividends declared on common stock ($0.21 per share)(7,438)(7,438)
Balance at September 30, 202235,104,248 $551,419 $330,284 $(105,001)$776,702 
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Number of
common
shares
 
Common
stock
 
Retained
earnings
 
Accumulated
other
comprehensive income (loss), net
 
Total
stock-
holders’
equity
 (Dollars in thousands, except per share amounts)
Balance at December 31, 201529,975
 $359,451
 $107,960
 $2,559
 $469,970
Restricted stock awards granted, net of forfeitures111
 —
 —
 —
 —
Exercise of stock options (including excess tax benefits from nonqualified stock options)28
 421
 —
 —
 421
Stock-based compensation expense—
 1,367
 —
 —
 1,367
Net excess tax benefits from vesting of restricted stock—
 99
 —
 —
 99
Common stock repurchased(167) (2,887) —
 —
 (2,887)
Net income—
 —
 29,025
 —
 29,025
Other comprehensive income, net of tax—
 —
 —
 8,505
 8,505
Cash dividends declared on common stock ($0.35 per share)—
 —
 (10,488) —
 (10,488)
Balance at September 30, 201629,947
 $358,451
 $126,497
 $11,064
 $496,012
          
Balance at December 31, 201629,955
 $359,060
 $125,309
 $(2,606) $481,763
Restricted stock awards forfeited(10) —
 —
 —
 —
Exercise of stock options12
 159
 —
 —
 159
Stock-based compensation expense—
 1,568
 —
 —
 1,568
Common stock repurchased(28) (674) —
 —
 (674)
Net income—
 —
 31,768
 —
 31,768
Other comprehensive income, net of tax—
 —
 —
 4,424
 4,424
Cash dividends declared on common stock ($0.38 per share)—
 —
 (11,400) —
 (11,400)
Balance at September 30, 201729,929
 $360,113
 $145,677
 $1,818
 $507,608
Nine Months Ended September 30, 2022
Number of
common
shares		Common
stock		Retained
earnings		AOCITotal
stockholders’
equity
Balance at December 31, 202135,105,779 $551,798 $293,238 $9,396 $854,432 
Restricted stock units vested124,839 
Stock-based compensation expense2,797 2,797 
Common stock repurchased(126,370)(3,176)(3,176)
Net income59,331 59,331 
Other comprehensive loss, net of tax(114,397)(114,397)
Cash dividends declared on common stock ($0.63 per share)(22,285)(22,285)
Balance at September 30, 202235,104,248 $551,419 $330,284 $(105,001)$776,702 

See accompanying Notes to Condensed Consolidated Financial Statements.


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,
  2017 2016
  (Dollars in thousands)
Cash flows from operating activities:    
Net income $31,768
 $29,025
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 8,117
 9,543
Changes in net deferred loan costs, net of amortization (656) (971)
Provision for loan losses 2,882
 3,754
Net change in accrued interest receivable, prepaid expenses and other assets, accrued expenses and other liabilities 8,315
 (193)
Stock-based compensation expense 1,568
 1,367
Net excess tax benefit from exercise of stock options and vesting of restricted stock —
 (119)
Amortization of intangible assets 966
 1,057
Origination of loans held for sale (82,767) (99,513)
Proceeds from sale of loans 91,576
 101,574
Earnings on bank owned life insurance (1,108) (1,086)
Valuation adjustment on other real estate owned —
 383
Gain on sale of loans, net (6,562) (5,406)
Gain on sale of investment securities, net (161) (1,106)
Gain on sale of assets held for sale (53) —
Gain on sale of other real estate owned, net (111) (173)
Loss on sale or write-off of furniture, equipment and leasehold improvements 12
 107
Net cash provided by operating activities 53,786
 38,243
Cash flows from investing activities:    
Loans originated, net of principal payments (178,800) (190,798)
Maturities of other interest earning deposits —
 1,248
Maturities, calls and payments of investment securities available for sale 75,800
 94,328
Purchase of investment securities available for sale (101,017) (188,164)
Purchase of premises and equipment (2,221) (5,128)
Proceeds from sales of other loans 24,142
 12,931
Proceeds from sales of other real estate owned 374
 2,486
Proceeds from sales of investment securities available for sale 21,850
 94,380
Proceeds from sale of assets held for sale 265
 —
Proceeds from redemption of Federal Home Loan Bank stock 21,788
 15,416
Purchases of Federal Home Loan Bank stock (23,567) (16,356)
Proceeds from sale of premises and equipment —
 659
Purchase of bank owned life insurance —
 (8,000)
Capital contribution to low-income housing tax credit partnership (8,506) (3,315)
Net cash used in investing activities (169,892) (190,313)

Nine Months Ended September 30,
20232022
Cash flows from operating activities:
Net income$55,522 $59,331 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion2,370 (620)
Provision for (reversal of) credit losses2,856 (2,836)
Stock-based compensation expense3,204 2,797 
Amortization of intangible assets1,841 2,079 
Origination of mortgage loans held for sale(13,685)(15,190)
Proceeds from sale of mortgage loans held for sale13,729 17,259 
Bank owned life insurance income(2,280)(3,182)
Valuation adjustment on interest rate swaps— (67)
Gain on sale of mortgage loans held for sale, net(307)(593)
Loss on sale of investment securities available for sale, net2,226 — 
Gain on sale of premises and equipment— (403)
Gain on sale of branch including related deposits, net(610)— 
Other13,698 3,865 
Net cash provided by operating activities78,564 62,440 
Cash flows from investing activities:
Loan originations and purchases, net of payments(212,222)(176,700)
Maturities and repayments of investment securities available for sale135,084 132,854 
Maturities and repayments of investment securities held to maturity18,876 21,620 
Purchase of investment securities available for sale(37,724)(742,801)
Purchase of investment securities held to maturity— (412,835)
Purchase of premises and equipment(9,250)(2,295)
Purchase of bank owned life insurance— (105)
Proceeds from bank owned life insurance death benefit— 2,114 
Purchases of Federal Home Loan Bank stock(45,588)(985)
Proceeds from sales of investment securities available for sale67,900 — 
Proceeds from redemption of Federal Home Loan Bank stock46,131 2 
Proceeds from sales of premises and equipment2 2,208 
Capital contributions to low-income housing tax credit partnerships(32,517)(9,245)
Net cash paid related to branch divestiture(13,826)— 
Net cash used by investing activities(83,134)(1,186,168)
Cash flows from financing activities:
Net decrease in deposits(274,988)(156,555)
Proceeds from borrowings1,789,700 50 
Repayment of borrowings(1,339,700)(50)
Common stock cash dividends paid(23,141)(22,119)
Net decrease in securities sold under agreement to repurchase(23,439)(10,390)
Repurchase of common stock(6,949)(3,176)
Net cash provided (used) by financing activities121,483 (192,240)
Net increase (decrease) in cash and cash equivalents116,913 (1,315,968)
Cash and cash equivalents at beginning of period103,590 1,723,292 
Cash and cash equivalents at end of period$220,503 $407,324 
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Nine Months Ended September 30,
20232022
Supplemental disclosures of cash flow information:
Cash paid for interest$29,921 $4,939 
Cash paid for income taxes, net of refunds1,634 1,987 
Supplemental non-cash disclosures of cash flow information:
Investment in LIHTC partnership and related funding commitment37,042 10,728 
Right of use assets obtained in exchange for new operating lease liabilities6,663 2,869 
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, net5,074 910 
Transfer of deposits to deposits held for sale— 22,771 
  Nine Months Ended September 30,
  2017 2016
  (Dollars in thousands)
Cash flows from financing activities:    
Net increase in deposits 91,170
 134,134
Federal Home Loan Bank advances 582,500
 403,100
Repayments of Federal Home Loan Bank advances (544,700) (385,400)
Common stock cash dividends paid (11,400) (10,488)
Net increase (decrease) in securities sold under agreement to repurchase 6,564
 (789)
Proceeds from exercise of stock options 159
 401
Net excess tax benefit from exercise of stock options and vesting of restricted stock —
 119
Repurchase of common stock (674) (2,887)
Net cash provided by financing activities 123,619
 138,190
Net increase (decrease) in cash and cash equivalents 7,513
 (13,880)
Cash and cash equivalents at beginning of period 103,745
 126,640
Cash and cash equivalents at end of period $111,258
 $112,760
     
Supplemental disclosures of cash flow information:    
Cash paid for interest $6,024
 $4,533
Cash paid for income taxes 1,500
 9,000
     
Supplemental non-cash disclosures of cash flow information:    
Transfers of loans receivable to other real estate owned $32
 $677
Transfers of premises and equipment, net to prepaid expenses and other assets for properties held for sale 2,687
 —
Investment in low income housing tax credit partnership and related funding commitment 14,267
 19,663

See accompanying Notes to Condensed Consolidated Financial Statements.

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
(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements
(a) Description of Business
Heritage Financial Corporation ("Heritage" or the “Company”) is a bank holding company that was incorporated in the State of Washington in August 1997. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, Heritage Bank (the “Bank”). The Bank is a Washington-chartered commercial bank and its deposits are insured by the FDIC.Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 5950 branch offices located throughout Washington State, and the greater Portland, Oregon area.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 first mortgage loans on residential properties primarily located in its market areas.
On July 26, 2017, The Bank's deposits are insured by the Company announced the execution of a definitive agreementFDIC subject to purchase Puget Sound Bancorp, Inc., ("Puget Sound"), the holding company of Puget Sound Bank, a business bank headquartered in downtown Bellevue, Washington with one branch location and $567.2 million in total assets, $366.6 million in total loans receivables, net and $505.1 million in total deposits as of June 30, 2017. Upon consummation of the merger, the shareholders of Puget Sound will own approximately 13.5% of the combined company and Puget Sound will be merged into Heritage Bank. For additional information regarding the proposed transaction, see Note (16), Definitive Agreement.limitations.
(b) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the accounting principles generally accepted in the United States (“U.S. GAAP”)GAAP for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").SEC. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. It is recommended that these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (“20162022 Annual Form 10-K”).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 three and nine months ended September 30, 20172023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. In preparing2023.
The accompanying Condensed Consolidated Financial Statements presented for the year end December 31, 2022 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 is required to makemakes estimates and assumptions thatbased on available information. These estimates and assumptions affect the amounts reported amounts of assets, liabilities, revenues, expensesin the financial statements and related disclosures.the disclosures provided. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statementsunaudited 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.
(c) Significant Accounting Policies
The significant accounting policies used in preparation of the Company'sunaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the 20162022 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the 20162022 Annual Form 10-K except for accounting policies for stock-based compensation relating toduring the issuance of restricted stock units, including grants subject to performance-based and market-based vesting conditions, adopted January 1, 2017 as discussed below.
Stock-Based Compensation
Compensation cost is recognized for stock options, restricted stock awards and restricted stock units issued to employees and directors, based on the fair value of these awards at the date of grant. Compensation cost is recognized over the requisite service period, generally defined as the vesting period, on a straight-line basis. Compensation cost for restricted stock units with market-based vesting is recognized over the service period to the extent the restricted stock units are expected to vest. With the adoption of FASB Accounting Standards Update ("ASU" or "Update") 2016-09 on January 1, 2017, forfeitures are recognized as they occur.
The market price of the Company’s common stock at the date of grant is used to determine the fair value of the restricted stock awards and restricted stock units. The fair value of stock options granted is estimated based on the date of grant using the Black-Scholes-Merton option pricing model. Certain restricted stock unit grants are subject to performance-based vesting as well as other approved vesting conditions and

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cliff vest based on those conditions, and the fair value is estimated using a Monte Carlo simulation pricing model. The assumptions used in the Black-Scholes-Merton option pricing model and the Monte Carlo simulation pricing model include the expected term based on the valuation date and the remaining contractual term of the award; the risk-free interest rate based on the U.S. Treasury curve at the valuation date of the award; the expected dividend yield based on expected dividends being payable to the holders; and the expected stock price volatility over the expected term based on the historical volatility over the equivalent historical term.nine months ended September 30, 2023.
(d) Recently Issued or Adopted Accounting Pronouncements
FASB ASU 2014-092020-04, Revenue from Contracts with CustomersReference Rate Reform (Topic 848), as amended by ASU 2021-01, and ASU 2022-06 was issued in May 2014. UnderMarch 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 Update,ASU are effective for all entities as of March 12, 2020. In December 2022, FASB createdamended 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 majority of the Bank’s interest rate swap-related transactions indexed to LIBOR were transferred to another index during the three months ended June 30, 2023. The remaining instruments including loans and investments are either in the process of transition or will transition to a new Topic 606 which is in response to a joint initiative of FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and international financial reporting standards that would:
Remove inconsistencies and weaknesses in revenue requirements.
Provide a more robust framework for addressing revenue issues.
Improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets.
Provide more useful information to users of financial statements through improved disclosure requirements.
Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
The original effective date for this Update was deferred in FASB ASU 2015-14 below.
FASB ASU 2015-14, Revenue from Contracts with Customers (Topic 606), was issued in August 2015 and defers the effective date of the above-mentioned FASB ASU 2014-09 for certain entities. Public business entities, certain not-for-profit entities and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is now permitted, but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company expects to adopt the revenue recognition guidance on January 1, 2018 using the modified retrospective approach.  A significant amount of the Company’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance.  With respect to noninterest income and related disclosures, the Company is in its preliminary stages of identifying and evaluating the revenue streams and underlying revenue contracts within the scope of the guidance. To date, the Company has not yet identified any significant changes in the timing of revenue recognition when considering the amended accounting guidance; however, the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date. The Company expects to develop processes and procedures to ensure it is fully compliant with these amendmentsindex at the adoptionnext repricing date.
FASB ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), was issued in January 2016, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This Update contains several provisions, including but not limited to 1) requiring equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; 2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate fair value; and 4) requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The Update also changes certain financial statement disclosure requirements, including requiring disclosures of the fair value of financial instruments be made on the basis of exit price. The Update is effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of this Update willASU to have a significantmaterial impact on the Company’s statements of financial conditionits business operations or income.  Management is in the planning stages of developing processes and procedures to comply with the disclosures requirements of this Update, which could impact the disclosures the Company makes related to fair value of its financial instruments.
FASB ASU 2016-02, Leases (Topic 842) was originally issued in February 2016, to increase transparency and comparability of leases among organizations and to disclose key information about leasing arrangements. The Update sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The Update requires lessees to apply a dual approach, classifying leases as either a finance or operating lease. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a

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lease liability for all leases with a term greater than 12 months regardless of their classification. All cash payments will be classified within operating activities in the statement of cash flows. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Update is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company anticipates adopting the Update on January 1, 2019. Upon adoption of the guidance, the Company expects to report increased assets and increased liabilities on its Condensed Consolidated Statements of Financial Condition as a result of recognizing right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, which currently are not reflected in its Condensed Consolidated Statements of Financial Condition.  During 2017, management began its evaluation of its leasing contracts and activities. Management is in the initial stages of developing its methodology to estimate the right-of use assets and lease liabilities. The Company anticipates electing an accounting policy to not recognize lease assets and lease liabilities for leases with a term of twelve months or less. The Company was committed to $14.7 million of minimum lease payments under noncancelable operating lease agreements at December 31, 2016. The Company does not expect the adoption of this amendment will have a significant impact to its Condensed Consolidated Financial Statements.
FASB ASU 2016-082022-02, Revenue from Contracts with CustomersFinancial Instruments - Credit Losses (Topic 606)326): Principal versus Agent ConsiderationsTroubled Debt Restructurings and Vintage Disclosures, was issued in March 20162022. The ASU eliminates the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and it clarifies the implementation guidance of the above-mentioned FASB ASU 2014-09 as it relates to principal versus agent considerations. The Update addresses identifying the unit of account and nature of the goods or services as well asrestructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the control principlerecognition and interactions withmeasurement guidance for TDRs, the control principle. The amendmentsentity will apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or continuation of an existing loan. Additionally, the Update do not change the core principle of the guidance. The effective date, transition requirements and impact on the Company's Condensed Consolidated Financial Statements for this Update are the same as those described in FASB ASU 2015-14 above.
FASB ASU 2016-09, Stock Compensation (Topic 718), issued in March 2016, is intended to simplify several aspects of the accounting for share-based payment award transactions. Forrequires public business entities the guidance is effectiveto disclose current-period gross write-offs
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by year of origination for annual periods after December 15, 2016, including interim periods within those annual periods with early adoption permitted. Certain amendments are required to be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Other amendments are applied retroactively (such as presentation of employee taxes paid on the statement of cash flows) or prospectively (such as recognition of excess tax benefits on the income statement). The Company adopted this standard effective January 1, 2017. The Company made an accounting policy election to account for forfeitures as they occurfinancing receivables and this change resulted in a cumulative adjustment that was immaterial to all periods presented. Changes to the statement of cash flows have been applied prospectively and the Company recorded excess tax benefits in its income tax expense. Adoption of all other changes under this Update did not have a material impact on the Condensed Consolidated Financial Statements.
FASB ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, was issued in April 2016 which clarifies the implementation guidance of the above-mentioned FASB ASU 2014-09 as it relates to identifying performance obligations and licensing. The effective date, transition requirements and impact on the Company's Condensed Consolidated Financial Statements for this Update are the same as those described in FASB ASU 2015-14 above.
FASB ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients, was issued in May 2016. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update affect only the narrow aspects of Topic 606. The effective date, transition requirements and impact on the Company's Condensed Consolidated Financial Statements for this Update are the same as those described in FASB ASU 2015-14 above.
FASB ASU 2016-13, Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued in June 2016. Commonly referred to as the current expected credit loss model ("CECL"), this Update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. The amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables and any other financial asset not excluded from the scope that have the contractual right to receive cash. The Update replaces the incurred loss impairment methodology, which generally only considered past events and current conditions, with a methodology that reflects the expected credit losses and required consideration of a broader range of reasonable and supportable information to estimate all expected

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credit losses. The Update additionally addresses purchased assets and introduces the purchased financial asset with a more-than-insignificant amount of credit deterioration since origination ("PCD"). The accounting for these PCD assets is similar to the existing accounting guidance of FASB Accounting Standards Codification ("ASC") 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, for purchased credit impaired ("PCI") assets, except the subsequent improvements in estimated cash flows will be immediately recognized into income, similar to the immediate recognition of subsequent deteriorations in cash flows. Current guidance only allows for the prospective recognition of these cash flow improvements. Because the terminology has been changed to a "more-than-insignificant" amount of credit deterioration, the presumption is that more assets might qualify for this accounting under the Update than those under current guidance. For public business entities, the Update isleases. These amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for fiscal years after December 15, 2018. An entity will apply the Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. A prospective transition approach is required for debt securities. An entity that has previously applied the guidance of FASB ASC 310-30 will prospectively apply the guidance in this Update for PCD assets. A prospective transition approach should be used for PCD assets where upon adoption, the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses. The Company is anticipating adopting the Update on January 1, 2020. Upon adoption, the Company expects a change in the processes, internal controls and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on PCI loans; however, the Company is still in the process of determining the magnitude of the increase and its impact on the Condensed Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. During 2017, the Company's management created a CECL steering committee which will begin developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. To date, the CECL steering committee has reviewed proposals from several vendors to assist the Company in the adoption.
FASB ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, was issued in August 2016. The Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017,2022, including interim periods within those fiscal years. Early adoption is permitted in any interim period if an entity has adopted ASU 2016-13 and mustsuch election may be applied usingmade individually to adopt the guidance related to TDRs, including related disclosures, and the presentation of gross write-offs in the vintage disclosure. This update requires prospective transition for the disclosures related to loan restructurings for borrowers experiencing financial difficulty and the presentation of gross write-offs in the vintage disclosures. The guidance related to the recognition and measurement of TDRs may be adopted on a prospective or modified retrospective transitional method to each period presented. transition method.
The Company has evaluatedadopted ASU 2022-02 on a prospective basis January 1, 2023. The Company elected at the newdate of adoption to account for existing TDR loans as of December 31, 2022 under the Company's TDR accounting policy which is disclosed in the 2022 Annual Form 10-K. All loan modifications post adoption are accounted for under the loan modification guidance and does not anticipate that itsin ASC 310-20. The adoption of this Update on January 1, 2018 willASU did not have a significantmaterial impact on its Condensedbusiness operations or the Consolidated Statements of Financial Statements.Condition.
FASB ASU 2017-032023-02, Accounting Changes and Error Corrections (Topic 250) and Investments—Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements atAccounting for Investments in Tax Credit Structures Using the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)Proportional Amortization Method (a consensus of the Emerging Issues Task Force), was issued in January 2017.February 2023. The SEC staff view is that a registrant should evaluate FASB ASC Updates that have not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an update, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent FASB ASC amendments to Topic 326, Financial Instruments - Credit Losses; Topic 842, Leases; and Topic 606, Revenue from Contracts with Customers; although, the amendments apply to any subsequent amendments to guidance in the FASB ASC. The Company adopted the amendments in this Update duringASU permit companies to elect to account for their tax equity investments, regardless of the fourth quarter of 2016 and appropriate disclosures have been included in this Note for each recently issued accounting standard.
FASB ASU 2017-04, Goodwill (Topic 350), was issued in January 2017 and eliminates Step 2tax credit program from which the goodwill impairment test.income tax credits are received, using the proportional amortization method, if certain conditions are met. Under the amendments,proportional amortization method, an entity should perform its goodwill impairment test by comparingamortizes the fair valueinitial 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 unit with its carrying amount. An entity should recognize an impairment charge fordisclose certain information in annual and interim reporting periods that enable investors to understand the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized, however, should not exceed the total amount of goodwill allocated toinvestments that reporting unit. Additionally, an entity should considergenerate income tax effectscredits and other income tax benefits from anya tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.credit program. The UpdateASU is effective for annualfiscal years, and interim periods or any interim goodwill impairment testswithin those fiscal years, beginning after December 15, 2019 using a prospective transition method and2023, with early adoption is permitted. The amendments in the ASU can be applied either on a modified retrospective or a retrospective basis. The Company does not expect the Update willadoption of this ASU to have a material impact on its Condensedbusiness operations or Consolidated Statements of Financial Statements.Condition.

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(2)Investment Securities


FASB ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities was issued in March 2017 and changes the accounting for certain purchased callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call date rather than to the maturity date. Accounting for purchased callable debt securities held at a discount does not change. The discount would continue to amortize to the maturity date. The updated is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect the Update will have a material impact on its Condensed Consolidated Financial Statements as the Company had been accounting for premiums as prescribed under this guidance. The Company anticipates early adopting this Update in January 2018.

FASB ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting was issued in May 2017 to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this Update, an entity should account for the effects of a modification unless the fair value, vesting conditions and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The Update is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company does not expect the Update will have a material impact on its Condensed Consolidated Financial Statements.

(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.

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There were no investment securities classified as trading at September 30, 2023 or December 31, 2022.
(a) Investment Securities by Classification, Type and Maturity
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment securities available for sale atfollowing tables present the dates indicated were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 (In thousands)
September 30, 2017       
U.S. Treasury and U.S. Government-sponsored agencies$9,464
 $12
 $(73) $9,403
Municipal securities248,420
 5,429
 (1,043) 252,806
Mortgage-backed securities and collateralized mortgage obligations(1):
       
Residential275,128
 879
 (1,646) 274,361
Commercial214,793
 699
 (2,209) 213,283
Collateralized loan obligations6,007
 15
 —
 6,022
Corporate obligations15,583
 247
 —
 15,830
Other securities27,850
 505
 —
 28,355
Total$797,245
 $7,786
 $(4,971) $800,060
        
December 31, 2016       
U.S. Treasury and U.S. Government-sponsored agencies$1,563
 $6
 $—
 $1,569
Municipal securities237,305
 2,427
 (2,476) 237,256
Mortgage-backed securities and collateralized mortgage obligations(1):
       
Residential310,391
 985
 (2,200) 309,176
Commercial211,259
 599
 (3,540) 208,318
Collateralized loan obligations10,505
 4
 (31) 10,478
Corporate obligations16,611
 104
 (9) 16,706
Other securities11,005
 156
 (19) 11,142
Total$798,639
 $4,281
 $(8,275) $794,645

(1)Issued and guaranteed by U.S. Government-sponsored agencies.
There were no securities classified as trading or held to maturity at September 30, 2017 or December 31, 2016.
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 September 30, 2017,the dates indicated:
September 30, 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$23,533 $— $(3,109)$20,424 
Municipal securities126,763 7 (19,965)106,805 
Residential CMO and MBS(1)
468,174 — (66,993)401,181 
Commercial CMO and MBS(1)
651,713 5 (54,505)597,213 
Corporate obligations4,000 — (220)3,780 
Other asset-backed securities18,317 62 (235)18,144 
Total$1,292,500 $74 $(145,027)$1,147,547 
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
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September 30, 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$151,040 $— $(35,221)$115,819 
Residential CMO and MBS(1)
273,609 — (27,445)246,164 
Commercial CMO and MBS(1)
322,196 — (47,922)274,274 
Total$746,845 $— $(110,588)$636,257 
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
December 31, 2022
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities$68,912 $— $(5,053)$63,859 
Municipal securities171,087 172 (18,233)153,026 
Residential CMO and MBS(1)
479,473 — (55,087)424,386 
Commercial CMO and MBS(1)
714,136 19 (49,734)664,421 
Corporate obligations4,000 — (166)3,834 
Other asset-backed securities22,425 14 (522)21,917 
Total$1,460,033 $205 $(128,795)$1,331,443 
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
December 31, 2022
Amortized
Cost		Gross
Unrecognized
Gains		Gross
Unrecognized
Losses		Fair
Value
(Dollars in thousands)
Investment securities held to maturity:
U.S. government and agency securities$150,936 $— $(33,585)$117,351 
Residential CMO and MBS(1)
290,318 — (17,440)272,878 
Commercial CMO and MBS(1)
325,142 — (41,937)283,205 
Total$766,396 $— $(92,962)$673,434 
(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 are set forth below.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, 2023
Securities Available for SaleSecurities Held to Maturity
Amortized CostFair ValueAmortized CostFair Value
(Dollars in thousands)
Due in one year or less$14,139 $14,016 $— $— 
Due after one year through five years4,983 4,714 — — 
Due after five years through ten years43,247 38,366 83,252 66,660 
Due after ten years91,927 73,913 67,788 49,159 
Total investment securities due at a single maturity date154,296 131,009 151,040 115,819 
14
 Amortized Cost Fair Value
 (In thousands)
Due in one year or less$6,556
 $6,595
Due after one year through five years121,518
 122,740
Due after five years through ten years248,291
 248,603
Due after ten years420,835
 421,972
Investment securities with no stated maturities45
 150
Total$797,245
 $800,060

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September 30, 2023
Securities Available for SaleSecurities Held to Maturity
Amortized CostFair ValueAmortized CostFair Value
(Dollars in thousands)
MBS(1)
1,138,204 1,016,538 595,805 520,438 
Total investment securities$1,292,500 $1,147,547 $746,845 $636,257 
(1) MBS, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.
There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at September 30, 2023 and December 31, 2022.
(b) Unrealized Losses and Other-Than-Temporary Impairmentson Investment Securities Available for Sale
The following table showstables present the gross unrealized losses and fair value of the Company'sCompany’s investment securities available for sale that arefor which an ACL on investment securities available for sale has not deemed to be other-than-temporarily impaired,been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss positions as of September 30, 2017position at the dates indicated:
September 30, 2023
Less than 12 Months12 Months or LongerTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
(Dollars in thousands)
U.S. government and agency securities$— $— $20,424 $(3,109)$20,424 $(3,109)
Municipal securities17,390 (485)84,118 (19,480)101,508 (19,965)
Residential CMO and MBS(1)
35,167 (515)366,014 (66,478)401,181 (66,993)
Commercial CMO and MBS(1)
44,981 (785)549,283 (53,720)594,264 (54,505)
Corporate obligations— — 3,780 (220)3,780 (220)
Other asset-backed securities466 — 7,469 (235)7,935 (235)
Total$98,004 $(1,785)$1,031,088 $(143,242)$1,129,092 $(145,027)
(1) U.S. government agency and December 31, 2016:government-sponsored enterprise CMO and MBS.
December 31, 2022
Less than 12 Months12 Months or LongerTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
(Dollars in thousands)
U.S. government and agency securities$51,900 $(2,031)$11,959 $(3,022)$63,859 $(5,053)
Municipal securities82,580 (5,585)40,945 (12,648)123,525 (18,233)
Residential CMO and MBS(1)
217,949 (14,770)206,437 (40,317)424,386 (55,087)
Commercial CMO and MBS(1)
473,580 (16,971)181,692 (32,763)655,272 (49,734)
Corporate obligations3,834 (166)— — 3,834 (166)
Other asset-backed securities16,489 (510)721 (12)17,210 (522)
Total$846,332 $(40,033)$441,754 $(88,762)$1,288,086 $(128,795)
 Less than 12 Months 12 Months or Longer Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 (In thousands)
September 30, 2017           
U.S. Treasury and U.S. Government-sponsored agencies$6,484
 $(73) $—
 $—
 $6,484
 $(73)
Municipal securities24,415
 (362) 23,629
 (681) 48,044
 (1,043)
Mortgage-backed securities and collateralized mortgage obligations(1):
           
Residential135,648
 (1,111) 23,937
 (535) 159,585
 (1,646)
Commercial112,595
 (1,478) 38,099
 (731) 150,694
 (2,209)
Total$279,142
 $(3,024) $85,665
 $(1,947) $364,807
 $(4,971)
            
December 31, 2016           
Municipal securities$90,188
 $(2,476) $—
 $—
 $90,188
 $(2,476)
Mortgage-backed securities and collateralized mortgage obligations(1):
           
Residential181,562
 (2,148) 10,854
 (52) 192,416
 (2,200)
Commercial157,055
 (3,446) 12,597
 (94) 169,652
 (3,540)
Collateralized loan obligations2,976
 (1) 2,969
 (30) 5,945
 (31)
Corporate obligations4,032
 (9) —
 —
 4,032
 (9)
Other securities6,998
 (19) —
 —
 6,998
 (19)
Total$442,811
 $(8,099) $26,420
 $(176) $469,231
 $(8,275)
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
(1) Issued and guaranteed by U.S. Government-sponsored agencies.(c) ACL on Investment Securities
The Company has evaluated these investment securities available for sale as of September 30, 20172023 and December 31, 20162022 and has determined that the declineany declines in theirfair value is temporary. The unrealized losses are primarily duewere attributable to increaseschanges in market interest rates relative to where these investments fall within the yield curve and larger spreads in the marketindividual characteristics. Management monitors published credit ratings for mortgage-related products. The fair valueadverse changes for all rated investment securities and none of these securities is expected to recover as the securities approach their maturity date and/or as the pricing spreads narrow on mortgage-related securities. None of the underlying issuers of the municipal securities had credit ratings that werea below investment grade levels atcredit rating as of both September 30, 2017 or2023 and December 31, 2016. The2022. In addition, the Company hasdoes not intend to sell these securities nor does the ability and intentCompany consider it more likely than not that it will be required to holdsell these securities before the investments until recovery of the securities' amortized cost basis, which may be the maturity dateupon maturity. Therefore, no ACL on investment securities available for sale was recorded as of the securities.
For the three and nine months ended September 30, 20172023 and 2016, thereDecember 31, 2022.
The Company also evaluated investment securities held to maturity for current expected credit losses as of September 30, 2023 and December 31, 2022. There were no investment securities determinedheld to be other-than-temporarily impaired.

maturity classified as nonaccrual or past due as of September 30, 2023 and December 31, 2022 and all were issued by the U.S. government and its agencies and either
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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 forecasts 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, 2023 and December 31, 2022.
(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:
(c)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(Dollars in thousands)
Gross realized gains$— $— $36 $— 
Gross realized losses(1,940)— (2,262)— 
Net realized gains$(1,940)$— $(2,226)$— 
(e) Pledged Securities
The following table summarizes the amortized cost and fair value of investment securities available for sale that arewere pledged as collateral for the following obligations at the dates indicated:
September 30, 2023December 31, 2022
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
(Dollars in thousands)
State and local governments public deposits$242,616 $220,348 $156,784 $137,931 
FRB852,720 712,009 60,660 49,506 
Securities sold under agreement to repurchase28,104 25,654 63,685 55,836 
Other securities pledged53,883 45,922 54,910 48,358 
Total$1,177,323 $1,003,933 $336,039 $291,631 
(f) Accrued Interest Receivable
Accrued interest receivable excluded from the amortized cost of investment securities available for sale totaled $3.8 million and $4.8 million at September 30, 20172023 and December 31, 2016:2022, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $2.3 million and $2.4 million at September 30, 2023 and December 31, 2022, 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, 2023 and 2022.
(g) Non-Marketable Securities
At December 31, 2022, as a member bank of Visa U.S.A., we held 6,549 shares of Visa Inc. Class B common stock. These shares had a carrying value of zero and were restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. During the nine months ended September 30, 2023, the Bank sold all shares of Visa Inc. Class B common stock and recognized a $1.6 million gain which is included in other income.

(3)Loans Receivable
 September 30, 2017 December 31, 2016
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 (In thousands)
Washington and Oregon state to secure public deposits$40,997
 $40,772
 $214,834
 $215,247
Repurchase agreements12,620
 12,724
 29,481
 29,294
Other securities pledged201,783
 203,482
 3,557
 3,546
Total$255,400
 $256,978
 $247,872
 $248,087

(3)Loans Receivable
The CompanyBank originates loans in the ordinary course of business and has also acquired loans through FDIC-assistedmergers and open bank transactions. Disclosures related toacquisitions. Accrued interest receivable was excluded from disclosures presenting the Company's recorded investment inBank's amortized cost of loans receivable generally exclude accrued interest receivableas it was deemed insignificant. In addition to originating loans, the Bank may also purchase loans through pool purchases, participation purchases and net deferred costs because they are insignificant.
Loans acquired in a business combination are further classified as “purchased” loans. Loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are accounted for under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as "PCI" loans. Loans purchased that are not accounted for under FASB ASC 310-30 are accounted for under FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs, and are referred to as "non-PCI" loans.syndicated loan purchases.
(a) Loan Origination/Risk Management
The CompanyBank categorizes the individual loans in one of the four segments of the total loan portfolio:portfolio into four segments: commercial business, one-to-four familybusiness; residential real estate; real estate construction and land developmentdevelopment; 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 2022 Annual Form 10-K.
The CompanyBank has certain lending policies and proceduresguidelines in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and proceduresguidelines on a regular basis. A reporting system
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supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problemcriticized loans. The CompanyBank 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, as well as the Company’s policies and procedures.personnel.
A discussion of the risk characteristics of each loan portfolio segment is as follows:
Commercial Business:
There are three significant classesThe amortized cost of loans in the commercial business portfolio segment: commercial and industrial, owner-occupied commercial real estate and non-owner occupied commercial real estate. The owner and non-owner occupied commercial real estate are both considered commercial real estate loans. As the commercial and industrial loans carry different risk characteristics than the commercial real estate loans, they are discussed separately below.
Commercial and industrial. Commercial and industrial loans are primarily made based on the identified cash flowsreceivable, net of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may include a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial and industrial loans carry more risk than other loans because the borrowers’ cash flow is less predictable, and in the event of a default, the amount of loss is potentially greater and more difficult to quantify because the value of the collateral securing these loans may fluctuate, may be uncollectible, or may be obsolete or of limited use, among other things.

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Commercial real estate. The Company originates commercial real estate loans primarily within its primary market areas. These loans are subject to underwriting standards and processes similar to commercial and industrial loans in that these loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate properties. Commercial real estate lending typically involves higher loan principal amounts and paymentsACL on loans, and repayment is dependent on successful operation and management of the properties. The value of the real estate securing these loans can be adversely affected by conditions in the real estate market or the economy. There is little difference in risk between owner-occupied commercial real estate loans and non-owner occupied commercial real estate loans.
One-to-Four Family Residential:
The majority of the Company’s one-to-four family residential loans are secured by single-family residences located in its primary market areas. The Company’s underwriting standards require that single-family portfolio loans generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms of maturity typically range from 15 to 30 years. The Company sells most of its single-family loans in the secondary market and retains a smaller portion in its loan portfolio.
Real Estate Construction and Land Development:
The Company originates construction loans for one-to-four family residential and for five or more family residential and commercial properties. The one-to-four family residential construction loans generally include construction of custom homes whereby the home buyer is the borrower. The Company also provides financing to builders for the construction of pre-sold homes and, in selected cases, to builders for the construction of speculative residential property. Substantially all construction loans are short-term in nature and priced with variable rates of interest. Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion. Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Company’s estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness. If the Company’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being dependent upon successful completion of the construction project, interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.
Consumer:
The Company originates consumer loans and lines of credit that are both secured and unsecured. The underwriting process for these loans ensures a qualifying primary and secondary source of repayment. Underwriting standards for home equity loans are significantly influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. The majority of consumer loans are for relatively small amounts disbursed among many individual borrowers which reduces the credit risk for this type of loan. To further reduce the risk, trend reports are reviewed by management on a regular basis.
The Company also originates indirect consumer loans. These loans are for new and used automobile and recreational vehicles that are originated indirectly by selected dealers located in the Company's market areas. The Company has limited its purchase of indirect loans primarily to dealerships that are established and well-known in their market areas and to applicants that are not classified as sub-prime.

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Loans receivable at September 30, 2017 and December 31, 2016 consisted of the following portfolio segments and classes:classes at the dates indicated:
 September 30, 2017 December 31, 2016
 (In thousands)
Commercial business:   
Commercial and industrial$665,582
 $637,773
Owner-occupied commercial real estate602,238
 558,035
Non-owner occupied commercial real estate930,188
 880,880
Total commercial business2,198,008
 2,076,688
One-to-four family residential81,422
 77,391
Real estate construction and land development:   
One-to-four family residential51,451
 50,414
Five or more family residential and commercial properties122,981
 108,764
Total real estate construction and land development174,432
 159,178
Consumer340,643
 325,140
Gross loans receivable2,794,505
 2,638,397
Net deferred loan costs3,008
 2,352
 Loans receivable, net2,797,513
 2,640,749
Allowance for loan losses(31,400) (31,083)
 Total loans receivable, net$2,766,113
 $2,609,666
September 30, 2023December 31, 2022
(Dollars in thousands)
Commercial business:
Commercial and industrial$691,318 $693,568 
Owner-occupied CRE953,779 937,040 
Non-owner occupied CRE1,690,099 1,586,632 
Total commercial business3,335,196 3,217,240 
Residential real estate377,448 343,631 
Real estate construction and land development:
Residential70,804 80,074 
Commercial and multifamily310,024 214,038 
Total real estate construction and land development380,828 294,112 
Consumer173,386 195,875 
Loans receivable4,266,858 4,050,858 
ACL on loans(46,947)(42,986)
Loans receivable, net$4,219,911 $4,007,872 
Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans$(2,036)$(2,501)
Unamortized net deferred fee$(10,949)$(10,016)
(b) Concentrations of Credit
Most of the Company’sBank’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County, Washington to ClarkLane County, in Washington State and Multnomah County in Oregon, as well as other contiguous markets. The majority ofYakima County in Washington and Ada County in Idaho. Additionally, the Company’sBank's loan portfolio consists of (in order of balances at September 30, 2017) non-owner occupiedis concentrated in commercial real estate,business loans, which include commercial and industrial, owner-occupied and owner-occupiednonowner-occupied CRE, and commercial and multifamily real estate. Asestate construction and land development loans. Commercial business loans are generally considered as having a more inherent risk of September 30, 2017default 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 December 31, 2016, there were no concentrations ofconsumer loans, related to any single industry in excess of 10% of the Company’s total loans.implying higher potential losses on an individual loan basis.
(c) Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Company’sBank’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 (v)(vi) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon.
The CompanyBank 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. A descriptionRisk 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, is as follows:
Grades 1including qualitative information on how the risk grades relate to 5: These gradesthe risk of loss, are considered “pass grade” and include loans with negligible to above average but acceptable risk. These borrowers generally have strong to acceptable capital levels and consistent earnings and debt service capacity. Loans with the higher grades within the “pass” category may include borrowers who are experiencing unusual operating difficulties, but have acceptable payment performance to date. Increased monitoring of financial information and/or collateral may be appropriate. Loans with this grade show no immediate loss exposure.
Grade 6: This grade includes "Watch" loans and is considered a “pass grade”. The grade is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipatedcontained in the near term.
Grade 7: This grade includes “Other Assets Especially Mentioned” (“OAEM”) loans in accordance with regulatory guidelines, and is intended to highlight loans with elevated risks. Loans with this grade show signs of deteriorating profits and capital, and the borrower might not be strong enough to sustain a major setback. The borrower is typically higher than normally leveraged, and outside support might be modest and likely illiquid. The loan is at risk of further decline unless active measures are taken to correct the situation.

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Grade 8: This grade includes “Substandard” loans in accordance with regulatory guidelines, which the Company has determined have a high credit risk. These loans also have well-defined weaknesses which make payment default or principal exposure likely, but not yet certain. The borrower may have shown serious negative trends in financial ratios and performance. Such loans may be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. Loans with this grade can be placed on accrual or nonaccrual status based on the Company’s accrual policy.
Grade 9: This grade includes “Doubtful” loans in accordance with regulatory guidelines, and the Company has determined these loans to have excessive credit risk. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance or have been partially charged-off for the amount considered uncollectible.
Grade 10: This grade includes “Loss” loans in accordance with regulatory guidelines, and the Company has determined these loans have the highest risk of loss. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.
2022 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. LoanChanges to loan grades are reviewed onconsidered at the time new information about the performance of a quarterly basis, or more frequently if necessary, byloan becomes available, including the credit department. Thereceipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Bank 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.
The loanLoan 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 OAEMSM loan grade is
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transitory in that the CompanyBank is waiting on additional information to determine the likelihood and extent of theany potential loss. The likelihood of loss for OAEMSM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a SubstandardSS grade are generallyhave further credit deterioration and include both accrual loans for which the Company has individually analyzed for potential impairment.and nonaccrual loans. For Doubtful and Loss graded loans, the CompanyBank is almost certain of the losses and the outstanding principal balances are generally charged-offcharged off to the realizable value.

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The following tables present the balanceamortized cost of loans receivable by risk grade and origination year, and the gross charge-offs by loan class and origination year, at the dates indicated. The Bank adopted the vintage disclosure requirements of ASU 2022-02 prospectively as described in Note 1 beginning January 1, 2023.
September 30, 2023Revolving Loans
Revolving Loans Converted(1)
Loans Receivable
Term Loans
Amortized Cost Basis by Origination Year
20232022202120202019Prior
(Dollars in thousands)
Commercial business:
Commercial and industrial
Pass$72,204 $157,851 $80,225 $72,575 $44,139 $87,318 $141,690 $290 $656,292 
SM— 201 254 1,748 4,413 3,911 846 — 11,373 
SS— 1,239 2,667 1,541 1,220 5,137 11,849 — 23,653 
Total72,204 159,291 83,146 75,864 49,772 96,366 154,385 290 691,318 
Owner-occupied CRE
Pass67,181 139,102 161,632 84,403 149,576 311,216 — — 913,110 
SM— — 3,565 2,012 710 16,108 — — 22,395 
SS— — 3,090 658 — 14,526 — — 18,274 
Total67,181 139,102 168,287 87,073 150,286 341,850 — — 953,779 
Non-owner occupied CRE
Pass137,013 260,502 206,919 154,132 242,200 647,754 — — 1,648,520 
SM— 601 8,217 — 575 19,479 — — 28,872 
SS— — — — — 12,707 — — 12,707 
Total137,013 261,103 215,136 154,132 242,775 679,940 — — 1,690,099 
Total commercial business
Pass276,398 557,455 448,776 311,110 435,915 1,046,288 141,690 290 3,217,922 
SM— 802 12,036 3,760 5,698 39,498 846 — 62,640 
SS— 1,239 5,757 2,199 1,220 32,370 11,849 — 54,634 
Total276,398 559,496 466,569 317,069 442,833 1,118,156 154,385 290 3,335,196 
Commercial business gross charge-offs
Current period— — 15 61 — 100 — — 176 
Residential real estate
Pass(1)
37,158 139,887 143,647 24,868 15,134 16,590 — — 377,284 
SS— — — — — 164 — — 164 
Total37,158 139,887 143,647 24,868 15,134 16,754 — — 377,448 
Real estate construction and land development:
Residential
Pass26,212 30,529 5,024 1,488 822 732 — — 64,807 
SS997 319 4,495 — — 186 — — 5,997 
Total27,209 30,848 9,519 1,488 822 918 — — 70,804 
Commercial and multifamily
Pass26,072 158,782 106,134 5,391 764 3,369 — — 300,512 
SM— — — 3,452 5,687 373 — — 9,512 
Total26,072 158,782 106,134 8,843 6,451 3,742 — — 310,024 
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September 30, 2023Revolving Loans
Revolving Loans Converted(1)
Loans Receivable
Term Loans
Amortized Cost Basis by Origination Year
20232022202120202019Prior
(Dollars in thousands)
Total real estate construction and land development
Pass52,284 189,311 111,158 6,879 1,586 4,101 — — 365,319 
SM— — — 3,452 5,687 373 — — 9,512 
SS997 319 4,495 — — 186 — — 5,997 
Total53,281 189,630 115,653 10,331 7,273 4,660 — — 380,828 
Consumer
Pass1,713 2,314 332 7,016 18,305 23,514 117,681 653 171,528 
SS— — — 150 286 1,023 375 24 1,858 
Total1,713 2,314 332 7,166 18,591 24,537 118,056 677 173,386 
Consumer gross charge-offs:
Current period7 10 12 21 54 122 194 — 420 
Loans receivable
Pass367,553 888,967 703,913 349,873 470,940 1,090,493 259,371 943 4,132,053 
SM— 802 12,036 7,212 11,385 39,871 846 — 72,152 
SS997 1,558 10,252 2,349 1,506 33,743 12,224 24 62,653 
Total$368,550 $891,327 $726,201 $359,434 $483,831 $1,164,107 $272,441 $967 $4,266,858 
Gross charge-offs:
Total$7 $10 $27 $82 $54 $222 $194 $— $596 
(1) Represents the loans receivable by credit quality indicator as of balance at September 30, 2017 and December 31, 2016.
 September 30, 2017
 Pass OAEM Substandard Doubtful/Loss Total
 (In thousands)
Commercial business:         
Commercial and industrial$625,387
 $11,067
 $29,128
 $—
 $665,582
Owner-occupied commercial real estate576,313
 8,305
 17,620
 —
 602,238
Non-owner occupied commercial real estate897,677
 15,790
 16,721
 —
 930,188
Total commercial business2,099,377
 35,162
 63,469
 —
 2,198,008
One-to-four family residential79,882
 —
 1,540
 —
 81,422
Real estate construction and land development:         
One-to-four family residential48,101
 273
 3,077
 —
 51,451
Five or more family residential and commercial properties121,854
 722
 405
 —
 122,981
Total real estate construction and land development169,955
 995
 3,482
 —
 174,432
Consumer335,073
 —
 5,045
 525
 340,643
Gross loans receivable$2,684,287
 $36,157
 $73,536
 $525
 $2,794,505

 December 31, 2016
 Pass OAEM Substandard Doubtful/Loss Total
 (In thousands)
Commercial business:         
Commercial and industrial$601,273
 $5,048
 $31,452
 $—
 $637,773
Owner-occupied commercial real estate532,585
 4,437
 21,013
 —
 558,035
Non-owner occupied commercial real estate841,383
 14,573
 24,924
 —
 880,880
Total commercial business1,975,241
 24,058
 77,389
 —
 2,076,688
One-to-four family residential76,020
 —
 1,371
 —
 77,391
Real estate construction and land development:         
One-to-four family residential44,752
 500
 5,162
 —
 50,414
Five or more family residential and commercial properties105,723
 1,150
 1,891
 —
 108,764
Total real estate construction and land development150,475
 1,650
 7,053
 —
 159,178
Consumer320,140
 —
 5,000
 —
 325,140
Gross loans receivable$2,521,876
 $25,708
 $90,813
 $—
 $2,638,397

Potential problem loans are loans classified as OAEM or worse that are currently accruing interest and are not considered impaired, but2023 which management is monitoring becausewas converted from a revolving loan to a non-revolving amortizing loan during the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem loans may include PCI loans as these loans continue to accrete loan discounts established at acquisition based on the guidance of FASB ASC 310-30. Potential problem loans as of nine months ended September 30, 2017 and December 31, 2016 were $84.1 million and $87.8 million, respectively. The balance of potential problem loans guaranteed by a governmental agency, which guarantee reduces2023.

December 31, 2022Revolving Loans
Revolving Loans Converted(1)
Loans Receivable
Term Loans
Amortized Cost Basis by Origination Year
20222021202020192018Prior
(Dollars in thousands)
Commercial business:
Commercial and industrial
Pass$168,818 $94,653 $82,554 $61,160 $33,957 $74,181 $146,795 $172 $662,290 
SM212 109 443 4,637 362 4,447 5,433 — 15,643 
SS773 188 1,710 3,465 559 5,098 3,674 168 15,635 
Total169,803 94,950 84,707 69,262 34,878 83,726 155,902 340 693,568 
Owner-occupied CRE
Pass134,432 167,927 93,834 157,096 62,876 282,212 — — 898,377 
SM— 1,744 — — 2,540 16,664 — 247 21,195 
SS— — 671 — 3,722 13,075 — — 17,468 
Total134,432 169,671 94,505 157,096 69,138 311,951 — 247 937,040 
Non-owner-occupied CRE
Pass240,151 189,300 160,930 258,778 121,369 561,645 — — 1,532,173 
SM— 8,349 — 4,172 — 12,190 — — 24,711 
SS— — — — 3,627 26,121 — — 29,748 
Total240,151 197,649 160,930 262,950 124,996 599,956 — — 1,586,632 
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December 31, 2022Revolving Loans
Revolving Loans Converted(1)
Loans Receivable
Term Loans
Amortized Cost Basis by Origination Year
20222021202020192018Prior
(Dollars in thousands)
Total commercial business
Pass543,401 451,880 337,318 477,034 218,202 918,038 146,795 172 3,092,840 
SM212 10,202 443 8,809 2,902 33,301 5,433 247 61,549 
SS773 188 2,381 3,465 7,908 44,294 3,674 168 62,851 
Total544,386 462,270 340,142 489,308 229,012 995,633 155,902 587 3,217,240 
Residential real estate
Pass132,510 149,934 24,668 16,803 4,207 15,337 — — 343,459 
SS— — — — — 172 — — 172 
Total132,510 149,934 24,668 16,803 4,207 15,509 — — 343,631 
Real estate construction and land development:
Residential
Pass45,521 26,675 2,891 3,061 871 1,055 — — 80,074 
Commercial and multifamily
Pass71,168 123,626 6,272 1,084 2,562 995 — — 205,707 
SM— — 2,213 5,687 — — — — 7,900 
SS— — — 37 — 394 — — 431 
Total71,168 123,626 8,485 6,808 2,562 1,389 — — 214,038 
Total real estate construction and land development
Pass116,689 150,301 9,163 4,145 3,433 2,050 — — 285,781 
SM— — 2,213 5,687 — — — — 7,900 
SS— — — 37 — 394 — — 431 
Total116,689 150,301 11,376 9,869 3,433 2,444 — — 294,112 
Consumer
Pass3,379 509 9,848 27,370 15,563 19,855 116,605 435 193,564 
SS— — 168 559 320 1,120 44 100 2,311 
Total3,379 509 10,016 27,929 15,883 20,975 116,649 535 195,875 
Loans receivable
Pass795,979 752,624 380,997 525,352 241,405 955,280 263,400 607 3,915,644 
SM212 10,202 2,656 14,496 2,902 33,301 5,433 247 69,449 
SS773 188 2,549 4,061 8,228 45,980 3,718 268 65,765 
Total$796,964 $763,014 $386,202 $543,909 $252,535 $1,034,561 $272,551 $1,122 $4,050,858 
(1) Represents the Company's credit exposure, was $1.7 million and $1.1 million as of September 30, 2017 and loans receivable balance at December 31, 2016, respectively.2022 which was converted from a revolving loan to non-revolving amortizing loan during the year ended December 31, 2022.
(d) Nonaccrual Loans
Nonaccrual loans, segregated by segments and classes of loans, were as follows as of September 30, 2017 and December 31, 2016:
 September 30, 2017 December 31, 2016
 (In thousands)
Commercial business:   
Commercial and industrial$4,056
 $3,531
Owner-occupied commercial real estate3,720
 3,728
Non-owner occupied commercial real estate1,907
 1,321
Total commercial business9,683
 8,580
One-to-four family residential84
 94
Real estate construction and land development:   
One-to-four family residential869
 2,008
Consumer316
 227
Nonaccrual loans$10,952
 $10,909
The Company had $2.5 million and $2.8 millionfollowing tables present the amortized cost of nonaccrual loans guaranteed by governmental agencies at the dates indicated:
September 30, 2023
Nonaccrual without ACLNonaccrual with ACLTotal Nonaccrual
(Dollars in thousands)
Commercial business:
Commercial and industrial$2,172 $686 $2,858 
Owner-occupied CRE— 207 207 
Total$2,172 $893 $3,065 
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December 31, 2022
Nonaccrual without ACLNonaccrual with ACLTotal Nonaccrual
(Dollars in thousands)
Commercial business:
Commercial and industrial$4,503 $1,154 $5,657 
Owner-occupied CRE— 212 212 
Total commercial business4,503 1,366 5,869 
Real estate construction and land development:
Commercial and multifamily— 37 37 
Total$4,503 $1,403 $5,906 
The following table presents the reversal of interest income on loans due to the write-off of accrued interest receivable upon the initial classification of loans as nonaccrual loans and the interest income recognized due to payment in full or sale of previously classified nonaccrual loans during the following periods:
Three Months Ended September 30,
20232022
Interest Income ReversedInterest Income RecognizedInterest Income ReversedInterest Income Recognized
(Dollars in thousands)
Commercial business:
Commercial and industrial$(10)$18 $— $31 
Total$(10)$18 $— $31 

Nine Months Ended September 30,
20232022
Interest Income ReversedInterest Income RecognizedInterest Income ReversedInterest Income Recognized
(Dollars in thousands)
Commercial business:
Commercial and industrial$(24)$48 $(14)$260 
Owner-occupied CRE— — — 53 
Non-owner occupied CRE— — — 774 
Total commercial business(24)48 (14)1,087 
Residential real estate— — — 19 
Consumer— — — 68 
Total$(24)$48 $(14)$1,174 
For the three and nine months ended September 30, 20172023 and December 31, 2016, respectively.
PCI loans are not included2022, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the nonaccrual loan tabletables above because these loans are accounted for under FASB ASC 310-30, which provides that accretable yield is calculated based on a loan's expected cash flow even if the loan is not performing under its contractual terms.due to payment in full or sale.
(e) Past due loans
The CompanyBank performs an aging analysis of past due loans using thepolicies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. This policy is consistent with regulatory reporting requirements.
The balancesfollowing tables present the amortized cost of past due loans segregated by segments and classes of loans, as of September 30, 2017 and December 31, 2016 were as follows:at the dates indicated:
September 30, 2023
30-89 Days90 Days or
Greater		Total Past 
Due		CurrentLoans Receivable
(Dollars in thousands)
Commercial business:
Commercial and industrial$1,126 $2,883 $4,009 $687,309 $691,318 
21
 September 30, 2017
 30-89 Days 
90 Days or
Greater
 
Total Past 
Due
 Current Total
 (In thousands)
Commercial business:         
Commercial and industrial$790
 $1,014
 $1,804
 $663,778
 $665,582
Owner-occupied commercial real estate498
 1,270
 1,768
 600,470
 602,238
Non-owner occupied commercial real estate—
 2,085
 2,085
 928,103
 930,188
Total commercial business1,288
 4,369
 5,657
 2,192,351
 2,198,008
One-to-four family residential—
 —
 —
 81,422
 81,422
Real estate construction and land development:         
One-to-four family residential1,038
 309
 1,347
 50,104
 51,451
Five or more family residential and commercial properties366
 —
 366
 122,615
 122,981
Total real estate construction and land development1,404
 309
 1,713
 172,719
 174,432
Consumer1,738
 657
 2,395
 338,248
 340,643
Gross loans receivable$4,430
 $5,335
 $9,765
 $2,784,740
 $2,794,505


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September 30, 2023
30-89 Days90 Days or
Greater		Total Past 
Due		CurrentLoans Receivable
(Dollars in thousands)
Owner-occupied CRE426 635 1,061 952,718 953,779 
Non-owner occupied CRE— — — 1,690,099 1,690,099 
Total commercial business1,552 3,518 5,070 3,330,126 3,335,196 
Residential real estate— — — 377,448 377,448 
Real estate construction and land development:
Residential505 — 505 70,299 70,804 
Commercial and multifamily— — — 310,024 310,024 
Total real estate construction and land development505 — 505 380,323 380,828 
Consumer635 325 960 172,426 173,386 
Total$2,692 $3,843 $6,535 $4,260,323 $4,266,858 
December 31, 2022
30-89 Days90 Days or
Greater		Total Past 
Due		CurrentLoans Receivable
(Dollars in thousands)
Commercial business:
Commercial and industrial$822 $6,104 $6,926 $686,642 $693,568 
Owner-occupied CRE— 189 189 936,851 937,040 
Non-owner occupied CRE— — — 1,586,632 1,586,632 
Total commercial business822 6,293 7,115 3,210,125 3,217,240 
Residential real estate3,066 — 3,066 340,565 343,631 
Real estate construction and land development:
Residential— — — 80,074 80,074 
Commercial and multifamily— — — 214,038 214,038 
Total real estate construction and land development— — — 294,112 294,112 
Consumer1,561 — 1,561 194,314 195,875 
Total$5,449 $6,293 $11,742 $4,039,116 $4,050,858 
 December 31, 2016
 30-89 Days 
90 Days or
Greater
 
Total Past 
Due
 Current Total
 (In thousands)
Commercial business:         
Commercial and industrial$2,687
 $1,733
 $4,420
 $633,353
 $637,773
Owner-occupied commercial real estate1,807
 2,915
 4,722
 553,313
 558,035
Non-owner occupied commercial real estate733
 —
 733
 880,147
 880,880
Total commercial business5,227
 4,648
 9,875
 2,066,813
 2,076,688
One-to-four family residential523
 —
 523
 76,868
 77,391
Real estate construction and land development:         
One-to-four family residential90
 2,008
 2,098
 48,316
 50,414
Five or more family residential and commercial properties—
 377
 377
 108,387
 108,764
Total real estate construction and land development90
 2,385
 2,475
 156,703
 159,178
Consumer2,292
 105
 2,397
 322,743
 325,140
Gross loans receivable$8,132
 $7,138
 $15,270
 $2,623,127
 $2,638,397

There were no loansLoans 90 days or more past due that wereand still accruing interest were $2.2 million and $1.6 million as of September 30, 2017 or2023 and December 31, 2016, excluding PCI loans.

2022, respectively.
(f) ImpairedCollateral-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 balances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:
Impaired loans include nonaccrual loans and performing troubled debt restructured ("TDR") loans. The balances of impaired loans as of September 30, 2017 and December 31, 2016 are set forth in the following tables.
September 30, 2023
CREFarmlandResidential Real EstateEquipmentTotal
(Dollars in thousands)
Commercial business:
Commercial and industrial$260 $389 $630 $541 $1,820 
Owner-occupied CRE189 — — — 189 
Total$449 $389 $630 $541 $2,009 
22
 September 30, 2017
 
Recorded
Investment With
No Specific
Valuation
Allowance
 
Recorded
Investment With
Specific
Valuation
Allowance
 
Total
Recorded
Investment
 
Unpaid
Contractual
Principal
Balance
 
Related
Specific
Valuation
Allowance
 (In thousands)
Commercial business:         
Commercial and industrial$3,131
 $8,581
 $11,712
 $12,060
 $1,254
Owner-occupied commercial real estate1,082
 4,676
 5,758
 6,068
 767
Non-owner occupied commercial real estate4,749
 6,034
 10,783
 10,927
 895
Total commercial business8,962
 19,291
 28,253
 29,055
 2,916
One-to-four family residential—
 304
 304
 311
 96
Real estate construction and land development:         
One-to-four family residential1,347
 —
 1,347
 2,305
 —
Five or more family residential and commercial properties—
 658
 658
 658
 39
Total real estate construction and land development1,347
 658
 2,005
 2,963
 39
Consumer160
 274
 434
 457
 60
Total$10,469
 $20,527
 $30,996
 $32,786
 $3,111

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December 31, 2022
CREFarmlandResidential Real EstateEquipmentTotal
(Dollars in thousands)
Commercial business:
Commercial and industrial$1,239 $1,977 $929 $— $4,145 
Owner-occupied CRE189 — — — 189 
Total$1,428 $1,977 $929 $— $4,334 
 December 31, 2016
 
Recorded
Investment With
No Specific
Valuation
Allowance
 
Recorded
Investment With
Specific
Valuation
Allowance
 
Total
Recorded
Investment
 
Unpaid
Contractual
Principal
Balance
 
Related
Specific
Valuation
Allowance
 (In thousands)
Commercial business:         
Commercial and industrial$1,739
 $10,636
 $12,375
 $13,249
 $1,199
Owner-occupied commercial real estate1,150
 3,574
 4,724
 5,107
 511
Non-owner occupied commercial real estate4,905
 6,413
 11,318
 11,386
 797
Total commercial business7,794
 20,623
 28,417
 29,742
 2,507
One-to-four family residential—
 321
 321
 325
 97
Real estate construction and land development:         
One-to-four family residential2,243
 828
 3,071
 3,755
 6
Five or more family residential and commercial properties—
 1,079
 1,079
 1,079
 60
Total real estate construction and land development2,243
 1,907
 4,150
 4,834
 66
Consumer48
 262
 310
 325
 64
Total$10,085
 $23,113
 $33,198
 $35,226
 $2,734

The Company had governmental guarantees of $3.9 million and $3.5 million relatedThere have been no significant changes to the impaired loan balances at September 30, 2017collateral securing loans individually evaluated for credit losses and December 31, 2016, respectively.
The average recorded investmentfor which repayment was expected to be provided substantially through the operation or sale of impaired loans for the three andcollateral during the nine months ended September 30, 2017 and 2016 are set forth2023, except changes due to additions or removals of loans in the following table.
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (In thousands)
Commercial business:       
Commercial and industrial$11,171
 $9,625
 $11,190
 $9,750
Owner-occupied commercial real estate5,289
 4,553
 5,049
 4,560
Non-owner occupied commercial real estate11,037
 12,107
 11,198
 12,232
Total commercial business27,497
 26,285
 27,437
 26,542
One-to-four family residential307
 265
 312
 267
Real estate construction and land development:       
One-to-four family residential2,157
 3,177
 2,530
 3,253
Five or more family residential and commercial properties860
 1,619
 967
 1,746
Total real estate construction and land development3,017
 4,796
 3,497
 4,999
Consumer346
 885
 328
 907
Total$31,167
 $32,231
 $31,574
 $32,715
For the three and nine months ended September 30, 2017 and 2016, no interest income was recognized subsequent to a loan’s classification as nonaccrual. For the three and nine months ended September 30, 2017, the Bank recorded $366,000 and $1.0 million, respectively, of interest income related to performing TDR loans. For the

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three and nine months ended September 30, 2016, the Bank recorded $156,000 and $501,000, respectively, of interest income related to performing TDR loans.this classification.
(g) Modification of Loans
In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructured LoansRestructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis.
A TDR loan is a restructuring in which the Bank, for economic or legal reasons relatedModifications of loans to a borrower’sborrowers experiencing financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDRs are considered impaired and are separately measured for impairment under FASB ASC 310-10-35, whether on accrual ("performing") or nonaccrual ("nonperforming") status. The Company has more stringent definitions of concessions and impairment measures for PCI loans as these loans have known credit deterioration and are generally accreting income at a lower discounted rate as compared to the contractual note rate based on the guidance of FASB ASC 310-30.
The majority of the Bank’s TDR loans are a result of granting extensions of maturity on troubled credits which have already been adversely classified. The Bank grants such extensions to reassess the borrower’s financial status and to develop a plan for repayment. The second most prevalent concessions are certain modifications with extensions that alsodifficulty may include interest rate reductions. Certain TDRs were additionally re-amortized over a longer periodreductions, principal or interest forgiveness, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of time. These modifications would all be considered a concession for a borrower that could not obtain similar financing terms from another source other than from the Bank.collateral.
The financial effectsfollowing table presents loan modifications by type of each modification will vary based on the specific restructure. For the majority of the Bank’s TDR loans, the loans were interest-only with a balloon payment at maturity. If the interest rate is not adjusted and the modified terms are consistent with other similar credits being offered, the Bank may not experience any loss associated with the restructure. If, however, the restructure involves forbearance agreements or interest rate modifications, the Bank may not collect all the principal and interest based on the original contractual terms. The Bank estimates the necessary allowance for loan losses on TDRs using the same guidance as used for other impaired loans.
The recorded investment balance and related allowance for loan losses of performing and nonaccrual TDR loans as of September 30, 2017 and December 31, 2016 were as follows:
 September 30, 2017 December 31, 2016
 
Performing
TDRs
 
Nonaccrual
TDRs
 
Performing
TDRs
 Nonaccrual
TDRs
 (In thousands)
TDR loans$20,044
 $5,903
 $22,288
 $6,900
Allowance for loan losses on TDR loans2,136
 555
 1,965
 437

The unfunded commitment to borrowers related to TDRs was $160,000 and $249,000 at September 30, 2017 and December 31, 2016, respectively.

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Loansamortized cost that were modified as TDRsa result of experiencing both financial difficulty and modified during the period indicated:
Three Months Ended September 30, 2023
Term ExtensionTerm Extension & Int. Rate ReductionTotal 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$313 $239 $552 0.01 %
Nine Months Ended September 30, 2023
Term ExtensionTerm Extension & Int. Rate ReductionTotal 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 CRE2,716 239 2,955 0.17 
Total commercial business9,232 239 9,471 0.28 
Real estate construction and land development:
Commercial and multifamily3,452 — 3,452 1.11 %
Consumer28 17 45 0.03 %
Total$12,712 $256 $12,968 0.30 %
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The following tables present the financial effect of the loan modifications presented in the preceding table during the periods indicated:
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
Weighted Average % of Interest Rate ReductionsWeighted Average Years of Term ExtensionsWeighted Average % of Interest Rate ReductionsWeighted Average Years of Term Extensions
Commercial business:
Commercial and industrial— %1.82— %0.58
Owner-occupied CRE— %— %
Non-owner occupied CRE3.00 2.003.00 1.09
Total commercial business3.00 1.903.00 0.74
Real estate construction and land development:
Commercial and multifamily— — 0.42
Consumer— 1.00 2.62
Total3.00 %1.903.00 %0.66
There were no modified loans included in the tables above that were past due or on nonaccrual as of September 30, 2023.
There were no modified loans made during the three and nine months ended September 30, 20172023, that subsequently defaulted.
(h) Accrued interest receivable on loans receivable
Accrued interest receivable on loans receivable totaled $12.5 million and 2016 are set forth in the following tables:
 Three Months Ended September 30,
 2017 2016
 
Number of
Contracts
(1)
 Outstanding
Principal Balance 
(1)(2)		 
Number of
Contracts
(1)
 
Outstanding
Principal Balance 
(1)(2)
 (Dollars in thousands)
Commercial business:       
Commercial and industrial4
 $1,353
 8
 $2,324
Owner-occupied commercial real estate2
 1,299
 2
 576
Non-owner occupied commercial real estate1
 655
 1
 818
Total commercial business7
 3,307
 11
 3,718
Real estate construction and land development:       
One-to-four family residential—
 —
 5
 2,274
Five or more family residential and commercial properties—
 —
 1
 1,606
Total real estate construction and land development—
 —
 6
 3,880
Consumer4
 52
 2
 26
Total TDR loans11
 $3,359
 19
 $7,624

 Nine Months Ended September 30,
 2017 2016
 
Number of
Contracts
(1)
 Outstanding
Principal Balance 
(1)(2)		 
Number of
Contracts
(1)
 
Outstanding
Principal Balance 
(1)(2)
 (Dollars in thousands)
Commercial business:       
Commercial and industrial13
 $5,564
 15
 $2,915
Owner-occupied commercial real estate3
 1,351
 2
 576
Non-owner occupied commercial real estate2
 1,596
 1
 818
Total commercial business18
 8,511
 18
 4,309
Real estate construction and land development:       
One-to-four family residential2
 1,038
 5
 2,274
Five or more family residential and commercial properties—
 —
 1
 1,606
Total real estate construction and land development2
 1,038
 6
 3,880
Consumer5
 60
 6
 70
Total TDR loans25
 $9,609
 30
 $8,259

(1)Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the three and nine months ended September 30, 2017 and 2016.
(2)Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification).

Of the 11 loans modified during the three months ended September 30, 2017, seven loans with a total outstanding principal balance of $2.1$11.3 million had no prior modifications. Of the 25 loans modified during the nine months

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ended September 30, 2017, 15 loans with a total outstanding principal balance of $5.0 million had no prior modifications. Of the 19 loans modified during the three months ended September 30, 2016, eight loans with a total outstanding principal balance of $1.4 million had no prior modifications. Of the 30 loans modified during the nine months ended September 30, 2016, 15 loans with a total outstanding principal balance of $1.7 million had no prior modifications. The remaining loans included in the table above for the three and nine months ended September 30, 2017 and 2016 were previously reported as TDRs. The Bank typically grants shorter extension periods to continually monitor these TDRs despite the fact that the extended date might not be the date the Bank expects sufficient cash flow from these borrowers. The Company does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted. The potential losses related to these loans would have been considered in the period the loan was first reported as a TDR and are adjusted, as necessary, in the current period based on more recent information. The related specific valuation allowance at September 30, 2017 was $1.1 million for loans that were modified as TDRs during the nine months ended September 30, 2017.
There was one commercial and industrial loan totaling $234,000 at September 30, 2017 that was modified during the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2017 because the borrower was more than 90 days delinquent on their scheduled loan payments. There were no loans that were modified during the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2016.
(h) Purchased Credit Impaired Loans
The Company acquired loans and designated them as PCI loans, which are accounted for under FASB ASC 310-30, in the Washington Banking Merger on May 1, 2014 and in previously completed acquisitions, including the FDIC-assisted acquisitions of Cowlitz Bank ("Cowlitz") and Pierce Commercial Bank ("Pierce") on July 30, 2010 and November 8, 2010, respectively, and the acquisitions of Northwest Commercial Bank ("NCB") on January 9, 2013 and Valley Community Bancshares, Inc. ("Valley") on July 15, 2013.
The following table reflects the outstanding principal balance and recorded investment of the PCI loans at September 30, 20172023 and December 31, 2016:
 September 30, 2017 December 31, 2016
 Outstanding Principal Recorded Investment Outstanding Principal Recorded Investment
 (In thousands)
Commercial business:       
Commercial and industrial$9,220
 $5,001
 $13,067
 $9,317
Owner-occupied commercial real estate14,059
 12,492
 17,639
 15,973
Non-owner occupied commercial real estate15,026
 13,058
 25,037
 23,360
Total commercial business38,305
 30,551
 55,743
 48,650
One-to-four family residential4,426
 3,983
 5,120
 4,905
Real estate construction and land development:       
One-to-four family residential2,928
 1,749
 2,958
 2,123
Five or more family residential and commercial properties2,392
 2,284
 2,614
 2,488
Total real estate construction and land development5,320
 4,033
 5,572
 4,611
Consumer3,998
 5,129
 5,296
 6,282
Gross PCI loans$52,049
 $43,696
 $71,731
 $64,448

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Table of Contents


On2022, respectively, and is excluded from the acquisition dates, the amount by which the undiscounted expected cash flowscalculation of the PCIACL on loans exceeded the estimated fair value of the loanas interest accrued, but not received, is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the PCI loans.reversed timely.
The following table summarizes the accretable yield on the PCI loans for the three and nine months ended September 30, 2017 and 2016.
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  (In thousands)
Balance at the beginning of the period $12,296
 $15,359
 $13,860
 $17,592
Accretion (796) (1,178) (2,725) (3,900)
Disposal and other (1,287) (491) (2,430) (2,921)
Change in accretable yield 939
 1,214
 2,447
 4,133
Balance at the end of the period $11,152
 $14,904
 $11,152
 $14,904

(4)Allowance for Loan Losses
The allowance for loan losses is maintained at a level deemed appropriate by management to provide for probable incurred credit losses(i) Foreclosure proceedings in the loan portfolio. The following tables detail the activity in the allowance for loan losses disaggregated by segment and class for the three and nine months ended September 30, 2017:

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 Balance at Beginning of Period Charge-offs Recoveries Provision for Loan Losses Balance at End of Period
 (In thousands)
Three Months Ended September 30, 2017         
Commercial business:         
Commercial and industrial$10,651
 $(3) $4
 $(772) $9,880
Owner-occupied commercial real estate4,154
 (1,494) 4
 1,397
 4,061
Non-owner occupied commercial real estate7,709
 —
 —
 (415) 7,294
Total commercial business22,514
 (1,497) 8
 210
 21,235
One-to-four family residential1,073
 (15) —
 (21) 1,037
Real estate construction and land development:         
One-to-four family residential821
 (556) 191
 337
 793
Five or more family residential and commercial properties1,666
 —
 —
 (271) 1,395
Total real estate construction and land development2,487
 (556) 191
 66
 2,188
Consumer5,710
 (478) 112
 453
 5,797
Unallocated967
 —
 —
 176
 1,143
Total$32,751
 $(2,546) $311
 $884
 $31,400
          
Nine Months Ended September 30, 2017         
Commercial business:         
Commercial and industrial$10,968
 $(361) $679
 $(1,406) $9,880
Owner-occupied commercial real estate3,661
 (1,579) 155
 1,824
 4,061
Non-owner occupied commercial real estate7,753
 —
 —
 (459) 7,294
Total commercial business22,382
 (1,940) 834
 (41) 21,235
One-to-four family residential1,015
 (15) 1
 36
 1,037
Real estate construction and land development:         
One-to-four family residential797
 (556) 201
 351
 793
Five or more family residential and commercial properties1,359
 —
 —
 36
 1,395
Total real estate construction and land development2,156
 (556) 201
 387
 2,188
Consumer5,024
 (1,419) 329
 1,863
 5,797
Unallocated506
 —
 —
 637
 1,143
Total$31,083
 $(3,930) $1,365
 $2,882
 $31,400


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The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of September 30, 2017.
 Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment PCI Loans Total Allowance for Loan Losses
 (In thousands)
Commercial business:       
Commercial and industrial$1,254
 $7,589
 $1,037
 $9,880
Owner-occupied commercial real estate767
 2,434
 860
 4,061
Non-owner occupied commercial real estate895
 5,389
 1,010
 7,294
Total commercial business2,916
 15,412
 2,907
 21,235
One-to-four family residential96
 740
 201
 1,037
Real estate construction and land development:       
One-to-four family residential—
 568
 225
 793
Five or more family residential and commercial properties39
 1,259
 97
 1,395
Total real estate construction and land development39
 1,827
 322
 2,188
Consumer60
 4,991
 746
 5,797
Unallocated—
 1,143
 —
 1,143
Total$3,111
 $24,113
 $4,176
 $31,400
The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of September 30, 2017:
 Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment PCI Loans Total Gross Loans Receivable
 (In thousands)
Commercial business:       
Commercial and industrial$11,712
 $648,869
 $5,001
 $665,582
Owner-occupied commercial real estate5,758
 583,988
 12,492
 602,238
Non-owner occupied commercial real estate10,783
 906,347
 13,058
 930,188
Total commercial business28,253
 2,139,204
 30,551
 2,198,008
One-to-four family residential304
 77,135
 3,983
 81,422
Real estate construction and land development:       
One-to-four family residential1,347
 48,355
 1,749
 51,451
Five or more family residential and commercial properties658
 120,039
 2,284
 122,981
Total real estate construction and land development2,005
 168,394
 4,033
 174,432
Consumer434
 335,080
 5,129
 340,643
Total$30,996
 $2,719,813
 $43,696
 $2,794,505

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The following tables detail activity in the allowance for loan losses disaggregated by segment and class for the three and nine months ended September 30, 2016.
 Balance at Beginning of Period Charge-offs Recoveries Provision for Loan Losses Balance at End of Period
 (In thousands)
Three Months Ended September 30, 2016         
Commercial business:         
Commercial and industrial$9,970
 $(240) $993
 $182
 $10,905
Owner-occupied commercial real estate3,578
 (88) —
 222
 3,712
Non-owner occupied commercial real estate6,924
 —
 —
 303
 7,227
Total commercial business20,472
 (328) 993
 707
 21,844
One-to-four family residential950
 —
 —
 26
 976
Real estate construction and land development:         
One-to-four family residential754
 —
 —
 96
 850
Five or more family residential and commercial properties1,277
 —
 —
 5
 1,282
Total real estate construction and land development2,031
 —
 —
 101
 2,132
Consumer4,816
 (572) 197
 665
 5,106
Unallocated157
 —
 —
 (4) 153
Total$28,426
 $(900) $1,190
 $1,495
 $30,211
          
Nine Months Ended September 30, 2016         
Commercial business:         
Commercial and industrial$9,972
 $(2,810) $1,352
 $2,391
 $10,905
Owner-occupied commercial real estate4,370
 (538) —
 (120) 3,712
Non-owner occupied commercial real estate7,722
 (350) —
 (145) 7,227
Total commercial business22,064
 (3,698) 1,352
 2,126
 21,844
One-to-four family residential1,157
 —
 2
 (183) 976
Real estate construction and land development:         
One-to-four family residential1,058
 (100) 83
 (191) 850
Five or more family residential and commercial properties813
 (54) —
 523
 1,282
Total real estate construction and land development1,871
 (154) 83
 332
 2,132
Consumer4,309
 (1,370) 496
 1,671
 5,106
Unallocated345
 —
 —
 (192) 153
Total$29,746
 $(5,222) $1,933
 $3,754
 $30,211








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The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of December 31, 2016.
 Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment PCI Loans Total Allowance for Loan Losses
 (In thousands)
Commercial business:       
Commercial and industrial$1,199
 $8,048
 $1,721
 $10,968
Owner-occupied commercial real estate511
 1,834
 1,316
 3,661
Non-owner occupied commercial real estate797
 5,142
 1,814
 7,753
Total commercial business2,507
 15,024
 4,851
 22,382
One-to-four family residential97
 643
 275
 1,015
Real estate construction and land development:       
One-to-four family residential6
 538
 253
 797
Five or more family residential and commercial properties60
 1,168
 131
 1,359
Total real estate construction and land development66
 1,706
 384
 2,156
Consumer64
 3,912
 1,048
 5,024
Unallocated—
 506
 —
 506
Total$2,734
 $21,791
 $6,558
 $31,083
The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of December 31, 2016:
 Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment PCI Loans Total Gross Loans Receivable
 (In thousands)
Commercial business:       
Commercial and industrial$12,375
 $616,081
 $9,317
 $637,773
Owner-occupied commercial real estate4,724
 537,338
 15,973
 558,035
Non-owner occupied commercial real estate11,318
 846,202
 23,360
 880,880
Total commercial business28,417
 1,999,621
 48,650
 2,076,688
One-to-four family residential321
 72,165
 4,905
 77,391
Real estate construction and land development:       
One-to-four family residential3,071
 45,220
 2,123
 50,414
Five or more family residential and commercial properties1,079
 105,197
 2,488
 108,764
Total real estate construction and land development4,150
 150,417
 4,611
 159,178
Consumer310
 318,548
 6,282
 325,140
Total$33,198

$2,540,751
 $64,448
 $2,638,397


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(5)Other Real Estate Owned
Changes in other real estate owned during the three and nine months ended September 30, 2017 and 2016 were as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (In thousands)
Balance at the beginning of the period$786
 $1,560
 $754
 $2,019
Additions—
 25
 32
 677
Proceeds from dispositions(374) (1,716) (374) (2,486)
Gain on sales, net111
 131
 111
 173
Valuation adjustment—
 —
 —
 (383)
Balance at the end of the period$523
 $—
 $523
 $—

process
At September 30, 2017, the carrying amount of other real estate owned that was the result of foreclosure and obtaining physical possession of residential real estate properties was $523,000. At September 30, 2017, the recorded investment of2023, there were no consumer mortgage loans secured by residential real estate properties (included in the one-to-four family residential loan class in Note (3) Loans Receivable) for which formal foreclosure proceedings were in process 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 2022 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. 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.
At September 30, 2023, the Company upgraded the version of the model used to calculate the ACL for collectively evaluated loans. This new version includes changes to the macroeconomic variables used for each of the loan segments to either add or eliminate variables based upon regression testing and the relationship to expected results and the lookback period
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was $657,000.changed to look back to 2000 as compared to 1991 to improve data relevance. The most significant changes to macroeconomic variables were in the commercial and industrial segment and commercial real estate segments. The commercial and industrial segment had previously used unemployment as a macroeconomic variable which was removed and replaced with a market index, rate index and real estate price index. The commercial real estate segments had previously used gross domestic product as a macroeconomic variable which was removed and replaced with a housing price index. The new version also added a segment for home equity lines of credit. The overall impact to the ACL for collectively evaluated loans due to this version change prior to applying qualitative adjustments was not considered to be material.

The Company recognizes that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses. The Company, therefore, considers the need for qualitative adjustments to the ACL on a quarterly basis. 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 limitations identified through back-testing, and other limitations associated with factors such as 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, 2023, qualitative adjustments primarily relate to certain 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 fully captured the associated impact to the ACL. In addition, qualitative adjustments also relate 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.
During the nine months ended September 30, 2023, the ACL on loans increased $3.9 million to $46.9 million from $43.0 million at December 31, 2022 due primarily to a provision for credit losses on loans of $3.1 million driven by growth in loans receivable, net and secondarily due to net recoveries of $895,000 as a result of a $1.1 million recovery from the payoff of a nonaccrual loan.
The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:
Three Months Ended September 30, 2023
Beginning BalanceCharge-offsRecoveries(Reversal of) Provision for Credit LossesEnding Balance
(Dollars in thousands)
Commercial business:
Commercial and industrial$13,288 $(15)$1,253 $(2,781)$11,745 
Owner-occupied CRE8,503 — — 191 8,694 
Non-owner occupied CRE9,482 — — 1,184 10,666 
Total commercial business31,273 (15)1,253 (1,406)31,105 
Residential real estate2,865 — — 684 3,549 
Real estate construction and land development:
Residential1,671 — — (163)1,508 
Commercial and multifamily8,014 — — 437 8,451 
Total real estate construction and land development9,685 — — 274 9,959 
Consumer2,585 (123)59 (187)2,334 
Total$46,408 $(138)$1,312 $(635)$46,947 
Nine Months Ended September 30, 2023
Beginning BalanceCharge-offsRecoveriesProvision for (Reversal of) Credit LossesEnding Balance
(Dollars in thousands)
Commercial business:
Commercial and industrial$13,962 $(176)$1,342 $(3,383)$11,745 
Owner-occupied CRE7,480 — — 1,214 8,694 
Non-owner occupied CRE9,276 — — 1,390 10,666 
Total commercial business30,718 (176)1,342 (779)31,105 
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(6)Goodwill and Other Intangible Assets
Nine Months Ended September 30, 2023
Beginning BalanceCharge-offsRecoveriesProvision for (Reversal of) Credit LossesEnding Balance
(Dollars in thousands)
Residential real estate2,872 — — 677 3,549 
Real estate construction and land development:
Residential1,654 — — (146)1,508 
Commercial and multifamily5,409 — — 3,042 8,451 
Total real estate construction and land development7,063 — — 2,896 9,959 
Consumer2,333 (420)149 272 2,334 
Total$42,986 $(596)$1,491 $3,066 $46,947 
Three Months Ended September 30, 2022
Beginning BalanceCharge-offsRecoveries(Reversal of) Provision for Credit LossesEnding Balance
(Dollars in thousands)
Commercial business:
Commercial and industrial$14,033 $— $455 $180 $14,668 
Owner-occupied CRE8,162 — — (443)7,719 
Non-owner occupied CRE9,512 — — 41 9,553 
Total commercial business31,707 — 455 (222)31,940 
Residential real estate2,137 — — 408 2,545 
Real estate construction and land development:
Residential1,081 — 5 208 1,294 
Commercial and multifamily2,203 — 102 1,505 3,810 
Total real estate construction and land development3,284 — 107 1,713 5,104 
Consumer2,568 (138)50 20 2,500 
Total$39,696 $(138)$612 $1,919 $42,089 
Nine Months Ended September 30, 2022
Beginning BalanceCharge-offsRecoveries(Reversal of) Provision for Credit LossesEnding Balance
(Dollars in thousands)
Commercial business:
Commercial and industrial$17,777 $(280)$876 $(3,705)$14,668 
Owner-occupied CRE6,411 (36)— 1,344 7,719 
Non-owner occupied CRE8,861 — — 692 9,553 
Total commercial business33,049 (316)876 (1,669)31,940 
Residential real estate1,409 (30)3 1,163 2,545 
Real estate construction and land development:
Residential1,304 — 19 (29)1,294 
Commercial and multifamily3,972 — 155 (317)3,810 
Total real estate construction and land development5,276 — 174 (346)5,104 
Consumer2,627 (396)669 (400)2,500 
Total$42,361 $(742)$1,722 $(1,252)$42,089 

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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,
2023202220232022
(Dollars in thousands)
Balance, beginning of period$1,777 $997 $1,744 $2,607 
(Reversal of) provision for credit losses on unfunded commitments(243)26 (210)(1,584)
Balance, end of period$1,534 $1,023 $1,534 $1,023 

(5)Goodwill and Other Intangible Assets
(a) Goodwill
The Company’s goodwill represents the excess of the purchase price over the fair value of net assets acquired in the Washington Banking Merger on May 1, 2014, and the acquisitions of Valley on July 15, 2013, Western Washington Bancorp in 2006 and North Pacific Bank in 1998. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit).
There were no additions to goodwill during the three and nine months ended September 30, 20172023 and 2016.2022. 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 amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2022 and concluded that there was no impairment.
Due to a sustained decline in stock price during the three months ended June 30, 2023, the Company determined a triggering event occurred and consequently performed a quantitative assessment of goodwill as of May 31, 2023. We estimated the fair value of the reporting unit by weighting results from the market approach and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill were employed and included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, we determined that the fair value of the reporting unit more likely than not exceeded the carrying value.
At September 30, 2017,2023, the Company’s step-one analysisCompany determined that no material adverse changes had occurred since the quantitative assessment was performed as of May 31, 2023 and concluded that the reporting unit’s fair value was greater than its carrying value and thereforethere continues to be no goodwill impairment charges were required, or recorded, for the three and nine months ended September 30, 2017. Similarly, no goodwill impairment charges were required, or recorded, for the three and nine months ended September 30, 2016. Even though there was no goodwill impairment at September 30, 2017, adverse events may impact the recoverability of goodwill and could result in a future impairment charge which could have a material impact on the Company’s operating results.goodwill.
(b) Other Intangible Assets
TheOther intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets represent the core deposit intangible ("CDI") acquired in business combinations. The useful life of the CDI related to the Washington Banking Merger, the acquisitions of Valley, NCB and Cowlitz were estimated to be ten, ten, five and nine years, respectively.
The following table presents the change in the other intangible assets for the periods indicated:
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  (In thousands)
Balance at the beginning of the period $6,727
 $8,091
 $7,374
 $8,789
Less: Amortization 319
 359
 966
 1,057
Balance at the end of the period $6,408
 $7,732
 $6,408
 $7,732

(7)Other Borrowings
(a) Federal Home Loan Bank Advances
The Federal Home Loan Bank ("FHLB") of Des Moines functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program

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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, 2017, the Bank maintained a credit facility with the FHLB of Des Moines for $662.4 million and had short-term FHLB advances outstanding of $117.4 million with maturity dates within 30 days. At December 31, 2016 there were FHLB advances outstanding of $79.6 million.
The following table sets forth the details of FHLB advances during the three and nine months ended September 30, 20172023 and 2016:2022.

(6)Derivative Financial Instruments
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in thousands)
Average balance during the period$111,293
 $5,618
 $106,553
 $11,608
Maximum month-end balance during the period$126,200
 $17,700
 $137,450
 $57,300
Weighted average rate during the period1.53% 0.57% 1.09% 0.54%
Advances from the FHLB are collateralized by a blanket pledge on FHLB stock owned by the Bank, deposits at the FHLB, certain one-to-four single family residential loans or other assets, principally investment securities which are obligations of or guaranteed by the United States or other assets. In accordance with the pledge agreement, the Company must maintain unencumbered collateral in an amount equal to varying percentages ranging from 100% to 160% of outstanding advances depending on the type of collateral.

(b) Federal Funds Purchased
The Bank maintains advance lines with Wells Fargo Bank, US Bank, The Independent Bankers Bank and Pacific Coast Bankers’ Bank to purchase federal funds of up to $90.0 million as of September 30, 2017. The lines generally mature annually or are reviewed annually. As of September 30, 2017 and December 31, 2016, there were no federal funds purchased.
(c) Credit facilities
The Bank maintains a credit facility with the Federal Reserve Bank of San Francisco for $50.6 million as of September 30, 2017, of which there were no borrowings outstanding as of September 30, 2017 or December 31, 2016. Any advances on the credit facility would have to be first secured by the Bank's investment securities or loans receivable.

(8)Junior Subordinated Debentures
As part of the Washington Banking Merger, the Company assumed trust preferred securities and junior subordinated debentures with a total fair value of $18.9 million at the May 1, 2014 merger date.
Washington Banking Master Trust, a Delaware statutory business trust, was a wholly-owned subsidiary of Washington Banking created for the exclusive purposes of issuing and selling capital securities and utilizing sale proceeds to acquire junior subordinated debt issued by Washington Banking. During 2007, the Trust issued $25.0 million of trust preferred securities with a 30-year maturity, callable after the fifth year by Washington Banking. The trust preferred securities have a quarterly adjustable rate based upon the three-month London Interbank Offered Rate (“LIBOR”) plus 1.56%. On the Washington Banking Merger date of May 1, 2014, the Company acquired the Trust, which retained the Washington Banking Master Trust name, and assumed the performance and observance of the covenants under the indenture related to the trust preferred securities.
The adjustable rate of the trust preferred securities at September 30, 2017 was 2.89%. The weighted average rate of the junior subordinated debentures was 5.20% and 5.05% for the three and nine months ended September 30, 2017, respectively, and 4.49% and 4.43% for the three and nine months ended September 30, 2016, respectively. The weighted average rate includes the accretion of the discount established at the merger date which is amortized over the life of the trust preferred securities.
The junior subordinated debentures are the sole assets of the Trust and payments under the junior subordinated debentures are the sole revenues of the Trust. At September 30, 2017 and December 31, 2016, the balance of the junior subordinated debentures, net of unaccreted discount, was $19.9 million and $19.7 million, respectively. All of the common securities of the Trust are owned by the Company. Heritage has fully and unconditionally guaranteed the capital securities along with all obligations of the Trust under the trust agreements.

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(9)Repurchase Agreements
The Company utilizes repurchase agreements with one-day maturities as a supplement to funding sources. Repurchase agreements are secured by pledged investment securities available for sale. Under the repurchase agreements, the Company is required to maintain an aggregate market value of securities pledged greater than the balance of the repurchase agreements. The Company is required to pledge additional securities to cover any declines below the balance of the repurchase agreements. For additional information on the total value of investment securities pledged for repurchase agreements see Note (2) Investment Securities.
The following table presents the Company's repurchase agreement obligations by class of collateral pledged:
 September 30, 2017 December 31, 2016
 (In thousands)
U.S. Treasury and U.S. Government-sponsored agencies$—
 $2,944
Mortgage-backed securities and collateralized mortgage obligations(1):
   
Residential12,336
 5,191
Commercial16,332
 13,969
Total repurchase agreements$28,668
 $22,104
(1) Issued and guaranteed by U.S. Government-sponsored agencies.

(10)Derivative Financial Instruments
The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. The purpose of these derivative contracts is primarily to providefacilitate the needs of its commercial business loan customers the ability to convert their loans from variable to fixedwhereby it enters into an interest rates. Upon the origination of a derivative contractrate swap with a customer while at the Company simultaneously enterssame time entering into an offsetting derivative contractinterest rate swap with another financial institution. The transaction allows the Company’s customer to effectively convert a third party in ordervariable rate loan to offset its exposure on the variable anda fixed rate components ofloan, or a fixed rate loan to a variable rate loan, and the customer agreement. 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, which is recorded inthird-party. These interest rate swap fees onswaps are not designated as hedging instruments.
The Company is exposed to interest rate risk as part of the Condensed Consolidated Statements of Income. Becausetransaction. However, the Company acts only as an intermediary for its customer subsequenttherefore 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.
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The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2017 and December 31, 2016 are presented in the following table.dates indicated:
September 30, 2023December 31, 2022
Notional AmountsEstimated Fair ValueNotional AmountsEstimated Fair Value
(Dollars in thousands)
Non-hedging interest rate derivatives
Interest rate swap asset (1)
$289,978 33,840 $288,785 $30,107 
Interest rate swap liability (1)
289,978 (33,840)288,785 (30,107)
  September 30, 2017 December 31, 2016
  Notional Amounts Estimated Fair Value Notional Amounts Estimated Fair Value
  (In thousands)
Non-hedging interest rate derivatives        
Interest rate swaps with customer (1)
 $134,295
 $74
 $102,709
 $(1,099)
Interest rate swap with third party (1)
 134,295
 (74) 102,709
 1,099
(1) The estimated fair value of the derivative included in prepaid and other assets on the Condensed Consolidated Statements of Financial Conditionderivatives with customers was $3.3$(33.7) million and $2.8$(30.1) million as of September 30, 20172023 and December 31, 2016,2022, respectively. The estimated fair value of the derivative included in accrued expenses and other liabilities on the Condensed Consolidated Statements of Financial Conditionderivatives with third-parties was $3.3$33.7 million and $2.8$30.1 million as of September 30, 20172023 and December 31, 2016,2022, 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.


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(11)Stockholders’ Equity
(a) Earnings Per Common Share
The following table illustrates the reconciliationcalculation of weighted average shares used for earnings per common share computations for the three and nine months ended September 30, 2017 and 2016:periods indicated:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(Dollars in thousands, except shares)
Net income allocated to common shareholders$18,219 $20,990 $55,522 $59,331 
Basic:
Weighted average common shares outstanding35,022,676 35,103,984 35,062,760 35,103,048 
Diluted:
Basic weighted average common shares outstanding35,022,676 35,103,984 35,062,760 35,103,048 
Effect of potentially dilutive common shares (1)
92,489 364,906 242,696 335,624 
Total diluted weighted average common shares outstanding35,115,165 35,468,890 35,305,456 35,438,672 
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)
312,539 3,026 163,860 13,662 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in thousands)
Net income:       
Net income$10,624
 $11,039
 $31,768
 $29,025
Less: Dividends and undistributed earnings allocated to participating securities(64) (102) (228) (280)
Net income allocated to common shareholders$10,560
 $10,937
 $31,540
 $28,745
Basic:       
Weighted average common shares outstanding29,929,721
 29,962,270
 29,940,276
 29,968,034
Less: Restricted stock awards(146,425) (277,495) (192,186) (292,832)
Total basic weighted average common shares outstanding29,783,296
 29,684,775
 29,748,090
 29,675,202
Diluted:       
Basic weighted average common shares outstanding29,783,296
 29,684,775
 29,748,090
 29,675,202
Effect of potentially dilutive common shares (1)
107,414
 11,031
 86,004
 12,543
Total diluted weighted average common shares outstanding29,890,710
 29,695,806
 29,834,094
 29,687,745
(1) Represents the effect of the vesting of restricted stock units.

(1)Represents the effect of the assumed exercise of stock options and vesting of restricted stock units.
Potential dilutive shares are excluded from(2) Anti-dilution occurs when the computation of earningsunrecognized compensation cost per share if their effect is anti-dilutive. Forof a restricted stock unit exceeds the three and nine months ended September 30, 2017 and the three months ended September 30, 2016, there were no anti-dilutive shares outstanding related to options to acquire common stock. For the nine months ended September 30, 2016, anti-dilutive shares outstanding related to options to acquire common stock totaled 580 as the assumed proceeds from exercisemarket price tax benefits and future compensation were in excess of the market value.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 forduring the nine months ended September 30, 2017 2023and the calendar year 2016.
2022:
DeclaredCash Dividend per ShareRecord DatePaid Date
Declared
January 26, 2022$0.21February 9, 2022February 23, 2022
April 20, 2022$0.21May 4, 2022May 18, 2022
July 20, 2022$0.21August 3, 2022August 17, 2022
October 19, 2022$0.21November 2, 2022November 16, 2022
January 25, 2023$0.22February 8, 2023February 22, 2023
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DeclaredCash Dividend per ShareRecord DatePaid Date
January 27, 2016April 19, 2023$0.110.22February 10, 2016May 4, 2023February 24, 2016May 18, 2023
April 20, 2016July 19, 2023$0.120.22May 5, 2016August 2, 2023May 19, 2016August 16, 2023
July 20, 2016$0.12August 4, 2016August 18, 2016
October 26, 2016$0.12November 8, 2016November 22, 2016
October 26, 2016$0.25November 8, 2016November 22, 2016*
January 25, 2017$0.12February 9, 2017February 23, 2017
April 25, 2017$0.13May 10, 2017May 24, 2017
July 25, 2017$0.13August 10, 2017August 24, 2017
* Denotes a special dividend.

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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 Board of Governors of the Federal Reserve System ("Federal Reserve Board") 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 Board and the FDIC.
(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On October 23, 2014,March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or approximately 1,513,0001,799,054 shares, under the eleventhtwelfth stock repurchase plan.plan with 307,790 shares remaining available for repurchase as of September 30, 2023. The number, timing and price of shares repurchased under the twelfth stock repurchase plan will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.
The following table provides total repurchased shares and average share prices under the repurchase plan for the periods indicated:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Plan Total(1)
Twelfth Stock Repurchase Plan
Repurchased shares148,119 — 330,424 100,090 1,491,264 
Stock repurchase average share price$17.08 $— $18.82 $25.07 $22.80 
 Three Months Ended September 30, Nine Months Ended September 30,  
 2017 2016 2017 2016 
Plan Total (1)
Eleventh Plan         
Repurchased shares—
 38,000
 —
 138,000
 579,996
Stock repurchase average share price$—
 $17.46
 $—
 $17.16
 $16.76
(1) Represents total shares repurchased and average price per share paid during the duration of the repurchase plan.
In addition to the stock repurchases disclosed in the table above,under a stock repurchase plan, the Company repurchasedrepurchases shares to pay withholding taxes on the vesting of restricted stock. During the three and nine months ended September 30, 2017, the Companystock units. The following table provides total shares repurchased 344 and 27,711 shares of common stock at an average price per share of $25.80 and $24.61 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods. During the three and nine months ended September 30, 2016, the Company repurchased 5,276 and 29,206 shares of common stock at an average price per share of $18.64 and $17.77 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods.periods indicated:

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Repurchased shares to pay withholding taxes335 100 31,567 26,280 
Stock repurchase to pay withholding taxes average share price$17.26 $26.94 $22.03 $25.40 
(12)Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss) (“AOCI”) by component, during the three and nine months ended September 30, 2017 and 2016 are as follows:
  
Three Months Ended September 30, 2017 (1)
 
Nine Months Ended September 30, 2017 (1)
  (In thousands)
Balance of AOCI at the beginning of period $1,557
 $(2,606)
Other comprehensive income before reclassification 289
 4,528
Amounts reclassified from AOCI for gain on sale of investment securities included in net income (28) (104)
Net current period other comprehensive income 261
 4,424
Balance of AOCI at the end of period $1,818
 $1,818
(8)Fair Value Measurements
(1) All amounts are due to the changes in fair value of available for sale securities and are net of tax.


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Three Months Ended
September 30, 2016 (1)
 
Nine Months Ended September 30, 2016 (1)
  (In thousands)
Balance of AOCI at the beginning of period $12,343
 $2,559
Other comprehensive income before reclassification (1,055) 9,223
Amounts reclassified from AOCI for gain on sale of investment securities available for sale included in net income (224) (718)
Net current period other comprehensive income (1,279) 8,505
Balance of AOCI at the end of period $11,064
 $11,064
(1) All amounts are due to the changes in fair value of available for sale securities and are net of tax.

(13)Stock-Based Compensation
Stock options generally vest ratably over three years and expire five years after they become exercisable or vest ratably over four years and expire ten years from date of grant. Restricted stock awards issued generally have a four-year cliff vesting or four-year ratable vesting schedule. Restricted stock units vest ratably over three years. Performance restricted stock units issued generally have a three-year cliff vesting schedule. Additionally, performance restricted stock unit grants may be subject to performance-based vesting as well as other approved vesting conditions. The Company issues new shares of common stock to satisfy share option exercises, restricted stock awards and restricted stock units.
On July 24, 2014, the Company's shareholders approved the Heritage Financial Corporation 2014 Omnibus Equity Plan (the "Plan") that provides for the issuance of 1,500,000 shares of the Company's common stock in the form of stock options, stock appreciation rights, stock awards (which includes restricted stock units, restricted stock, performance units, performance shares or bonus shares) and cash incentive awards.
Under the Company's stock-based compensation plans, 1,073,146 shares remain available for future issuance as of September 30, 2017.
(a) Stock Option Awards
For the three and nine months ended September 30, 2017 and 2016, the Company did not recognize any compensation expense or related tax benefit related to stock options as all of the compensation expense related to the outstanding stock options had been previously recognized. The intrinsic value and cash proceeds from options exercised during the nine months ended September 30, 2017 was $156,000 and $159,000, respectively. The intrinsic value and cash proceeds from options exercised during the nine months ended September 30, 2016 was $99,000 and $401,000, respectively.
The following table summarizes the stock option activity for the nine months ended September 30, 2017 and 2016:
 Shares Weighted-Average Exercise Price 
Weighted-Average
Remaining
Contractual
Term (In years)
 
Aggregate
Intrinsic
Value (In
thousands)
Outstanding at December 31, 201579,408
 $14.19
    
Exercised(27,867) 14.37
    
Forfeited or expired(4,200) 16.80
    
Outstanding at September 30, 201647,341
 $13.85
 2.80 $194
        
Outstanding at December 31, 201637,495
 $13.77
    
Exercised(12,304) 12.92
    
Forfeited or expired(1,308) 13.53
    
Outstanding, vested and expected to vest and exercisable at September 30, 201723,883
 $14.23
 2.45 $365


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(b) Restricted Stock Awards
For the three and nine months ended September 30, 2017, the Company recognized compensation expense related to restricted stock awards of $292,000 and $1.1 million, respectively, and a related tax benefit of $102,000 and $384,000, respectively. For the three and nine months ended September 30, 2016, the Company recognized compensation expense related to restricted stock awards of $494,000 and $1.4 million, respectively, and a related tax benefit of $173,000 and $479,000, respectively. As of September 30, 2017, the total unrecognized compensation expense related to non-vested restricted stock awards was $1.8 million and the related weighted average period over which the compensation expense is expected to be recognized is approximately 1.78 years. The vesting date fair value of the restricted stock awards that vested during the nine months ended September 30, 2017 and 2016 was $2.7 million and $2.0 million, respectively.
The following table summarizes the restricted stock award activity for the nine months ended September 30, 2017 and 2016:
 Shares Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2015264,521
 $15.92
Granted119,939
 17.53
Vested(111,357) 15.62
Forfeited(9,216) 16.57
Nonvested at September 30, 2016263,887
 $16.76
    
Nonvested at December 31, 2016261,296
 $16.80
Granted—
 —
Vested(107,202) 16.49
Forfeited(10,418) 16.80
Nonvested at September 30, 2017143,676
 $17.02

(c) Restricted Stock Units
For the three and nine months ended September 30, 2017, the Company recognized compensation expense related to restricted stock units of $236,000 and $472,000, respectively, and a related tax benefit of $83,000 and $165,000, respectively. As of September 30, 2017, the total unrecognized compensation expense related to non-vested restricted stock units was $1.8 million and the related weighted average period over which the compensation expense is expected to be recognized is approximately 2.26 years.
The following table summarizes the restricted stock unit activity for the nine months ended September 30, 2017:
 Shares Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2016—
 $—
Granted92,019
 25.29
Vested—
 —
Forfeited(1,812) 25.35
Nonvested at September 30, 201790,207
 $25.29
The following table summarizes the assumptions used in the Monte Carlo model for restricted stock unit grants with market-based conditions during the nine months ended September 30, 2017:
Shares Expected Term in Years Weighted-Average Risk Free Interest Rate Expected Volatility Expected Dividend Yield Weighted-Average Fair Value
6,089 2.85 1.40% 21.8% —% $24.39


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(14)Fair Value Measurements
Fair value is the exchange price that would be received forto 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 onat 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.
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 Available for Sale:
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
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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). SecurityInvestment security valuations are obtained from third partythird-party pricing servicesservices.
Collateral-Dependent Loans:
Collateral-dependent loans are identified for comparable assets or liabilities.
Impaired Loans:
At the time a loan is considered impaired, its impairment is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price, or the fair market valuecalculation of the collateral if the loan is collateral-dependent. Impaired loans for which impairment is measured using the discounted cash flow approach are not considered to be measured at fair value because the loan’s effective interest rate is generally not a fair value input, and for the purposes of fair value disclosures, the fair value of these loans are measured commensurate with non-impairedACL on loans. If the Company utilizes the fair market value of the collateral method, theThe fair value used to measure impairmentcredit loss for this type of loan is commonly based on recent real estate appraisals.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 Bank also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments are usuallymay be significant and typically 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 clientcustomer and client’scustomer’s business (Level 3). ImpairedIndividually evaluated loans are evaluatedanalyzed for credit loss on a quarterly basis for additional impairment and the ACL on loans is adjusted accordingly.
Other Real Estate Owned:
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonlyas required based on recent real estate appraisals. 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. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value.results.
Appraisals for bothon collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose

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qualifications and licenses have been reviewed and verified by the Company.Bank. Once received, the CompanyBank'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. On a quarterly basis, the Company compares the actual selling price of collateral that has been liquidated to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.
Derivative Financial Instruments:
The CompanyBank 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 Bank 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, 2023 and December 31, 2022, the Bank 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 Bank 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 as of September 30, 2017 and December 31, 2016.at the dates indicated:
September 30, 2023
TotalLevel 1Level 2Level 3
(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities$20,424 $— $20,424 $— 
Municipal securities106,805 5,137 101,668 — 
Residential CMO and MBS401,181 — 401,181 — 
Commercial CMO and MBS597,213 — 597,213 — 
Corporate obligations3,780 — 3,780 — 
Other asset-backed securities18,144 — 18,144 — 
Total investment securities available for sale1,147,547 5,137 1,142,410 — 
Equity security256 256 — — 
Derivative assets - interest rate swaps33,840 — 33,840 — 
Liabilities
Derivative liabilities - interest rate swaps$33,840 $— $33,840 $— 
December 31, 2022
TotalLevel 1Level 2Level 3
(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities$63,859 $19,779 $44,080 $— 
30
 September 30, 2017
 Total Level 1 Level 2 Level 3
 (In thousands)
Assets       
Investment securities available for sale:       
U.S. Treasury and U.S. Government-sponsored agencies$9,403
 $—
 $9,403
 $—
Municipal securities252,806
 —
 252,806
 —
Mortgage-backed securities and collateralized mortgage obligations:       
Residential274,361
 —
 274,361
 —
Commercial213,283
 —
 213,283
 —
Collateralized loan obligations6,022
 —
 6,022
 —
Corporate obligations15,830
 —
 15,830
 —
Other securities28,355
 150
 28,205
 —
Total investment securities available for sale800,060
 150
 799,910
 —
Derivative assets - interest rate swaps3,308
 —
 3,308
 —
Liabilities       
Derivative liabilities - interest rate swaps$3,308
 $—
 $3,308
 $—
 December 31, 2016
 Total Level 1 Level 2 Level 3
 (In thousands)
Assets       
Investment securities available for sale:       
U.S. Treasury and U.S. Government-sponsored agencies$1,569
 $—
 $1,569
 $—
Municipal securities237,256
 —
 237,256
 —
Mortgage-backed securities and collateralized mortgage obligations:       
Residential309,176
 —
 309,176
 —
Commercial208,318
 —
 208,318
 —
Collateralized loan obligations10,478
 —
 10,478
 —
Corporate obligations16,706
 —
 16,706
 —
Other securities11,142
 123
 11,019
 —
Total investment securities available for sale794,645
 123
 794,522
 —
Derivative assets - interest rate swaps2,804
 —
 2,804
 —
Liabilities       
Derivative liabilities - interest rate swaps$2,804
 $—
 $2,804
 $—

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December 31, 2022
TotalLevel 1Level 2Level 3
(Dollars in thousands)
Municipal securities153,026 5,399 147,627 — 
Residential CMO and MBS424,386 — 424,386 — 
Commercial CMO and MBS664,421 — 664,421 — 
Corporate obligations3,834 — 3,834 — 
Other asset-backed securities21,917 — 21,917 — 
Total investment securities available for sale1,331,443 25,178 1,306,265 — 
Equity security185 185 — — 
Derivative assets - interest rate swaps30,107 — 30,107 — 
Liabilities
Derivative liabilities - interest rate swaps$30,107 $— $30,107 $— 
There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2017 and 2016.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 below represent assets measured at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016 and the net losses (gains) recorded in earnings during three and nine months ended September 30, 2017 and 2016.dates indicated:
Fair Value at September 30, 2023
Basis(1)
TotalLevel 1Level 2Level 3
(Dollars in thousands)
Collateral-dependent loans:
Commercial business:
Owner-occupied CRE613 178 — — 178 
Total assets measured at fair value on a nonrecurring basis$613 $178 $— $— $178 
 
Basis(1)
 Fair Value at September 30, 2017    
 Total Level 1 Level 2 Level 3 
Net Losses
Recorded in
Earnings 
During
the Three Months Ended September 30, 2017
 
Net Losses
(Gains)
Recorded in
Earnings 
During
the Nine Months Ended
September 30, 2017
 (In thousands)
Impaired loans:             
Commercial business:             
Commercial and industrial$172
 $163
 $—
 $—
 $163
 $—
 $7
Owner-occupied commercial real estate182
 179
 —
 —
 179
 —
 8
Total commercial business354
 342
 —
 —
 342
 —
 15
Total assets measured at fair value on a nonrecurring basis$354
 $342
 $—
 $—
 $342
 $—
 $15
(1)
Basis represents the unpaid principal balance of impaired loans.

(1) Basis represents the outstanding principal balance of collateral-dependent loans.
Fair Value at December 31, 2022
Basis(1)
TotalLevel 1Level 2Level 3
(Dollars in thousands)
Collateral-dependent loans:
Commercial business:
Owner-occupied CRE$613 $182 $— $— $182 
Total assets measured at fair value on a nonrecurring basis$613 $182 $— $— $182 
 
Basis(1)
 Fair Value at December 31, 2016    
 Total Level 1 Level 2 Level 3 
Net Losses
(Gains)
Recorded in
Earnings 
During
the Three Months Ended September 30, 2016
 
Net Losses
(Gains)
Recorded in
Earnings 
During
the Nine Months Ended September 30, 2016
 (In thousands)
Impaired loans:             
Commercial business:             
Commercial and industrial$205
 $200
 $—
 $—
 $200
 $24
 $25
Owner-occupied commercial real estate780
 603
 —
 —
 603
 23
 (2)
 Total commercial business985
 803
 —
 —
 803
 47
 23
Real estate construction and land development:             
One-to-four family residential828
 822
 —
 —
 822
 (13) (26)
Total real estate construction and land development828
 822
 —
 —
 822
 (13) (26)
Consumer16
 9
 —
 —
 9
 —
 —
Total assets measured at fair value on a nonrecurring basis$1,829
 $1,634
 $—
 $—
 $1,634
 $34
 $(3)
(1)
Basis represents the unpaid principal balance of impaired loans.

(1) Basis represents the outstanding principal balance of collateral-dependent loans.

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The following table presentstables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2017 and December 31, 2016.the dates indicated:
September 30, 2023
Fair
Value		Valuation
Technique(s)		Unobservable Input(s)Range of Inputs
Weighted
Average (1)
(Dollars in thousands)
Collateral-dependent loans$178 Market approachAdjustments to reflect current conditions and selling costs16.7% - 16.7%16.7%
(1) Weighted by net discount to net appraisal fair value
December 31, 2022
Fair
Value		Valuation
Technique(s)		Unobservable Input(s)Range of Inputs
Weighted
Average (1)
(Dollars in thousands)
Collateral-dependent loans$182 Market approachAdjustments to reflect current conditions and selling costs14.6% - 14.6%14.6%
(1) Weighted by net discount to net appraisal fair value
31
 September 30, 2017
 
Fair
Value
 
Valuation
Technique(s)
 Unobservable Input(s) 
Range of Inputs; Weighted
Average
 (Dollars in thousands)
Impaired loans$342
 Market approach Adjustment for differences between the comparable sales (23.8%) - 23.0%; (2.8%)
Table of Contents
 December 31, 2016
 
Fair
Value
 
Valuation
Technique(s)
 Unobservable Input(s) 
Range of Inputs; Weighted
Average
 (Dollars in thousands)
Impaired loans$1,634
 Market approach Adjustment for differences between the comparable sales (23.8%) - 63.9%; 20.4%

(b) Fair Value of Financial Instruments
Because broadlyBroadly traded markets do not exist for most of the Company’s financial instruments,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 dodoes not represent, and should not be construed to represent, the underlying value of the Company.

43

The following tables below present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated.indicated:
September 30, 2023
Carrying
Value		Fair
Value		Fair Value Measurements Using:
Level 1Level 2Level 3
(Dollars in thousands)
Financial Assets:
Cash and cash equivalents$220,503 $220,503 $220,503 $— $— 
Investment securities available for sale1,147,547 1,147,547 5,137 1,142,410 — 
Investment securities held to maturity746,845 636,257 — 636,257 — 
Loans held for sale263 268 — 268 — 
Loans receivable, net4,219,911 4,072,296 — — 4,072,296 
Accrued interest receivable18,794 18,794 271 6,001 12,522 
Derivative assets - interest rate swaps33,840 33,840 — 33,840 — 
Equity security256 256 256 — — 
Financial Liabilities:
Non-maturity deposits$5,006,581 $5,006,581 $5,006,581 $— $— 
Certificates of deposit628,606 637,048 — 637,048 — 
Borrowings450,000 447,952 — 447,952 — 
Securities sold under agreement to repurchase23,158 23,158 23,158 — — 
Junior subordinated debentures21,692 19,750 — — 19,750 
Accrued interest payable8,922 8,922 65 8,782 75 
Derivative liabilities - interest rate swaps33,840 33,840 — 33,840 — 
December 31, 2022
Carrying
Value		Fair
Value		Fair Value Measurements Using:
Level 1Level 2Level 3
(Dollars in thousands)
Financial Assets:
Cash and cash equivalents$103,590 $103,590 $103,590 $— $— 
Investment securities available for sale1,331,443 1,331,443 25,178 1,306,265 — 
Investment securities held to maturity766,396 673,434 — 673,434 — 
Loans receivable, net4,007,872 3,841,821 — — 3,841,821 
Accrued interest receivable18,547 18,547 349 6,892 11,306 
Derivative assets - interest rate swaps30,107 30,107 — 30,107 — 
Equity security185 185 185 — — 
Financial Liabilities:
Non-maturity deposits$5,617,267 $5,617,267 $5,617,267 $— $— 
Certificates of deposit307,573 308,325 — 308,325 — 
Securities sold under agreement to repurchase46,597 46,597 46,597 — — 
Junior subordinated debentures21,473 20,000 — — 20,000 
32
 September 30, 2017
 Carrying Value
Fair Value
Fair Value Measurements Using:
 
Level 1
Level 2
Level 3
 (In thousands)
Financial Assets:         
Cash and cash equivalents$111,258
 $111,258
 $111,258
 $—
 $—
Investment securities available for sale800,060
 800,060
 150
 799,910
 —
Federal Home Loan Bank stock9,343
 N/A
 N/A
 N/A
 N/A
Loans held for sale5,368
 5,553
 —
 5,553
 —
Total loans receivable, net2,766,113
 2,772,338
 —
 —
 2,772,338
Accrued interest receivable12,295
 12,295
 3
 3,770
 8,522
Derivative assets - interest rate swaps3,308
 3,308
 —

3,308
 —
Financial Liabilities:         
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts2,925,637
 2,925,637
 2,925,637
 —
 —
Certificate of deposit accounts395,181
 394,164
 —
 394,164
 —
Federal Home Loan Bank advances117,400
 117,400
 —
 117,400
 —
Securities sold under agreement to repurchase28,668
 28,668
 28,668
 —
 —
Junior subordinated debentures19,936
 15,250
 —
 —
 15,250
Accrued interest payable148
 148
 42
 73
 33
Derivative liabilities - interest rate swaps3,308
 3,308
 —
 3,308
 —

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December 31, 2022
Carrying
Value		Fair
Value		Fair Value Measurements Using:
Level 1Level 2Level 3
(Dollars in thousands)
Accrued interest payable143 143 57 13 73 
Derivative liabilities - interest rate swaps30,107 30,107 — 30,107 — 

 December 31, 2016
 Carrying Value Fair Value Fair Value Measurements Using:
  Level 1 Level 2 Level 3
 (In thousands)
Financial Assets:         
Cash and cash equivalents$103,745
 $103,745
 $103,745
 $—
 $—
Investment securities available for sale794,645
 794,645
 123
 794,522
 —
Federal Home Loan Bank stock7,564
 N/A
 N/A
 N/A
 N/A
Loans held for sale11,662
 11,988
 —
 11,988
 —
Loans receivable, net of allowance for loan losses2,609,666
 2,675,811
 —
 —
 2,675,811
Accrued interest receivable10,925
 10,925
 3
 3,472
 7,450
Derivative assets - interest rate swaps2,804
 2,804
 —
 2,804
 —
Financial Liabilities:         
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts$2,872,247
 $2,872,247
 $2,872,247
 $—
 $—
Certificate of deposit accounts357,401
 357,536
 —
 357,536
 —
Federal Home Loan Bank advances79,600
 79,600
 —
 79,600
 —
Securities sold under agreement to repurchase22,104
 22,104
 22,104
 —
 —
Junior subordinated debentures19,717
 15,000
 —
 —
 15,000
Accrued interest payable215
 215
 44
 142
 29
Derivative liabilities - interest rate swaps2,804
 2,804
 —
 2,804
 —
(9)Cash Restriction
The methodsBank had no cash restrictions at September 30, 2023 and assumptions, not previously presented, used to estimate fair value are described as follows:December 31, 2022.
Cash
(10)Commitments and Cash Equivalents:Contingencies
The fair valueIn the ordinary course of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to carrying value (Level 1).
Federal Home Loanbusiness, the Bank Stock:
FHLB stock is not publicly traded; thus, it is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans Held for Sale:
The fair value of loans held for sale is estimated based upon binding contracts or quotes from third party investors for similar loans. (Level 2).
Loans Receivable:
Except for certain impaired loans discussed previously, fair value is based on discounted cash flows using current market rates applied to the estimated life (Level 3). While these methodologies are permitted under U.S. GAAP, they are not based on the exit price concept of the fair value required under FASB ASC 820-10, Fair Value Measurements and Disclosures, and generally produce a higher value.
Accrued Interest Receivable/Payable:
The fair value of accrued interest receivable/payable balances approximates the carrying value. The fair value measurements are commensurate with the asset or liability from which the accrued interest is generated (Level 1, Level 2 and Level 3).

45

Deposits:
For deposits with no contractual maturity, the fair value is assumed to equal the carrying value (Level 1). The fair value of certificate of deposit accounts is based on discounted cash flows using the difference between the deposit rate and the rates offered by the Company for deposits of similar remaining maturities (Level 2).
Federal Home Loan Bank advances:
The fair value of FHLB advances is estimated based on discounting the future cash flows using the market rate currently offered (Level 2).
Securities Sold Under Agreement to Repurchase:
Securities sold under agreement to repurchase are short-term in nature and they reprice on a daily basis. Fair value financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to carrying value (Level 1).
Junior Subordinated Debentures:
The fair value is estimated using discounted cash flow analysis based on current rates for similarmay enter into various types of debt, which many be unobservable, and considering recent trading activity of similar instruments in markets which can be inactive (Level 3).
Off-Balance Sheet Financial Instruments:
The majority of ourtransactions that include commitments to extend credit standbythat are not included in its unaudited Condensed Consolidated Financial Statements. The Bank 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 Bank’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, and commitments to sell mortgage loans carry current market interest rates if converted to loans. As such, no premium or discount was ascribed to these commitments (Level 1). They are excluded fromat the preceding tables.dates indicated:
 September 30, 2023December 31, 2022
 (Dollars in thousands)
Commercial business:
Commercial and industrial$536,785 $548,438 
Owner-occupied CRE9,477 3,083 
Non-owner occupied CRE32,680 13,396 
Total commercial business578,942 564,917 
Real estate construction and land development:
Residential49,008 43,460 
Commercial and multifamily345,464 348,956 
Total real estate construction and land development394,472 392,416 
Consumer336,206 323,016 
Total outstanding commitments$1,309,620 $1,280,349 


(15)Commitments and Contingencies
In June 2016, the Company received preliminary findings from the Washington State Department of Revenue ("DOR") regarding its business and occupation ("B&O") tax audit on the B&O tax returns of Whidbey Island Bank for the years 2010-2014. The state B&O tax is a gross receipts tax and is calculated on the gross income from activities. It is measured on the value of products, gross proceeds of sale, or gross income of the business. A substantial portion of the preliminary findings related to the receipt of FDIC shared-loss payments from the FDIC to Washington Banking Company in connection with its acquisitions of City Bank in April 2010 and North County Bank in September 2010. In their preliminary findings, the DOR is considering those payments as taxable for B&O tax purposes. The total amount of this preliminary finding, along with calculated back interest, is approximately $1.6 million. Management is in discussions with the DOR as to whether these payments should be taxable for B&O tax purposes. Given the uncertainty of the outcome of these discussions, management's estimates of the Company's ultimate liability, if any, involve significant judgment and are based on currently available information and an assessment of the validity of facts and calculations assumed by the DOR. Management does not believe a material loss is probable at this time and there are significant factual and legal issues to be resolved. Management believes that it is reasonably possible that future changes to the Company's estimates of loss and the ultimate amount paid for resolution of this B&O audit could impact the Company's results of operations in future periods. Any such losses would be reported as a noninterest expense in the Company's Consolidated Statement of Income.
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(16)Definitive Agreement
On July 26, 2017 the Company announced the execution of a definitive agreement with Puget Sound under which Heritage will acquire Puget Sound in an all-stock transaction valued at approximately $126.1 million based on the closing price of Heritage common stock of $27.15 on July 26, 2017. Puget Sound is a business bank headquartered in Bellevue, Washington with one branch location. Under the terms of the agreement, Puget Sound shareholders will receive 1.320 shares of Heritage common stock for each share of Puget Sound common stock, subject to potential adjustment. The value of the consideration will fluctuate until closing based on the value of Heritage's stock price and may be adjusted by a cap and collar in certain circumstances. The definitive agreement has been unanimously approved by the boards of directors of both Heritage and Puget Sound. The merger is subject to regulatory approvals, approval by Puget Sound shareholders and certain other customary closing conditions and is expected to close in the first quarter of 2018.


46

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, 2017.2023. 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, 20162022 audited Consolidated Financial Statements, and the accompanying Notes included in our 2022 Annual Report on Form 10-K for the year ended December 31, 2016.10-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 focus on our commercial banking relationships, market expansion and asset quality. At September 30, 2017, we had total assets of $4.05 billion and total stockholders’ equity of $507.6 million. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.
Our business consists primarily of commercial lending and deposit relationships with small to medium sized businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and land development loans and consumer loans. We additionally originate for sale or for investment purposes one-to-four family residential real estate loans on residentialsingle family properties located primarily in our markets.
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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.deposits and borrowings. Management strives to matchmanages 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 significantly by general and local economic conditions, particularly changes in market interest rates including most 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 onin 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 loan losses.credit losses on loans. The provision for loancredit 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. The allowance for loan lossesManagement believes that the ACL on loans reflects the amount that we believe is appropriate to provide for probable incurredcurrent expected credit losses in our loan portfolio.portfolio based on our methodology.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees, gain on sale of loans (net)card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and data processing.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 payments,expenses, depreciation charges, maintenance and costs of utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including the account processing systems,system, electronic payments processing of products and services, and internet and mobile banking channels.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 significantly by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory authorities. Otherauthorities, including changes resulting from inflation and the governmental actions taken to address this issue. Net income and other expenses areis also impacted by growth of operations through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."

Recent Developments
Since March 2022, inflationary pressures have resulted in higher costs for consumers and businesses. To address inflation, the Federal Open Market Committee (“FOMC”) has taken steps to tighten monetary policy through a cumulative 525 basis point increase to the federal funds rate from March 2022 through September 30, 2023. Management notes that the rapid intervals of rate increases by the Federal Reserve and flattening or inversion of the yield curve, have boosted expectations of the US entering a recession within the next 12 months. Should these ongoing economic pressures persist, we anticipate it could have an impact on the following:
•Loan growth and interest income - If economic activity begins to wane, it may have an impact on our borrowers, the businesses they operate, and their financial condition. Our borrowers may have less demand for credit needed to invest in and expand their businesses, as well as less demand for real estate loans. Such factors would place pressure on the level of interest-earning assets, which may negatively impact our interest income.
•Credit quality - Should there be a decline in economic activity, the markets we serve could experience increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things. Such factors may result in weakened economic conditions, place strain on our borrowers, and ultimately impact the credit quality of our loan portfolio. We expect this could result in increases in the numberlevel of past due, nonaccrual, and classified loans, as well as higher net charge-offs. While economic conditions have generally been favorable thus far, notwithstanding higher levels of inflation, there can be no assurance favorable economic conditions will continue. As such, should we experience future deterioration in the credit quality of our loan portfolio, it may contribute to the need for additional provisions for credit losses.
•ACL - The Company is required to record credit losses on certain financial assets in accordance with the CECL model stipulated under ASC 326, which is highly dependent upon expectations of future economic conditions and requires management judgment. Should expectations of future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses.
•Impairment charges - If economic conditions deteriorate, it could adversely impact the Company’s operating results and the value of certain of our assets. As a result, the Company may be required to write-down the value of certain assets such as goodwill, intangible assets, or deferred tax assets when there is evidence to suggest their value has become impaired or will not be realizable at a future date.
•AOCI - Unrealized gains and losses on AFS investment securities are recognized in stockholders’ equity as accumulated other comprehensive income (loss). If economic conditions deteriorate, and/or if the interest rates continue to increase, the valuation of the Company’s AFS investment securities could be negatively impacted, which may lead to increases in other comprehensive loss, decreases to the Company’s stockholders’ equity.
•Deposits and deposit costs - Given the significant rate increases by the FOMC, it is likely that deposit costs will continue to increase and it may become more challenging for the Company to retain and attract deposit relationships.
•Liquidity - Consistent with our prudent, proactive approach to liquidity management, we may take certain actions to further enhance our liquidity, including but not limited to, increasing our FHLB borrowings, and increasing our brokered deposits.
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Table of Contents
Further, recent developments and events in the financial services industry, including the failures of two large U.S. banks in the span of three days during March 2023 and another failure in early May 2023, created industry-wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations and eroding consumer confidence in the banking system. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks and more competition for bank deposits. While many factors played a role in the ultimate failures, these institutions had significant industry/demographic concentrations within their deposit bases and high ratios of uninsured deposits. Lack of diversity within a deposit base may increase the risk of events or trends that could prompt a larger-scale demand for deposits outflow. Further, concerns over a financial institution's ability to protect deposit balances in excess of the federally insured limit may increase the risk of a deposit run.
Heritage’s business, overall financial condition and depositor profiles differ substantially from the banking institutions that are the focus of the recent bank failures. We consider our deposit base to be seasoned, stable and well-diversified, and we do not have any significant industry concentrations among our non-insured deposits. At September 30, 2023, our average deposit account size, calculated by dividing period-end deposits by the population of accounts with balances, was approximately $52,000. The recent industry events and developments have not had a material impact on our financial condition, operations, customer base, liquidity capital position or risk profile, nor have they required us to make any significant changes to our interest rate risk and asset/liability management policies following a review by our Asset Liability Committee. Nevertheless, in response to these recent developments, we have (1) reviewed our contingent liquidity funding plan, including validating procedures and reviewing execution risks in the event of a sudden critical liquidity event, (2) enhanced communication with our customers by holding a bank-wide training session to provide client-facing personnel with information on FDIC insurance, alternative product offerings, and data demonstrating the financial strength of the Bank, and (3) enhanced our monitoring of deposit flows and liquidity including monitoring of (i) deposits by segment, region and location, (ii) liquidity levels and (iii) transaction volumes to better enable us to detect any potential material changes in our financial condition.
Notwithstanding the above, the continued effects of recent industry events and developments could materially and adversely impact our business or financial condition, including through acquisitionspotential liquidity pressures, reduced net interest margins, and corepotential increased credit losses. Moreover, these recent events and developments have, and could continue to, adversely impact the market price and volatility of Heritage’s securities. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments. We are generally unable to control the amount of premiums or special assessments that our banking business growth.subsidiary may be required to pay for FDIC insurance.

The Company continues to focus on serving its customers and communities, maintaining the well-being of its employees, and executing its strategic initiatives. The Company continues to monitor the economic environment and makes changes as appropriate.

Earnings Summary
Results of Operations
Net Income Overview
Comparison of the quarter ended September 30, 20172023 to the comparable quarter in the prior year
Net income was $10.6decreased $2.8 million, or $0.3513.2%, to $18.2 million, or $0.51 per diluted common share, for the three months ended September 30, 20172023, compared to $11.0$21.0 million, or $0.37$0.59 per diluted common share, for the same period in 2022.
The decrease in net income was due primarily to a decrease in net interest income of $3.7 million, a decrease in noninterest income of $1.2 millionand an increase in noninterest expense of $1.8 million.
The decrease in net income was partially offset by a $2.8 million decrease in provision for credit losses, reflect a $878,000 reversal of provision for credit losses for the three months ended September 30, 2016. The $415,000, or 3.8% decrease in net income for the three months ended September 30, 20172023 compared to the three months ended September 30, 2016 was primarily the result of a $1.5$1.9 million or 14.9% decrease in noninterest

47

income and a $1.1 million, or 4.2% increase in noninterest expense, partially offset by a $1.4 million, or 4.1%, increase in net interest income and a $611,000, or 40.9%, decrease in provision for loan losses.
Net interest income as a percentage of average interest earning assets (net interest margin) decreased 10 basis points to 3.85% for the three months ended September 30, 2017 compared to 3.95%credit losses for the same period in 2016.2022.
The efficiency ratio consists of noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income. The Company’s efficiency ratio was 64.4% for the three months ended September 30, 2017 compared to 61.7% for the three months ended September 30, 2016 and the change was attributable to the decrease in noninterest income and the increase in noninterest expense.
Comparison of the nine months ended September 30, 20172023 to the comparable period in the prior yearyear.
Net income was $31.8decreased $3.8 million, or 6.4%, to $55.5 million, or $1.06$1.57 per diluted common share, for the nine months ended September 30, 20172023 compared to $29.0to $59.3 million, or $0.97$1.67 per diluted common share, for the same period in 2022. The decrease wasdue primarily to an increase in noninterest expense of $13.3 million and a $5.7 million increase in the provision for credit losses reflecting a $2.9 million provision for credit losses for the nine months ended September 30, 2016.2023, compared to a $2.8 million reversal of provision for credit losses for the same period in 2022. The $2.7 million, or 9.5% increasedecrease in net income for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily the result of a $3.0 million, or 12.7%increase in noninterest income and a $2.9 million, or 2.9%,partially offset by an increase in net interest income partially offset by a $3.3of $15.0 million, or 4.2% increase in noninterest expense.9.6%.
The net interest margin decreased 11 basis points to 3.89% for the nine months ended September 30, 2017 compared to 4.00% for the same period in 2016.
The Company’s efficiency ratio improved to 64.5% for the nine months ended September 30, 2017 from 64.8% for the nine months ended September 30, 2016. The improvement in the efficiency ratio for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily attributable to the increases in noninterest income and net interest income.
Net Interest Income and Margin Overview
One of the Company's key sources of earnings is net interest income. There are several factors that 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, and other noninterest bearing liabilities and stockholders' equity; the volume of noninterest earning assets; market interest rate fluctuations; and asset quality.
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Market rates impact the results of the Company's net interest income, including the significant increases in the federal funds target rate by the Federal Reserve in response to inflation during 2023 and 2022. The following table provides the federal funds target rate history and changes from each period since December 31, 2021:
Change DateRate (%)Rate Change (%)
December 31, 20210.00% - 0.25%N/A
March 17, 20220.25% - 0.50%0.25 %
May 5, 20220.75% - 1.00%0.50 %
June 16, 20221.50% - 1.75%0.75 %
July 28, 20222.25% - 2.50%0.75 %
September 22, 20223.00% - 3.25%0.75 %
November 3, 20223.75% - 4.00%0.75 %
December 15, 20224.25% - 4.50%0.50 %
February 2, 20234.50% - 4.75%0.25 %
March 23, 20234.75% - 5.00%0.25 %
May 4, 20235.00% - 5.25%0.25 %
July 27, 20235.25% - 5.50%0.25 %

Comparison of the quarter ended September 30, 20172023 to the comparable quarter in the prior year
Net interest income increased $1.4 million, or 4.1%, to $35.0 million for the three months ended September 30, 2017 compared to $33.6 million for the same period in 2016. The following table provides relevant net interest income information for the dates indicated.periods indicated:

 Three Months Ended September 30,
 20232022Change
 
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)
$4,201,554 $56,119 5.30 %$3,859,839 $43,847 4.51 %$341,715 $12,272 0.79 %
Taxable securities1,931,649 14,590 3.00 1,868,900 12,362 2.62 62,749 2,228 0.38 
Nontaxable securities (3)
60,654 448 2.93 133,022 892 2.66 (72,368)(444)0.27 
Interest earning deposits169,186 2,310 5.42 730,600 4,009 2.18 (561,414)(1,699)3.24 
Total interest earning assets6,363,043 73,467 4.58 %6,592,361 61,110 3.68 %(229,318)12,357 0.90 %
Noninterest earning assets849,689 775,375 74,314 
Total assets$7,212,732 $7,367,736 $(155,004)
Interest Bearing Liabilities:
Certificates of Deposit$553,015 $4,585 3.29 %$297,786 $290 0.39 %$255,229 $4,295 2.90 %
Savings accounts523,882 172 0.13 654,697 99 0.06 (130,815)73 0.07 
Interest bearing demand and money market accounts2,764,251 7,120 1.02 3,065,007 1,089 0.14 (300,756)6,031 0.88 
Total interest bearing deposits3,841,148 11,877 1.23 4,017,490 1,478 0.15 (176,342)10,399 1.08 
Junior subordinated debentures21,649 540 9.90 21,356 312 5.80 293 228 4.10 
Securities sold under agreement to repurchase31,729 38 0.48 42,959 34 0.31 (11,230)4 0.17 
Borrowings451,032 5,394 4.74 — — — 451,032 5,394 4.74 
Total interest bearing liabilities4,345,558 17,849 1.63 %4,081,805 1,824 0.18 %263,753 16,025 1.45 %
Noninterest bearing demand deposits1,859,374 2,356,688 (497,314)
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 Three Months Ended September 30,
 20232022Change
 
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)
Other noninterest bearing liabilities186,306 118,191 68,115 
Stockholders’ equity821,494 811,052 10,442 
Total liabilities and stock-holders’ equity$7,212,732 $7,367,736 $(155,004)
Net interest income and spread$55,618 2.95 %$59,286 3.50 %$(3,668)(0.55)%
Net interest margin3.47 %3.57 %(0.10)%
(1) Average balances are calculated using daily balances. Average yield/rate is annualized.
 Three Months Ended September 30,
 2017 2016
 
Average
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate (1)
 
Average
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate (1)
 (Dollars in thousands)
Interest Earning Assets:           
Total loans receivable, net (2) (3)
$2,737,535
 $32,595
 4.72% $2,526,150
 $30,915
 4.87%
Taxable securities562,256
 3,117
 2.20
 588,749
 2,888
 1.95
Nontaxable securities (3) 
229,683
 1,354
 2.34
 225,994
 1,235
 2.17
Other interest earning assets72,643
 258
 1.41
 42,934
 76
 0.70
Total interest earning assets3,602,117
 37,324
 4.11% 3,383,827
 35,114
 4.13%
Noninterest earning assets418,100
     408,634
    
Total assets$4,020,217
     $3,792,461
    
Interest Bearing Liabilities:           
Certificates of deposit$394,345
 $633
 0.64% $378,407
 $468
 0.49%
Savings accounts494,990
 360
 0.29
 507,523
 214
 0.17
Interest bearing demand and money market accounts1,499,335
 635
 0.17
 1,480,220
 587
 0.16
Total interest bearing deposits2,388,670
 1,628
 0.27
 2,366,150
 1,269
 0.21
FHLB advances and other borrowings111,293
 428
 1.53
 5,618
 8
 0.57
Securities sold under agreement to repurchase28,999
 16
 0.22
 18,861
 10
 0.21
Junior subordinated debentures19,897
 261
 5.20
 19,602
 221
 4.49
Total interest bearing liabilities2,548,859
 2,333
 0.36% 2,410,231
 1,508
 0.25%
Demand and other noninterest bearing deposits916,074
     844,468
    
Other noninterest bearing liabilities50,022
     44,378
    
Stockholders’ equity505,262
     493,384
    
Total liabilities and stockholders’ equity$4,020,217
     $3,792,461
    
Net interest income
 $34,991
     $33,606
  
Net interest spread    3.75%     3.88%
Net interest margin    3.85%     3.95%
Average interest earning assets to average interest bearing liabilities    141.32%     140.39%
(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 $940,000 and $857,000 for the three months ended September 30, 2023 and 2022, respectively.

(1)
Annualized
(2)
The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield.
(3)
Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
Interest Income(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
TotalThe following table provides the changes in net interest income increased $2.2for the three months ended September 30, 2023 compared to the same period in 2022 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:
 VolumeYield/RateTotal% Change
 (Dollars in thousands)
Interest Earning Assets:
Loans receivable, net$4,110 $8,162 $12,272 28.0 %
Taxable securities426 1,802 2,228 18.0 
Nontaxable securities(527)83 (444)(49.8)
Interest earning deposits(4,643)2,944 (1,699)(42.4)
Total interest income$(634)$12,991 $12,357 20.2 %
Interest Bearing Liabilities:
Certificates of deposit$441 $3,854 $4,295 1,481.0 %
Savings accounts(23)96 73 73.7 
Interest bearing demand and money market accounts(117)6,148 6,031 553.8 
Total interest bearing deposits301 10,098 10,399 703.6 
Junior subordinated debentures4 224 228 73.1 
Securities sold under agreement to repurchase(11)15 4 11.8 
Borrowings5,394 — 5,394 100.0 
Total interest expense$5,688 $10,337 $16,025 878.6 %
Net interest income$(6,322)$2,654 $(3,668)(6.2)%
Net interest income decreased $3.7 million, or 6.3%6.2%, to $37.3$55.6 million for the three months ended September 30, 20172023 as compared to $35.1$59.3 million for the same period in 2016. The balance2022 due primarily to a $16.0 million increase in total interest expense offset partially by a $12.4 million increase in total interest income.
Total interest expense increased to $17.8 million during the three months ended September 30, 2023 compared to $1.8 million for the same period in 2022 due primarily to a 108 basis point increase in the cost of average interest earning assets increased $218.3 million, or 6.5%,bearing deposits to $3.60 billion1.23% for the three months ended September 30, 2017 from $3.38 billion2023, as compared to 0.15% for the same period in 2022 due to competitive rate pressures and the addition of interest expense on borrowings during the three months ended September 30, 2016 and the average yield on total interest earning assets decreased two basis points to 4.11% for the three months ended September 30, 20172023 as compared to 4.13% forno interest expense on borrowings during the three months ended September 30, 2016.same period in 2022.
InterestTotal interest income from interest and fees on loans increased $1.7 million, or 5.4%, to $32.6$73.5 million for the three months ended September 30, 2017 from $30.92023, compared to $61.1 million for the same period in 20162022 primarily due to an increase in average loans receivable of $211.4 million, or 8.4%, as a result of loan growth, offset partially by a 1590 basis point decrease inincrease to the average loan yield on interest earning assets to 4.72%4.58% for the three months ended September 30, 2017 from 4.87%2023, as compared to 3.68% for the same period in 2022 due to an increase in market interest rates.
Net interest margin decreased ten basis points to 3.47% for the three months ended September 30, 2016. The decrease in average loan yield was due primarily to a decrease in incremental accretion income on purchased loans and secondarily to a decrease in contractual note rates.

49

The following table presents the average loan yield and effects of the incremental accretion on purchased loans for the three months ended September 30, 2017 and 2016:
  Three Months Ended September 30,
  2017 2016
  (Dollars in thousands)
Average loan yield, excluding incremental accretion on purchased loans (1)
 4.57% 4.63%
Impact on average loan yield from incremental accretion on purchased loans (1) 0.15% 0.24%
Average loan yield 4.72% 4.87%
     
Incremental accretion on purchased loans (1)
 $1,036
 $1,530
(1)
As of the dates of the completion of each of the merger and acquisition transactions, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modified quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.
Incremental accretion income was $1.0 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively. The decrease in the incremental accretion was primarily a result of a continued decline in the purchased loan balances and a decrease in the prepayments of purchased loans during the three months ended September 30, 20172023 compared to the same period in 2016. The incremental accretion is expected to continue to decrease as the balance of the purchased loans continues to decrease.
Total interest income increased primarily due to the increase in interest and fees on loans discussed above and secondarily due to a $348,000, or 8.4%, increase in interest income on investment securities to $4.5 million during the three months ended September 30, 2017 from $4.1 million for the three months ended September 30, 2016. The increase in income on investment securities was a result of an increase in average investment yields for the three months ended September 30, 2017 compared to the same period in 2016, offset partially by a decrease in the average balance of investment securities. Average yields on taxable securities increased 25 basis points to 2.20% for the three months ended September 30, 2017 from 1.95%3.57% for the same period in 2016. Average yields on nontaxable securities increased 17 basis points to 2.34% for the three months ended September 30, 2017 from 2.17% for the same period in 2016. The average balance of investment securities decreased $22.8 million, or 2.8%, to $791.9 million during the three months ended September 30, 2017 from $814.7 million during the three months ended September 30, 2016. The Company has actively managed its investment securities portfolio to mitigate declining trends in loan yields.2022.
Average other interest earning assets increased $29.7 million, or 69.2%, to $72.6 million for the three months ended September 30, 2017 compared to $42.9 million for the three months ended September 30, 2016. The increase was due primarily to an increase in interest earning deposits, as the Bank held more funds in interest earning accounts at the Federal Reserve Bank of San Francisco compared to the same period in the prior year.
Interest Expense
Total interest expense increased $825,000, or 54.7%, to $2.3 million for the three months ended September 30, 2017 compared to $1.5 million for the same period in 2016. The average cost of interest bearing liabilities increased 11 basis points to 0.36% for the three months ended September 30, 2017 from 0.25% for the three months ended September 30, 2016 as a result of increases in market rates. Total average interest bearing liabilities increased by $138.6 million, or 5.8%, to $2.55 billion for the three months ended September 30, 2017 from $2.41 billion for the three months ended September 30, 2016.
The average cost of interest bearing deposits increased six basis points to 0.27% for the three months ended September 30, 2017 from 0.21% for the same period in 2016 primarily as a result of increases in both the average balance and cost of certificates of deposit and an increase in the average cost of savings accounts.
Interest expense on certificates of deposit increased $165,000, or 35.3%, to $633,000 during the three months ended September 30, 2017 from $468,000 for the same period in 2016 due to increases in the average balance and the cost of the certificates of deposits accounts. The average balance of certificates of deposits increased $15.9 million, or 4.2%, to $394.3 million, for the three months ended September 30, 2017 from $378.4 million for the same period in 2016. The cost of certificates of deposits increased 15 basis points to 0.64% for the three months ended September 30, 2017 from 0.49% for the same period in 2016.


50
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Table of Contents


Interest expense on savings accounts increased $146,000, or 68.2%, to $360,000 during the three months ended September 30, 2017 from $214,000 for the same period in 2016 due primarily to the 12 basis point increase of the cost of the savings accounts to 0.29% for the three months ended September 30, 2017 from 0.17% for the same period in 2016.
Interest expense on FHLB advances and other borrowings increased $420,000, or 52.5%, to $428,000 for the three months ended September 30, 2018 from $8,000 for the same period in 2016 due to a combination of an increase in both average balances and cost of funds. The average balance for FHLB advances and other borrowings increased $105.7 million, or 1,881.0%, to $111.3 million for the three months ended September 30, 2017 from $5.6 million for the same period in 2016, due primarily to fund loan growth. The average rate of the FHLB advances for the three months ended September 30, 2017 was 1.53%, an increase of 96 basis points from 0.57% for the same period in 2016, due primarily to continued increases in short-term borrowing rates over the last year.
The average rate of the junior subordinated debentures, including the effects of accretion of the discount established as of the date of the merger with Washington Banking Company, for the three months ended September 30, 2017 was 5.20%, an increase of 71 basis points from 4.49% for the same period in 2016. The rate increase on the debentures was due to an increase in the three-month LIBOR rate to 1.33% at September 30, 2017 from 0.85% on September 30, 2016.

Net Interest Margin
Net interest margin for the three months ended September 30, 2017 decreased ten basis points to 3.85% from 3.95% for the same period in 2016 primarily due to the decline in the incremental accretion on purchased loans, as discussed below. The net interest spread for the three months ended September 30, 2017 decreased 13 basis points to 3.75% from 3.88% for the same period in 2016. The decrease was primarily due to the above mentioned increases in the cost of funds of interest bearing liabilities.
Net interest margin is impacted by the incremental accretion on purchased loans. The following table presents the net interest margin and effects of the incremental accretion on purchased loans for the three months ended September 30, 2017 and 2016:
  Three Months Ended September 30,
  2017 2016
Net interest margin, excluding incremental accretion on purchased loans (1)
 3.74% 3.77%
Impact on net interest margin from incremental accretion on purchased loans (1)
 0.11
 0.18
Net interest margin 3.85% 3.95%
(1)
As of the dates of the completion of each of the merger and acquisition transactions, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modified quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.
Comparison of nine months ended September 30, 20172023 to the comparable period in the prior year
Net interest income increased $2.9 million, or 2.9%, to $102.3 million for the nine months ended September 30, 2017 compared to $99.5 million for the same period in 2016. The following table provides relevant net interest income information for the dates indicated.periods indicated:

 Nine Months Ended September 30,
 20232022Change
 
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)
$4,129,429 $160,192 5.19 %$3,815,387 $125,762 4.41 %$314,042 $34,430 0.78 %
Taxable securities1,975,818 44,021 2.98 1,532,450 25,972 2.27 443,368 18,049 0.71 
Nontaxable securities (3)
71,702 1,554 2.90 138,904 2,645 2.55 (67,202)(1,091)0.35 
Interest earning deposits114,753 4,436 5.17 1,146,183 7,057 0.82 (1,031,430)(2,621)4.35 
Total interest earning assets6,291,702 210,203 4.47 %6,632,924 161,436 3.25 %(341,222)48,767 1.22 %
Noninterest earning assets848,035 762,877 85,158 
Total assets$7,139,737 $7,395,801 $(256,064)
Interest Bearing Liabilities:
Certificates of Deposit$442,301 $8,292 2.51 %$318,547 $952 0.40 %$123,754 $7,340 2.11 %
Savings accounts558,467 471 0.11 651,292 274 0.06 (92,825)197 0.05 
Interest bearing demand and money market accounts2,791,695 16,249 0.78 3,066,229 3,089 0.13 (274,534)13,160 0.65 
Total interest bearing deposits3,792,463 25,012 0.88 4,036,068 4,315 0.14 (243,605)20,697 0.74 
Junior subordinated debentures21,576 1,521 9.43 21,286 745 4.68 290 776 4.75 
Securities sold under agreement to repurchase38,187 148 0.52 47,057 98 0.28 (8,870)50 0.24 
Borrowings339,296 12,238 4.82 — — — %339,296 12,238 4.82 
Total interest bearing liabilities4,191,522 38,919 1.24 %4,104,411 5,158 0.17 %87,111 33,761 1.07 %
Noninterest bearing demand deposits1,942,134 2,355,285 (413,151)
Other noninterest bearing liabilities186,469 113,534 72,935 
Stockholders’ equity819,612 822,571 (2,959)
Total liabilities and stock-holders’ equity$7,139,737 $7,395,801 $(256,064)
Net interest income and spread$171,284 3.23 %$156,278 3.08 %$15,006 0.15 %
Net interest margin3.64 %3.15 %0.49 %
(1) Average balances are calculated using daily balances. Average yield/rate is annualized.
51
Table(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 Contents


 Nine Months Ended September 30,
 2017 2016
 
Average
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate (1)
 
Average
Balance
 
Interest
Earned/
Paid
 Average
Yield/
Rate (1)
 (Dollars in thousands)
Interest Earning Assets:           
Total loans receivable, net (2) (3)$2,676,153
 $94,580
 4.73% $2,461,856
 $91,595
 4.97%
Taxable securities565,528
 9,307
 2.20
 594,301
 8,522
 1.92
Nontaxable securities (3)225,583
 3,926
 2.33
 220,038
 3,599
 2.18
Other interest earning assets51,049
 461
 1.21
 47,829
 225
 0.63
Total interest earning assets3,518,313
 108,274
 4.11% 3,324,024
 103,941
 4.18%
Noninterest earning assets418,837
     391,342
    
Total assets$3,937,150
     $3,715,366
    
Interest Bearing Liabilities:           
Certificates of deposit$369,724
 $1,527
 0.55% $397,070
 $1,496
 0.50%
Savings accounts499,353
 940
 0.25
 478,762
 540
 0.15
Interest bearing demand and money market accounts1,489,149
 1,834
 0.16
 1,457,399
 1,729
 0.16
Total interest bearing deposits2,358,226
 4,301
 0.24
 2,333,231
 3,765
 0.22
FHLB advances and other borrowings106,556
 870
 1.09
 11,608
 47
 0.54
Securities sold under agreement to repurchase23,660
 38
 0.21
 20,031
 31
 0.21
Junior subordinated debentures19,823
 748
 5.05
 19,527
 647
 4.43
Total interest bearing liabilities2,508,265
 5,957
 0.32% 2,384,397
 4,490
 0.25%
Demand and other noninterest bearing deposits885,467
     811,043
    
Other noninterest bearing liabilities47,283
     35,266
    
Stockholders’ equity496,135
     484,660
    
Total liabilities and stockholders’ equity$3,937,150
     $3,715,366
    
Net interest income  $102,317
     $99,451
  
Net interest spread    3.79%     3.93%
Net interest margin    3.89%     4.00%
Average interest earning assets to average interest bearing liabilities    140.27%     139.41%

(1)
Annualized
(2)
The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield.
(3)
Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
Interest Income
Total interest income increased $4.3net deferred loan fees of $2.4 million or 4.2%, to $108.3and $6.7 million for the nine months ended September 30, 2017 compared to $103.9 million for2023 and 2022, respectively.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
The following table provides the same periodchanges in 2016. The balance of averagenet interest earning assets increased $194.3 million, or 5.8%, to $3.52 billionincome for the nine months ended September 30, 2017 from $3.32 billion for the nine months ended September 30, 2016 and the yield on total interest earning assets decreased seven basis points to 4.11% for the nine months ended September 30, 20172023 compared to 4.18% for the nine months ended September 30, 2016.same period in 2022 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:
Interest
 Increase (Decrease) Due to Changes In:
 VolumeYield/RateTotal% Change
 (Dollars in thousands)
Interest Earning Assets:
Loans receivable, net$10,932 $23,498 $34,430 27.4 %
Taxable securities8,646 9,403 18,049 69.5 
Nontaxable securities(1,417)326 (1,091)(41.2)
Interest earning deposits(11,234)8,613 (2,621)(37.1)
Total interest income$6,927 $41,840 $48,767 30.2 %
Interest Bearing Liabilities:
Certificates of deposit$504 $6,836 $7,340 771.0 %
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Table of Contents
 Increase (Decrease) Due to Changes In:
 VolumeYield/RateTotal% Change
 (Dollars in thousands)
Savings accounts(44)241 197 71.9 
Interest bearing demand and money market accounts(301)13,461 13,160 426.0 
Total interest bearing deposits159 20,538 20,697 479.7 
Junior subordinated debentures10 766 776 104.2 
Securities sold under agreement to repurchase(21)71 50 51.0 
Borrowings12,238 — 12,238 100.0 
Total interest expense$12,386 $21,375 $33,761 654.5 %
Net interest income$(5,459)$20,465 $15,006 9.6 %
Net interest income from interest and fees on loans increased $3.0$15.0 million, or 3.3%9.6%, to $94.6$171.3 million for the nine months ended September 30, 2017 from $91.62023 as compared to $156.3 million for the same period in 20162022 due primarily to an increase in average loans receivable,total interest income offset partially by a decreasean increase in average loan yields. Average loans receivabletotal interest expense.
Total interest income increased $214.3$48.8 million, or 8.7%30.2%, to $2.68 billion for the nine months ended September 30, 2017 compared to $2.46 billion for the nine months ended September 30, 2016. Average loan yields decreased 24 basis points to 4.73% for the nine months ended September 30, 2017 from 4.97% for the nine months ended September 30, 2016 due mostly to a decrease in incremental accretion income.

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The following table presents the average loan yield and effects of the incremental accretion on purchased loans for the nine months ended September 30, 2017 and 2016:
  Nine Months Ended September 30,
  2017 2016
  (Dollars in thousands)
Average loan yield, excluding incremental accretion on purchased loans (1)
 4.55% 4.66%
Impact on average loan yield from incremental accretion on purchased loans (1) 0.18% 0.31%
Average loan yield 4.73% 4.97%
     
Incremental accretion on purchased loans (1)
 $3,687
 $5,669
(1)
As of the dates of the completion of each of the merger and acquisition transactions, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modified quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.
Incremental accretion income was $3.7 million and $5.7$210.2 million for the nine months ended September 30, 2017 and 2016, respectively.2023, compared to $161.4 million for the same period in 2022. The decrease inincrease was the incremental accretion was primarily a result of a continued decline in122 basis point increase on the purchased loan balances and a decrease in the prepayments of purchased loans duringyield on interest earning assets to 4.47% for the nine months ended September 30, 20172023, as compared to 3.25% for the same period in 2016. The incremental accretion is expected2022, due to continue to decreasean increase in market interest rates as well as change in the balancemix of the purchased loans continues to decrease.total interest earning assets into higher yielding assets.
Total interest incomeexpense increased primarily due to the increase in interest and fees on loans discussed above and secondarily due to a $1.1$33.8 million, or 9.2%654.5%, increase in interest income on investment securities to $13.2$38.9 million during the nine months ended September 30, 2017 from $12.12023 compared to $5.2 million for the same period in 2022 due primarily to a 74 basis point increase in cost of interest bearing deposits to 0.88% for the nine months ended September 30, 2016. The increase2023, as compared to 0.14% for the same period in 2022, due to competitive rate pressures as well as the addition of interest incomeexpense on investment securities wasborrowings during the result of an increasenine months ended September 30, 2023 as compared to no interest expense on borrowings during the same period in average investment yields2022.
Net interest margin increased 49 basis points to 3.64% for the nine months ended September 30, 20172023 compared to the same period in 2016, offset partially by a decrease in the average balance of investment securities. Average yields on taxable securities increased 28 basis points to 2.20% for the nine months ended September 30, 2017 from 1.92%3.15% for the same period in 2016. Average yields on nontaxable securities increased 15 basis points to 2.33% for the nine months ended September 30, 2017 from 2.18% for the same period in 2016. The average balance of investment securities decreased $23.2 million, or 2.9%, to $791.1 million during the nine months ended September 30, 2017 from $814.3 million during the nine months ended September 30, 2016. The Company has actively managed its investment securities portfolio to mitigate declining, but recently improving, loan yields.2022.
Average other interest earning assets increased $3.2 million, or 6.7%, to $51.0 million for the nine months ended September 30, 2017 compared to $47.8 million for the nine months ended September 30, 2016. The increase was due primarily to an increase in interest earning deposits, as the Bank held more funds in interest earning accounts at the Federal Reserve Bank of San Francisco compared to the same period in 2016.
Interest Expense
Total interest expense increased $1.5 million, or 32.7%, to $6.0 million for the nine months ended September 30, 2017 compared to $4.5 million for the same period in 2016. The average cost of interest bearing liabilities increased seven basis points to 0.32% for the nine months ended September 30, 2017 from 0.25% for the nine months ended September 30, 2016. Total average interest bearing liabilities increased by $123.9 million, or 5.2%, to $2.51 billion for the nine months ended September 30, 2017 from $2.38 billion for the nine months ended September 30, 2016.
The average cost of interest bearing deposits increased two basis points to 0.24% for the nine months ended September 30, 2017 from 0.22% for the same period in 2016 due primarily to the changes in savings accounts.
Interest expense on savings accounts increased $400,000, or 74.1%, to $940,000 for the nine months ended September 30, 2017 from $540,000 for the same period in 2016 due to increases in both the average balance and cost of the savings accounts. The average balance of savings accounts increased $20.6 million, or 4.3%, to $499.4 million for the nine months ended September 30, 2017 from $478.8 million for the same period in 2016. The cost of savings accounts increased ten basis points to 0.25% for the nine months ended September 30, 2017 from 0.15% for the same period in 2016.
Interest expense of certificates of deposit accounts increased only $31,000, or 2.1%, to $1.5 million for the nine months ended September 30, 2017. The average balance of certificates of deposit decreased $27.3 million, or

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6.9%, to $369.7 million for the nine months ended September 30, 2017 compared to $397.1 million for the nine months ended September 30, 2016 while the cost of certificates of deposits increased to 0.55% for the nine months ended September 30, 2017 from 0.50% for the same period in 2016.
Interest expense on FHLB advances and other borrowings increased $823,000 to $870,000 for the nine months ended September 30, 2017 from $47,000 for the nine months ended September 30, 2016 due to a combination of an increase in average balances and an increase in the cost of funds. The average balance for FHLB advances and other borrowings increased $94.9 million to $106.6 million for the nine months ended September 30, 2017 from $11.6 million for the same period in 2016, due primarily to fund loan growth. The average rate of the FHLB advances and other borrowings for the nine months ended September 30, 2017 was 1.09%, an increase of 55 basis points from 0.54% for the same period in 2016.
The average rate of the junior subordinated debentures, including the effects of accretion of the discount established as of the date of the merger with Washington Banking Company, for the nine months ended September 30, 2017 was 5.05%, an increase of 62 basis points from 4.43% for the same period in 2016. The rate increase on the debentures was due to an increase in the three-month LIBOR rate to 1.33% at September 30, 2017 from 0.85% on September 30, 2016.

Net Interest Margin
Net interest margin for the nine months ended September 30, 2017 decreased 11 basis points to 3.89% from 4.00% for the same period in 2016 primarily due to the decline in the incremental accretion on purchased loans, as discussed below. The net interest spread for the nine months ended September 30, 2017 decreased 14 basis points to 3.79% from 3.93% for the same period in 2016. This decrease was primarily due to the above mentioned decrease in average yields on total interest earning assets and increase in the average cost of funds of total interest bearing liabilities.
Net interest margin is impacted by the incremental accretion on purchased loans. The following table presents the net interest margin and effects of the incremental accretion on purchased loans for the nine months ended September 30, 2017 and 2016:
  Nine Months Ended September 30,
  2017 2016
Net interest margin, excluding incremental accretion on purchased loans (1)
 3.75% 3.77%
Impact on net interest margin from incremental accretion on purchased loans (1)
 0.14
 0.23
Net interest margin 3.89% 4.00%
(1)
As of the dates of the completion of each of the merger and acquisition transactions, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modified quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.

Provision for LoanCredit Losses Overview
The Bank has established a comprehensive methodologyaggregate of the provision for determining its allowancecredit losses on loans and the provision for loancredit losses on unfunded commitments is presented on the unaudited Condensed Consolidated Statements of Income as the (reversal of) provision for credit losses. The allowance for loan lossesACL on unfunded commitments is increased by provisions for loan losses charged to expense, and is reduced by loans charged-off, net of loan recoveries or a recovery of previous provision. For additional information, see the section entitled "Analysis of Allowance for Loan Losses" below.
The provision for loan losses is dependentincluded on the Bank’s ability to manage asset qualityunaudited Condensed Consolidated Statements of Financial Condition within accrued expenses and control the level of net charge-offs through prudent underwriting standards. In addition, a decline in general economic conditions could increase future provisions for loan losses and have a material effect on the Company’s net income.other liabilities.
Comparison of the quarter ended September 30, 20172023 to the comparable quarter in the prior year
The following table presents the (reversal of) provision for credit losses for the periods indicated:
Three Months Ended September 30,Change
20232022$%
(Dollars in thousands)
(Reversal of) provision for credit losses on loans$(635)$1,919 $(2,554)133.1 %
(Reversal of) provision for credit losses on unfunded commitments(243)26 (269)1034.6 
(Reversal of) provision for credit losses$(878)$1,945 $(2,823)145.1 %
The provision for loancredit losses decreased $611,000, or 40.9%on loans reflects the amount required to $884,000maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The reversal of provision for credit losses on loans was $635,000 during the three months ended September 30, 2017 from $1.52023 due primarily to net recoveries of $1.2 million primarily due to the payoff of a nonaccrual loan. Future assessments of the expected credit losses will not only be impacted by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required 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, 2016. 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.
The decrease in the$1.9 million provision for loancredit losses foron loans recognized during the three months ended September 30, 2017 from2022 was due primarily to growth in loans receivable offset partially by a reduction to the same period in 2016 was primarily the result of a change in the composition of the loan portfolio, changes in certain environmental factors and improvements in certain historical loss factors. BasedACL on a thorough review of the loan portfolio, the Bank determined that the provisionloans individually evaluated for

losses.
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loan losses for the three months ended September 30, 2017 was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.
Comparison of the nine months ended September 30, 20172023 to the comparable period in the prior year
The following table presents the provision for loan(reversal of) credit losses decreased $872,000, or 23.2% for the periods indicated:
Nine Months Ended September 30,Change
20232022$%
(Dollars in thousands)
Provision for (reversal of) credit losses on loans$3,066 $(1,252)$4,318 (344.9)%
Reversal of provision for credit losses on unfunded commitments(210)(1,584)1,374 (86.7)
Provision for (reversal of) credit losses$2,856 $(2,836)$5,692 (200.7)%
The $3.1 million provision for credit losses on loans during the nine months ended September 30, 2023was due primarily to $2.9 millionan 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 recorded during the nine months ended September 30, 2017 from $3.82023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.
The $1.3 million reversal of provision for credit losses on loans recognized during the nine months ended September 30, 2022was due primarily to a reduction of loans individually evaluated for losses and their related ACL. The $1.6 million reversal of provision for credit losses on unfunded commitments recognized during the nine months ended September 30, 2016. The decrease in the provision for2022 was due primarily to higher loan losses for the nine months ended September 30, 2017 from the same period in 2016 was primarily the result of a change in the volume and mix of loans, changes in certain environmental factors and improvements in certain historical loss factors. Based on a thorough review of the loan portfolio, the Bank determined that the provision for loan losses for the nine months ended September 30, 2017 was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.utilization rates.


Noninterest Income Overview
Comparison of quarter ended September 30, 2017 to the comparable quarter in the prior year
Total noninterest income decreased $1.5 million, or 14.9%, to $8.4 million for the three months ended September 30, 2017 compared2023 to $9.9 million for the samecomparable period in 2016. the prior year
The following table presents the change in the key components of noninterest income for the periods noted.indicated:
Three Months Ended September 30,Change
20232022$%
(Dollars in thousands)
Service charges and other fees$2,856 $2,688 $168 6.3 %
Card revenue2,273 2,365 (92)(3.9)
Loss on sale of investment securities, net(1,940)— (1,940)100.0 
Gain on sale of loans, net157 133 24 18.0 
Interest rate swap fees62 78 (16)(20.5)
Bank owned life insurance income734 723 11 1.5 
Gain on sale of other assets, net— 265 (265)(100.0)
Other income2,129 1,201 928 77.3 
Total noninterest income$6,271 $7,453 $(1,182)(15.9)%
 Three Months Ended September 30,    
 2017 2016 Change Percentage Change
 (Dollars in thousands)
Service charges and other fees$4,769
 $3,630
 $1,139
 31.4 %
Gain on sale of investment securities, net44
 345
 (301) (87.2)
Gain on sale of loans, net1,229
 3,435
 (2,206) (64.2)
Interest rate swap fees328
 742
 (414) (55.8)
Other income2,024
 1,715
 309
 18.0
Total noninterest income$8,394
 $9,867
 $(1,473) (14.9)%
Gain on the sale of loans, netNoninterest income decreased $2.2$1.2 million, or 64.2% to $1.2 million for the three months ended September 30, 2017 compared to $3.4 million the same period in 2016, due primarily to a $2.1 million gain on sale of a previously classified purchased credit impaired loan recognized in 2016. The detail of gain on sale of loans, net is included in the following schedule.
 Three Months Ended September 30,  
 2017 2016 Change Percentage Change
 (Dollars in thousands)
Mortgage loans$875
 $1,087
 $(212) (19.5)%
SBA loans354
 285
 69
 24.2
Other loans—
 2,063
 (2,063) (100.0)
Total gain on sale of loans, net$1,229
 $3,435
 $(2,206) (64.2)%
Interest rate swap fees decreased $414,000, or 55.8% to $328,000 for the three months ended September 30, 2017 compared to $742,000 the same period in 2016, due primarily to a decrease in the number of swaps executed15.9%, during the three months ended September 30, 20172023 compared to the three months ended September 30, 2016.
The decrease in noninterest income was partially offset by an increase in service charges and other fees of $1.1 million, or 31.4% to $4.8 million for the three months ended September 30, 2017 compared to $3.6 million for the same period in 2016,2022 due primarily to a consumer deposit account consolidation process completed at$1.9 million loss on sale of investment securities available for sale partially offset by a $610,000 gain on sale of the end of 2016Ellensburg branch and a business deposit consolidation process completed during second quarter 2017 and the related changesdeposits included in fee structures, as well as increases in deposit balances.other income.


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Comparison of nine months ended September 30, 20172023 to the comparable period in the prior year
Total noninterest income increased $3.0 million, or 12.7%, to $26.4 million for the nine months ended September 30, 2017 compared to $23.4 million for the same period in 2016. The following table presents the change in the key components of noninterest income for the periods noted.indicated:
Nine Months Ended September 30,Change
20232022$%
(Dollars in thousands)
Service charges and other fees$8,162 $7,739 $423 5.5 %
Card revenue6,396 6,774 (378)(5.6)
Loss on sale of investment securities, net(2,226)— (2,226)(100.0)
Gain on sale of loans, net307 593 (286)(48.2)
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Nine Months Ended September 30,Change
Nine Months Ended September 30,    20232022$%
2017 2016 Change Percentage Change(Dollars in thousands)
(Dollars in thousands)
Service charges and other fees$13,408
 $10,462
 $2,946
 28.2 %
Gain on sale of investment securities, net161
 1,106
 (945) (85.4)
Gain on sale of loans, net6,562
 5,406
 1,156
 21.4
Interest rate swap fees743
 1,105
 (362) (32.8)Interest rate swap fees230 383 (153)(39.9)
Bank owned life insurance incomeBank owned life insurance income2,280 3,182 (902)(28.3)
Gain on sale of other assets, netGain on sale of other assets, net2 469 (467)(99.6)
Other income5,532
 5,354
 178
 3.3
Other income6,659 3,867 2,792 72.2 
Total noninterest income$26,406
 $23,433
 $2,973
 12.7 %Total noninterest income$21,810 $23,007 $(1,197)(5.2)%
Service charges and other fees increased $2.9Noninterest income decreased $1.2 million, or 28.2% to $13.4 million for5.2%, during the nine months ended September 30, 20172023 compared to $10.5 million for the same period in 2016, due primarily to a consumer deposit account consolidation process completed at the end of 2016 and a business deposit consolidation process completed during second quarter 2017 and the related changes in fee structures, as well as increases in deposit balances.
Gain2022. A loss on sale of loans, net increased $1.2investment securities of $2.2 million or 21.4% to $6.6 million forwas recognized during the nine months ended September 30, 2017 compared to $5.42023 as a result of the sale of $67.9 million of investment securities available for the same period in 2016,sale. Other income increased due primarily to a $935,000 increase inone-time $1.6 million gain on sale of other loans. During eachVisa Inc. Class B common stock recognized and a $610,000 gain on sale of the Ellensburg branch and related deposits during the nine months ended September 30, 2017 and 2016, the2023. Bank sold one loan previously classified as purchased credit impaired. In addition, gain on sale of SBA loans increased $272,000owned life insurance income decreased due primarily to an increase in proceeds from sale of SBA loans of $7.8a $1.0 million or 90.9%, to $16.4 million fordeath benefit recognized during the nine months ended September 30, 2017 compared to $8.6 million for the same period in 2016. The detail of gain on sale of loans, net is included in the following schedule.2022.

 Nine Months Ended September 30,  
 2017 2016 Change Percentage Change
 (Dollars in thousands)
Mortgage loans$2,515
 $2,566
 $(51) (2.0)%
SBA loans1,049
 777
 272
 35.0
Other loans2,998
 2,063
 935
 45.3
Total gain on sale of loans, net$6,562
 $5,406
 $1,156
 21.4 %
The increase in noninterest income was partially offset by a decrease in gain on sale of investment securities, net of $945,000, or 85.4%, to $161,000 for the nine months ended September 30, 2017 from $1.1 million for the nine months ended September 30, 2016. The decrease was primarily the result of fewer sales as the Bank actively managed its investment portfolio. The proceeds from sale of investment securities was $21.9 million for the nine months ended September 30, 2017 compared to $94.4 million for the same period in 2016.
Noninterest Expense Overview
Comparison of quarter ended September 30, 2017 to the comparable quarter in the prior year
Noninterest expense increased $1.1 million, or 4.2%, to $28.0 million during the three months ended September 30, 2017 compared2023 to $26.8 million for the three months ended September 30, 2016. comparable period in the prior year
The following table presents changes in the key components of noninterest expense for the periods noted.indicated:

Three Months Ended September 30,Change
20232022$%
(Dollars in thousands)
Compensation and employee benefits$25,008 $24,206 $802 3.3 %
Occupancy and equipment4,814 4,422 392 8.9 
Data processing4,366 4,185 181 4.3 
Marketing389 358 31 8.7 
Professional services582 639 (57)(8.9)
State/municipal business and use tax1,088 963 125 13.0 
Federal deposit insurance premium818 500 318 63.6 
Amortization of intangible assets595 671 (76)(11.3)
Other expense3,310 3,203 107 3.3 
Total noninterest expense$40,970 $39,147 $1,823 4.7 %
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 Three Months Ended September 30,    
 2017 2016 Change Percentage Change
 (Dollars in thousands)
Compensation and employee benefits$15,823
 $15,633
 $190
 1.2 %
Occupancy and equipment3,979
 3,926
 53
 1.3
Data processing2,090
 1,943
 147
 7.6
Marketing933
 745
 188
 25.2
Professional services1,453
 830
 623
 75.1
State and local taxes640
 820
 (180) (22.0)
Federal deposit insurance premium433
 296
 137
 46.3
Other real estate owned, net(88) (142) 54
 (38.0)
Amortization of intangible assets319
 359
 (40) (11.1)
Other expense2,373
 2,408
 (35) (1.5)
Total noninterest expense$27,955
 $26,818
 $1,137
 4.2 %
Professional servicesNoninterest expense increased $623,000,$1.8 million, or 75.1%4.7%, to $1.5 million during the three months ended September 30, 2017 from $830,000 during the three months ended September 30, 2016. The increase in the three months ended September 30, 20172023 compared to the same period in 2016 was2022 due primarily due to legal costs incurred for our pending merger with Puget Sound as discussed in Note (16) Definitive Agreement as well as benefit-based consulting fees related to the consumer and business deposit account consolidation processes, which correspondingly generated an increase in service charges and other fees.
Compensationcompensation and employee benefits increased $190,000, or 1.2%, to $15.8 million during the three months ended September 30, 2017resulting from $15.6 million during the three months ended September 30, 2016. Thean increase in the three months ended September 30, 2017 compared tonumber of full-time equivalent employees including the same periodaddition of commercial and relationship banking teams in 2016 was primarily due to senior level staffing increases2023 and standard salary increases.
The ratio of noninterest expense to average assets (annualized) was 2.76% for the three months ended September 30, 2017 compared to 2.81% for the three months ended September 30, 2016. The decrease was primarily a result of an increase in assetssalaries and cost efficiencies gained through efforts bywages due to annual salary increases. Occupancy and equipment expense increased due to our recent expansion into Eugene, Oregon and Boise, Idaho. Data processing costs increased due primarily to the Companyexpansion of digital services including the addition of the ability to manage noninterest expenses.open consumer deposit accounts online. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023.

Comparison of the nine months ended September 30, 20172023 to the comparable period in the prior year
Noninterest expense increased $3.3 million, or 4.2%, to $83.0 million during the nine months ended September 30, 2017 compared to $79.7 million for the nine months ended September 30, 2016. The following table presents changes in the key components of noninterest expense for the periods noted.indicated:
Nine Months Ended September 30,Change
20232022$%
(Dollars in thousands)
Compensation and employee benefits$75,325 $67,236 $8,089 12.0 %
Occupancy and equipment14,372 12,924 1,448 11.2 
Data processing13,208 12,431 777 6.3 
Marketing1,232 968 264 27.3 
41
 Nine Months Ended September 30,    
 2017 2016 Change Percentage Change
 (Dollars in thousands)
Compensation and employee benefits$48,119
 $45,652
 $2,467
 5.4 %
Occupancy and equipment11,607
 11,873
 (266) (2.2)
Data processing6,007
 5,564
 443
 8.0
Marketing2,545
 2,254
 291
 12.9
Professional services3,515
 2,508
 1,007
 40.2
State and local taxes1,828
 2,031
 (203) (10.0)
Federal deposit insurance premium1,090
 1,316
 (226) (17.2)
Other real estate owned, net(36) 330
 (366) (110.9)
Amortization of intangible assets966
 1,057
 (91) (8.6)
Other expense7,346
 7,079
 267
 3.8
Total noninterest expense$82,987
 $79,664
 $3,323
 4.2 %

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Nine Months Ended September 30,Change
20232022$%
(Dollars in thousands)
Professional services1,961 1,867 94 5.0 
State/municipal business and use tax3,150 2,626 524 20.0 
Federal deposit insurance premium2,465 1,525 940 61.6 
Amortization of intangible assets1,841 2,079 (238)(11.4)
Other expense10,346 8,918 1,428 16.0 
Total noninterest expense$123,900 $110,574 $13,326 12.1 %
Compensation and employee benefitsNoninterest expense increased $2.5$13.3 million, or 5.4%12.1%, to $48.1 million during the nine months ended September 30, 20172023 compared to the same period in 2022 due primarily to an increase in compensation and employee benefits resulting from $45.7 milliona 5.9% increase in the average number of full-time equivalent employees including the addition of commercial and relationship banking teams in 2023 and an increase in salaries and wages due to annual salary increases. Occupancy and equipment expense increased due to our recent expansion into Eugene, Oregon and Boise, Idaho. Data processing costs increased due primarily to the expansion of digital services including the addition of the ability to open consumer deposit accounts online. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023. Other expense increased due to an increase in customer deposit loss expense and employee related expenses, which included additional expenses related to calling efforts for the newly added teams, as well as a general increase in operating costs.

Income Tax Expense Overview
Comparison of the three months ended September 30, 2023to the comparable period in the prior year
The following table presents the income tax expense, related metrics and their changes for the periods indicated:
Three Months Ended September 30,Change
20232022$%
(Dollars in thousands)
Income before income taxes$21,797 $25,647 $(3,850)(15.0)%
Income tax expense$3,578 $4,657 $(1,079)(23.2)%
Effective income tax rate16.4 %18.2 %(1.8)%(9.9)%
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 bank owned life insurance and investments in low-income housing tax credits during the three months ended September 30, 2023 compared to the same period in 2022.

Comparison of the nine months ended September 30, 2023 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,
20232022Change% Change
(Dollars in thousands)
Income before income taxes$66,338 $71,547 $(5,209)(7.3)%
Income tax expense$10,816 $12,216 $(1,400)(11.5)%
Effective income tax rate16.3 %17.1 %(0.8)%(4.7)%
Income tax expense and the effective income rate both decreased due primarily to lower estimated pre-tax income during the nine months ended September 30, 2016. The increase in the nine months ended September 30, 20172023 compared to the same period in 2016 was primarily due to senior level staffing increases, including2022 which increased the additionimpact of the new Portland, Oregon lending team members who startedfavorable permanent tax items such as tax-exempt investments, investments in May 2017,bank owned life insurance and standard salary increases.
Professional services increased $1.0 million, or 40.2%, to $3.5 million during the nine months ended September 30, 2017 from $2.5 million during the nine months ended September 30, 2016. The increaseinvestments in the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to due to benefit-based consulting fees related to the consumer deposit account consolidation process, which correspondingly generated an increase in service charges and other fees. Professional services also increased as a result of Trust-related expenses based on a renegotiated contract for 2017, which also increased other noninterest income, and legal costs incurred for our pending merger with Puget Sound as discussed in Note (16) Definitive Agreement.
Data processing increased $443,000, or 8.0%, to $6.0 million during the nine months ended September 30, 2017 from $5.6 million during the nine months ended September 30, 2016 primarily due to higher transactional activity in the core operating system and internet banking as a result of the growth in loans and deposits..
Other real estate owned, net decreased $366,000 or 110.9%, to income of $36,000 during the nine months ended September 30, 2017 compared to expense of $330,000 during the nine months ended September 30, 2016. The income recorded during the nine months ended September 30, 2017 was due to gain on sale of properties of $111,000, offset by maintenance expense of $75,000. For the nine months ended September 30, 2016, the Bank recorded a valuation adjustment of $383,000 and maintenance expense of $120,000, which was offset by the gain on sale of properties of $173,000.
The ratio of noninterest expense to average assets (annualized) was 2.82% for the nine months ended September 30, 2017, compared to 2.86% for the nine months ended September 30, 2016. The decrease was primarily a result of an increase in assets and cost efficiencies gained through efforts by the Company to manage noninterest expenses.
Income Tax Expense
Comparison of quarter ended September 30, 2017 to the comparable quarter in the prior year
Income tax expense decreased by $199,000, or 4.8%, to $3.9 million for the three months ended September 30, 2017 from $4.1 million for the three months ended September 30, 2016. The effective tax rate was 27.0% for the three months ended September 30, 2017 compared to 27.2% for the same period in 2016. The decrease in the effective tax rate during the three months ended September 30, 2017 compared to the same period in 2016 was due primarily to an increase in tax benefits from low incomelow-income housing tax credits, offset partially by the implementationcredits.

42
Table of FASB ASU 2016-09 requiring the excess tax benefits on option exercises and restricted stock vesting to be recognized in earnings prospectively starting on January 1, 2017.Contents
Comparison of nine months ended September 30, 2017 to the comparable period in the prior year
Income tax expense increased by $645,000, or 6.2%, to $11.1 million for the nine months ended September 30, 2017 from $10.4 million for the nine months ended September 30, 2016. The effective tax rate was 25.9% for the nine months ended September 30, 2017 compared to 26.5% for the same period in 2016. The decrease in the effective tax rate during the nine months ended September 30, 2017 compared to the same period in 2016 was due primarily to the implementation of FASB ASU 2016-09 requiring the excess tax benefits on option exercises and restricted stock vesting to be recognized in earnings prospectively starting on January 1, 2017.

Financial Condition Overview
Total assets increased $171.1 million, or 4.4%, to $4.05 billion as of September 30, 2017 compared to $3.88 billion as of December 31, 2016. Total loans receivable, net, increased $156.4 million, or 6.0%, to $2.77 billion at September 30, 2017 compared to $2.61 billion at December 31, 2016. Loans were mostly funded through an increase in deposits. Deposits increased by $91.2 million, or 2.8%, to $3.32 billion as of September 30, 2017 compared to $3.23 billion as of December 31, 2016. Total non-maturity deposits decreased to 88.1% of total deposits at September 30, 2017 from 88.9% at December 31, 2016 and certificates of deposits increased to 11.9% of total deposits at September 30, 2017 from 11.1% at December 31, 2016.
Prepaid expenses and other assets increased $8.4 million, or 10.6%, to $87.7 million at September 30, 2017 from $79.4 million at December 31, 2016 primarily as a result of the Company's investment in two new low income housing tax credit partnerships totaling $14.3 million. These investments had corresponding obligations recorded in accrued expenses and other liabilities of $14.3 million at September 30, 2017. These obligations will decrease as

58

projects in the partnerships are funded. During the nine months ended September 30, 2017 the Company made capital contributions related to other low income housing tax credit partnerships of $8.5 million, partially offsetting the increase in accrued expenses and other liabilities.
Federal Home Loan Bank advances increased $37.8 million, or 47.5%, to $117.4 million as of September 30, 2017 from $79.6 million as of December 31, 2016. The increase in advances was required as a supplement to deposits in order to fund loan growth.
Total stockholders’ equity increased $25.8 million, or 5.4%, to $507.6 million as of September 30, 2017 from $481.8 million at December 31, 2016. The increase during the nine months ended September 30, 2017 was due primarily to net income of $31.8 million and a $4.4 million improvement in accumulated other comprehensive income, net of tax, offset partially by cash dividends declared of $11.4 million. The Company’s equity position was 12.5% of total assets as of September 30, 2017 and 12.4% as of December 31, 2016.
The table below provides a comparison of the changes in the Company's financial condition from December 31, 2016at the periods indicated:
September 30, 2023December 31, 2022Change
$%
(Dollars in thousands)
Assets
Cash and cash equivalents$220,503 $103,590 $116,913 112.9 %
Investment securities available for sale, at fair value, net1,147,547 1,331,443 (183,896)(13.8)
Investment securities held to maturity, at amortized cost, net746,845 766,396 (19,551)(2.6)
Loans held for sale263 — 263 100.0 
Loans receivable, net4,219,911 4,007,872 212,039 5.3 
Premises and equipment, net76,436 76,930 (494)(0.6)
Federal Home Loan Bank stock, at cost8,373 8,916 (543)(6.1)
Bank owned life insurance123,639 122,059 1,580 1.3 
Accrued interest receivable18,794 18,547 247 1.3 
Prepaid expenses and other assets341,952 296,181 45,771 15.5 
Other intangible assets, net5,386 7,227 (1,841)(25.5)
Goodwill240,939 240,939 — — 
Total assets$7,150,588 $6,980,100 $170,488 2.4 %
Liabilities and Stockholders' Equity
Deposits$5,635,187 $5,907,420 $(272,233)(4.6)%
Deposits held for sale— 17,420 (17,420)(100.0)
Total deposits5,635,187 5,924,840 (289,653)(4.9)
Borrowings450,000 — 450,000 100.0 
Junior subordinated debentures21,692 21,473 219 1.0 
Securities sold under agreement to repurchase23,158 46,597 (23,439)(50.3)
Accrued expenses and other liabilities207,005 189,297 17,708 9.4 
Total liabilities6,337,042 6,182,207 154,835 2.5 
Common stock548,652 552,397 (3,745)(0.7)
Retained earnings377,522 345,346 32,176 9.3 
Accumulated other comprehensive loss, net(112,628)(99,850)(12,778)(12.8)
Total stockholders' equity813,546 797,893 15,653 2.0 
Total liabilities and stockholders' equity$7,150,588 $6,980,100 $170,488 2.4 %
Total assets increased due primarily to September 30, 2017.an increase in loans receivable, net due to loan growth and an increase in cash and cash equivalents, offset partially by a decrease in investment securities. Total liabilities and stockholders' equity increased due primarily to an increase in borrowings offset partially by a decrease in deposits.

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 complements 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.
43
  September 30, 2017 December 31, 2016 Change Percent Change
  (Dollars in thousands)
Assets        
Cash and cash equivalents $111,258
 $103,745
 $7,513
 7.2 %
Investment securities 800,060
 794,645
 5,415
 0.7
Loans held for sale 5,368
 11,662
 (6,294) (54.0)
Total loans receivable, net 2,766,113
 2,609,666
 156,447
 6.0
Other real estate owned 523
 754
 (231) (30.6)
Premises and equipment, net 60,457
 63,911
 (3,454) (5.4)
Federal Home Loan Bank stock, at cost 9,343
 7,564
 1,779
 23.5
Bank owned life insurance 71,474
 70,355
 1,119
 1.6
Accrued interest receivable 12,295
 10,925
 1,370
 12.5
Prepaid expenses and other assets 87,728
 79,351
 8,377
 10.6
Other intangible assets, net 6,408
 7,374
 (966) (13.1)
Goodwill 119,029
 119,029
 —
 —
Total assets $4,050,056
 $3,878,981
 $171,075
 4.4 %
         
Liabilities        
Deposits $3,320,818
 $3,229,648
 $91,170
 2.8
Federal Home Loan Bank advances 117,400
 79,600
 37,800
 47.5
Junior subordinated debentures 19,936
 19,717
 219
 1.1
Securities sold under agreement to repurchase 28,668
 22,104
 6,564
 29.7
Accrued expenses and other liabilities 55,626
 46,149
 9,477
 20.5
Total liabilities 3,542,448
 3,397,218
 145,230
 4.3
Stockholders' equity     
  
Common stock 360,113
 359,060
 1,053
 0.3
Retained earnings 145,677
 125,309
 20,368
 16.3
Accumulated other comprehensive income (loss), net 1,818
 (2,606) 4,424
 169.8
Total stockholders' equity 507,608
 481,763
 25,845
 5.4
Total liabilities and stockholders' equity $4,050,056
 $3,878,981
 $171,075
 4.4 %


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Table of Contents


The following table provides information regarding our investment securities at the dates indicated:
Lending Activities
 September 30, 2023December 31, 2022Change
 Balance% of
Total		Balance% of
Total		$%
 (Dollars in thousands)
Investment securities available for sale, at fair value:
U.S. government and agency securities$20,424 1.1 %$63,859 3.0 %$(43,435)(68.0)%
Municipal securities106,805 5.6 153,026 7.3 (46,221)(30.2)
Residential CMO and MBS(1)
401,181 21.2 424,386 20.2 (23,205)(5.5)
Commercial CMO and MBS(1)
597,213 31.5 664,421 31.8 (67,208)(10.1)
Corporate obligations3,780 0.2 3,834 0.2 (54)(1.4)
Other asset-backed securities18,144 1.0 21,917 1.0 (3,773)(17.2)
Total$1,147,547 60.6 %$1,331,443 63.5 %$(183,896)(13.8)%
Investment securities held to maturity, at amortized cost:
U.S. government and agency securities$151,040 8.0 %$150,936 7.2 %$104 0.07 %
Residential CMO and MBS(1)
273,609 14.4 290,318 13.8 (16,709)(5.8)
Commercial CMO and MBS(1)
322,196 17.0 325,142 15.5 (2,946)(0.9)
Total$746,845 39.4 %$766,396 36.5 %$(19,551)(2.6)%
Total investment securities$1,894,392 100.0 %$2,097,839 100.0 %$(203,447)(9.7)%
As indicated in the table below, loans receivable, net was $2.80(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.
Total investment securities decreased $203.4 million, or 9.7%, to $1.89 billion at September 30, 2017, an increase of $156.8 million, or 5.9%,2023 from $2.64$2.10 billion at December 31, 2016. 2022 due primarily to maturities and prepayments of $154.0 million and sales of $67.9 million, partially offset by purchases of $37.7 million.

Loan Portfolio Overview
Changes by loan type
The increase inCompany 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, 2023December 31, 2022Change
Amortized Cost% of Loans ReceivableAmortized Cost% of Loans Receivable$%
(Dollars in thousands)
Commercial business:
Commercial and industrial$691,318 16.2 %$693,568 17.1 %$(2,250)(0.3)%
Owner-occupied CRE953,779 22.4 937,040 23.1 16,739 1.8 
Non-owner occupied CRE1,690,099 39.5 1,586,632 39.2 103,467 6.5 
Total commercial business3,335,196 78.1 3,217,240 79.4 117,956 3.7 
Residential real estate377,448 8.8 343,631 8.5 33,817 9.8 
Real estate construction and land development:
Residential70,804 1.7 80,074 2.0 (9,270)(11.6)
Commercial and multifamily310,024 7.3 214,038 5.3 95,986 44.8 
Total real estate construction and land development380,828 9.0 294,112 7.3 86,716 29.5 
Consumer173,386 4.1 195,875 4.8 (22,489)(11.5)
Total$4,266,858 100.0 %$4,050,858 100.0 %$216,000 5.3 %
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Table of Contents
Loans receivable forincreased $216.0 million, or 5.3%, to $4.27 billion at September 30, 2023 from $4.05 billion at December 31, 2022 primarily due to new loan growth. New loans funded during the nine months ended September 30, 2017 was primarily due2023 were $370.2 million.
Owner-occupied CRE and non-owner occupied CRE loans increased by $120.2 million to increases in commercial business loans of $121.3 million, consumer loans of $15.5 million and real estate construction and land development loans of $15.3 million.
 September 30, 2017 December 31, 2016
 Balance % of Total Balance % of Total
 (Dollars in thousands)
Commercial business:       
Commercial and industrial$665,582
 23.8% $637,773
 24.2%
Owner-occupied commercial real estate602,238
 21.5
 558,035
 21.1
Non-owner occupied commercial real estate930,188
 33.3
 880,880
 33.4
Total commercial business2,198,008
 78.6
 2,076,688
 78.7
One-to-four family residential81,422
 2.9
 77,391
 2.9
Real estate construction and land development:      
One-to-four family residential51,451
 1.8
 50,414
 1.9
Five or more family residential and commercial properties122,981
 4.4
 108,764
 4.1
Total real estate construction and land development174,432
 6.2
 159,178
 6.0
Consumer340,643
 12.2
 325,140
 12.3
Gross loans receivable2,794,505
 99.9
 2,638,397
 99.9
Deferred loan costs, net3,008
 0.1
 2,352
 0.1
Loans receivable, net$2,797,513
 100.0% $2,640,749
 100.0%


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Nonperforming Assets and Credit Quality Metrics
$2.64 billion at September 30, 2023, compared to $2.52 billion at December 31, 2022. The following table describes our nonperforming assetsprovides information about owner occupied CRE and other credit quality metricsnon-owner occupied CRE loans by collateral type at the dates indicated:
 September 30, 2017 December 31, 2016
 (Dollars in thousands)
Nonaccrual loans:   
Commercial business$9,683
 $8,580
One-to-four family residential84
 94
Real estate construction and land development869
 2,008
Consumer316
 227
Total nonaccrual loans (1)(2)10,952
 10,909
Other real estate owned523
 754
Total nonperforming assets$11,475
 $11,663
    
Allowance for loan losses$31,400
 $31,083
Allowance for loan losses to loans receivable, net1.12% 1.18%
Allowance for loan losses to nonperforming loans286.71% 284.93%
Nonperforming loans to loans receivable, net0.39% 0.41%
Nonperforming assets to total assets0.28% 0.30%
    
Performing TDR loans:   
Commercial business$18,571
 $19,837
One-to-four family residential219
 227
Real estate construction and land development1,136
 2,141
Consumer118
 83
Total performing TDR loans (3)$20,044
 $22,288
Accruing loans past due 90 days or more (4)$—
 $—
Potential problem loans (5)84,089
 87,762
(1)
At September 30, 2017 and December 31, 2016, $5.9 million and $6.9 million of nonperforming loans, respectively, were considered TDR loans.
(2)
At September 30, 2017 and December 31, 2016, $2.5 million and $2.8 million of nonperforming loans, respectively, were guaranteed by government agencies.
(3)
At September 30, 2017 and December 31, 2016, $1.4 million and $682,000 of performing TDR loans, respectively, were guaranteed by government agencies.
(4)
There were no accruing loans past due 90 days or more that were guaranteed by government agencies at September 30, 2017 or December 31, 2016.
(5)
At September 30, 2017 and December 31, 2016, $1.7 million and $1.1 million of potential problem loans, respectively, were guaranteed by government agencies.

September 30, 2023December 31, 2022Change
Amortized Cost% of CRE LoansAmortized Cost% of CRE Loans$%
(Dollars in thousands)
Owner occupied and non-owner occupied CRE loans by collateral type:
Office$566,916 21.4 %$579,762 22.9 %$(12,846)(2.2)%
Industrial415,243 15.7 366,947 14.6 48,296 13.2 
Retail store / shopping center287,746 10.9 291,799 11.6 (4,053)(1.4)
Multi-family286,091 10.8 256,661 10.2 29,430 11.5 
Mini-storage158,475 6.0 148,580 5.9 9,895 6.7 
Mixed use property152,979 5.8 154,793 6.1 (1,814)(1.2)
Warehouse152,055 5.8 147,443 5.8 4,612 3.1 
Motel / hotel141,731 5.4 129,352 5.1 12,379 9.6 
Single purpose122,819 4.6 112,924 4.5 9,895 8.8 
Recreational / school68,469 2.6 70,565 2.8 (2,096)(3.0)
Other291,354 11.0 264,846 10.5 26,508 10.0 
Total$2,643,878 100.0 %$2,523,672 100.0 %$120,206 4.8 %
Nonperforming assets were $11.5Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans totaling $566.9 million, or 0.28%21.4% of the total assetsowner-occupied CRE and $11.7 million, or 0.30% of total assets as of September 30, 2017 and December 31, 2016, respectively. The balance of nonaccrual loans increased $43,000, or 0.4%, to $11.0 million ($2.5 million guaranteed by governmental agencies)non-owner occupied CRE, at September 30, 20172023. Of this total, $283.7 million, or 50.0%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile as there is less tenant rollover risk and generally have guarantees from $10.9the company occupying the space as well as the owners of the company. The average loan balance of owner-occupied CRE and non-owner occupied CRE was $1.2 million ($2.8 million guaranteed by governmental agencies) at December 31, 2016. For the nine months ended September 30, 2017, the increase in nonaccrual loans was primarily due to additions to nonaccrual loans of $5.1 million, offset partially by net principal reductions of $4.3 million and charge-offs of $750,000. The other real estate owned balance decreased to $523,000 at September 30, 2017 from $754,000 at December 31, 2016 primarily as a result of the sale of two properties.2023.
Performing TDRCommercial and multifamily construction loans increased $96.0 million or 44.8% due to new loan originations and advances on outstanding loans. New commitments for commercial and multifamily construction loans were $20.0 million and $22.3 million as of September 30, 2017 and December 31, 2016, respectively. The $2.2 million, or 10.1%, decrease in performing TDR loans for the nine months ended September 30, 2017 was primarily the result of net principal payments of $8.3 million and loans transferred to nonaccrual of $1.1 million, partially offset by troubled loans restructured during the period of $7.1 million. At September 30, 2017 and

61

December 31, 2016, the Company had an allowance for loan losses on the performing TDR loans of $2.1 million and $2.0 million, respectively.
Potential problem loans as of September 30, 2017 and December 31, 2016 were $84.1 million and $87.8 million, respectively. Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which we are monitoring because the financial information of the borrower causes concerns as to their ability to meet their loan repayment terms. Loans that are past due 90 days or more and still accruing interest are both well secured and in the process of collection. The $3.7 million, or 4.2%, decrease in potential problem loans was primarily the result of net principal payments of $18.9 million, loans transferred to held for sale of $5.8 million, loans transferred to nonaccrual status of $4.6 million and loan grade improvements of $4.4 million, partially offset by the addition of loans graded as potential problem loans of $31.4$209.5 million during the nine months ended September 30, 2017.2023.

Consumer loans decreased $22.5 million primarily due to a $33.1 million decline in indirect loans outstanding as the Bank ceased originating indirect auto loan originations in 2020.
Loans classified as nonaccrual and performing modified loans and nonperforming assets
AnalysisThe following table provides information about our nonaccrual loans, performing modified loans and nonperforming assets for the dates indicated:
September 30, 2023December 31, 2022Change
$%
(Dollars in thousands)
Nonaccrual loans: (1)
Commercial business$3,065 $5,869 $(2,804)(47.8)%
Real estate construction and land development— 37 (37)(100.0)
Total nonaccrual loans3,065 5,906 (2,841)(48.1)
Other real estate owned— — — — 
Accruing loans past due 90 days or more$2,158 $1,615 $543 33.6 %
Total nonperforming assets$5,223 $7,521 $(2,298)(30.6)%
Credit quality ratios:
Nonaccrual loans to loans receivable0.07 %0.15 %(0.08)%(53.3)%
Nonperforming loans to loans receivable0.12 0.19 (0.07)(36.8)
Nonperforming assets to total assets0.07 0.11 (0.04)(36.4)
45
Table of Allowance for Loan LossesContents
Management maintains an allowance for loan losses (“ALL”) to provide for estimated probable incurred losses
September 30, 2023December 31, 2022Change
$%
Modified loans:(2)
Commercial business$9,471 
Real estate construction and land development3,452 
Consumer45 
Total performing modified loans$12,968 
(1) At both September 30, 2023 and December 31, 2022, $1.5 million of nonaccrual loans, were guaranteed by government agencies.
(2) The Company adopted ASU 2022-02 on a prospective basis January 1, 2023.
The following table provides the changes in nonaccrual loans during the loan portfolio at the balance sheet date. The adequacy of the ALL is monitored through our ongoing quarterly loan quality assessments.nine months ended September 30, 2023:
We assess the estimated credit losses inherent in our loan portfolio by considering a number of elements including:
•Historical loss experience in the loan portfolio;
•Impact of environmental factors, including:
▪Levels
(Dollars in thousands)
Balance, beginning of period$5,906 
Additions908 
Net principal payments, sales and trends in delinquencies and classified and impaired loans;transfers to accruing status(1,175)
Payoffs(2,574)
▪Levels of and trends in charge-offs and recoveries;
▪Balance, end of periodTrends in volume and terms of loans;$
3,065 
▪Effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices;
▪Experience, ability and depth of lending management and other relevant staff;
▪National and local economic trends and conditions;
▪Other external factors such as competition, legal and regulatory;
▪Effects of changes in credit concentrations; and
▪Other factors
We calculate an appropriate ALLNonaccrual loans decreased $2.8 million, or 48.1%, due primarily to ongoing collection efforts including the payoff of a commercial business loan for loans in our loan portfolio, except PCI loans, by applying historical loss factors$1.6 million which also included a recovery of $1.1 million recognized during the three months ended September 30, 2023.

Allowance for homogeneous classes of the portfolio, adjusted for changes to the above-noted environmental factors. We may record specific provisions for impaired loans, including loansCredit Losses on nonaccrual status and TDRs, after a careful analysis of each loan’s credit and collateral factors. Our analysis of an appropriate ALL combines the provisions made for our non-impaired loans and the specific provisions made for each impaired loan.
The allowance for loan losses on loans designated as non-PCI loans is similar to the methodology described above except that for non-PCI loans, the remaining unaccreted discounts resulting from the fair value adjustments recorded at the time the loans were purchased are additionally factored into the allowance methodology.
For the PCI loans, the acquisition date fair value incorporated our estimate of future expected cash flows until the ultimate resolution of these credits. To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the PCI loan portfolio will be recognized immediately into earnings. To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the previously recognized provision for that loan or pool of loans, if any, and then prospectively recognized in interest income as a yield adjustment.
While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. A decline in national and local economic conditions, or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of their routine examination process, which may result in the establishment of additional allowance for loan losses based upon their judgment of information available to them at the time of their examination.

62

Loans Overview
The following table provides information regarding changes in our allowance for loan losses as of andACL on loans for the threeperiods indicated:
At or For the Nine Months Ended September 30,Change
20232022$%
(Dollars in thousands)
ACL on loans at the end of period$46,947 $42,089 $4,858 11.5 %
Credit quality ratios:
ACL on loans to loans receivable1.10 %1.05 %0.05 4.8 
ACL on loans to nonaccrual loans1,531.71 675.15 856.56 126.9 
Net recoveries$(895)$(980)$85 (8.7)
Average balance of loans receivable, net during the period(1)
4,129,429 3,815,387 314,042 8.2 
Net recoveries on loans to average loans receivable, net(2)
(0.03)%(0.03)%— %— %
(1) Average balance of loans receivable, net includes loans held for sale.
(2) Annualized.
The ACL on loans increased $4.0 million, or 9.2%, to $46.9 million atSeptember 30, 2023 from $43.0 million at December 31, 2022due primarily to an increase in loans receivable, net as well as a change in mix of loans.
The following table presents the ACL on loans by loan portfolio segment at the indicated dates:
 September 30, 2023December 31, 2022
 ACL on LoansACL as a % of Loans in Loan Category% of Loans in Loan Category to
Total Loans		ACL on LoansACL as a % of Loans in Loan Category% of Loans in Loan Category to
Total Loans
 (Dollars in thousands)
Commercial business$31,105 0.93 %78.1 %$30,718 0.95 %79.4 %
Residential real estate3,549 0.94 8.8 2,872 0.84 8.5 
Real estate construction and land development9,959 2.62 9.0 7,063 2.40 7.3 
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Table of Contents
 September 30, 2023December 31, 2022
 ACL on LoansACL as a % of Loans in Loan Category% of Loans in Loan Category to
Total Loans		ACL on LoansACL as a % of Loans in Loan Category% of Loans in Loan Category to
Total Loans
 (Dollars in thousands)
Consumer2,334 1.35 4.1 2,333 1.19 4.8 
Total ACL on loans$46,947 1.10 %100.0 %$42,986 1.06 %100.0 %

Deposits Overview
The following table summarizes the Company's deposits at the dates indicated:
September 30, 2023December 31, 2022Change
Balance (1)
% of Total Deposits
Balance (1)
% of Total Deposits$%
(Dollars in thousands)
Noninterest demand deposits$1,789,293 31.7 %$2,099,464 35.5 %$(310,171)(14.8)%
Interest bearing demand deposits1,630,007 28.9 1,830,727 30.9 (200,720)(11.0)
Money market accounts1,081,253 19.2 1,063,243 17.9 18,010 1.7 
Savings accounts506,028 9.0 623,833 10.5 (117,805)(18.9)
Total non-maturity deposits5,006,581 88.8 5,617,267 94.8 (610,686)(10.9)
Certificates of deposit628,606 11.2 307,573 5.2 321,033 104.4 
Total deposits$5,635,187 100.0 %$5,924,840 100.0 %$(289,653)(4.9)%
(1) Deposit balances at December 31, 2022 include deposits held for sale of $17.4 million, respectively.
Total deposits decreased $289.7 million, or 4.9%, to $5.64 billion at September 30, 2023, compared to $5.92 billion at December 31, 2022 due primarily to an overall reduction in market liquidity, as well as interest rate sensitive clients moving a portion of their non-operating deposits to higher yielding accounts. Certificate of deposits increased due to increasing rates which, attracted customers to this deposit type as well as the addition of $107.5 million in brokered deposits.
The Bank entered into a purchase and ninesale agreement with a third party to sell and transfer certain assets, deposits and other liabilities of its branch in Ellensburg, WA in September 2022. During the three months ended September 30, 20172023, $13.8 million in deposits were sold as part of the closing of the Ellensburg branch sale, which included $13.6 million of non-maturity deposits. At December 31, 2022, $17.4 million in deposits were classified as held for sale.

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 2016: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, 2023, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.20 billion. The Bank had no FHLB advances outstanding at both September 30, 2023 and December 31, 2022. 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.
The Bank maintains a credit facility with the FRB through both the Discount Window and BTFP with available borrowing capacity of $823.1 million as of September 30, 2023. The Bank had $450.0 million in BTFP borrowings outstanding at September 30, 2023. The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities. The advance rate on the collateral is at par value. The average rate on borrowings from the BTFP was 4.74%. The Bank had no FRB borrowings outstanding at December 31, 2022. All advances are secured by investment securities.
The Company utilizes securities sold under agreement to repurchase with one day maturities as a supplement to funding sources. Securities sold under agreement to repurchase are secured by pledged investment securities. Under the securities sold under agreement to repurchase, the Company is required to maintain an aggregate market value of securities pledged greater than the balance of the securities sold under agreement to repurchase. At September 30, 2023 and December 31, 2022, the Company had securities sold under agreements to repurchase of $23.2 million and $46.6 million, respectively.
In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and 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 as of September 30, 2023 and December 31, 2022 were $21.7 million and $21.5 million, respectively, net of unaccreted discount.
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 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in thousands)
Loans receivable, net at the end of the period$2,797,513
 $2,578,977
 $2,797,513
 $2,578,977
Average loans receivable during the period2,737,535
 2,526,150
 2,676,153
 2,461,856
        
Allowance for loan losses on loans at the beginning of the period$32,751
 $28,426
 $31,083
 $29,746
Provision for loan losses884
 1,495
 2,882
 3,754
Charge-offs:       
Commercial business(1,497) (328) (1,940) (3,698)
One-to-four family residential(15) —
 (15) —
Real estate construction and land development(556) —
 (556) (154)
Consumer(478) (572) (1,419) (1,370)
Total charge-offs(2,546) (900) (3,930) (5,222)
Recoveries:       
Commercial business8
 993
 834
 1,352
One-to-four family residential—
 —
 1
 2
Real estate construction and land development191
 —
 201
 83
Consumer112
 197
 329
 496
Total recoveries311
 1,190
 1,365
 1,933
Net (charge-offs) recoveries(2,235) 290
 (2,565) (3,289)
Allowance for loan losses at the end of the period$31,400
 $30,211
 $31,400
 $30,211
        
Allowance for loan losses to loans receivable, net1.12% 1.17 % 1.12% 1.17%
Net charge-offs (recoveries) on loans to average loans, annualized0.32% (0.05)% 0.13% 0.18%
The Bank maintains available unsecured federal funds lines with five correspondent banks totaling $145.0 million, with no outstanding borrowings at September 30, 2023.

Stockholders' Equity Overview
The allowance for loan lossesCompany’s stockholders' equity to assets ratio was 11.4% at September 30, 2023 and December 31, 2022. Total stockholders' equity increased $15.7 million, or 2.0%, to $31.4$813.5 million at September 30, 20172023 from $31.1$797.9 millionat December 31, 2016.2022. The increase was thedue primarily to $55.5 million in net income recognized, offset partially by $23.3 million in cash dividends declared, an increase of $12.8 million in accumulated other comprehensive loss as a result of provisiondeclining fair values of investment securities available for loan lossessale, and $6.9 million for the repurchase of $2.9 million, partially offset by net charge-offs of $2.6 million recordedthe Company's common stock during the nine months ended September 30, 2017,2023.
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 included PCI loan pool charge-offsis the Company’s predominant source of $1.7 million. income. On October 18, 2023, the Company’s board of directors declared a regular quarterly dividend of $0.22 per common share payable on November 15, 2023 to shareholders of record on November 1, 2023.

Regulatory Requirements Overview
The allowance for loan lossesCompany is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to loans receivable, net, decreasedcapital 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 1.12% atthe 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. 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, 2017 from 1.18% at December 31, 2016.2023, the Company and the Bank met all capital adequacy requirements to which they are subject.
The ratio of net charge-offs (recoveries) on loans to average loans, annualized deteriorated to net charge-off of 0.32% for the three months ended September 30, 2017 compared to net recoveries of 0.05% for the three months ended September 30, 2016, primarily due to PCI loan pool charge-offs of $1.5 million for the three months ended September 30, 2017. The ratio of net charge-offs (recoveries) on loans to average loans, annualized improved to a net charge-off of 0.13% for the nine months ended September 30, 2017 from 0.18% for the nine months ended September 30, 2016. The improvement of the ratio was due primarily to fewer net charge-offs recorded during the nine months ended September 30, 2017 compared to the same period in 2016 in addition to growth in the loan portfolio.
Nonperforming loans were $11.0 million and $10.9 million at September 30, 2017 and December 31, 2016, respectively, or 0.39% and 0.41% of loans receivable, net, respectively. The allowance for loan losses to nonperforming loans was 286.71% at September 30, 2017 and 284.93% at December 31, 2016. As of September 30, 2017,2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank identified $31.0 millionas 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 presents the actual capital ratios of impaired loans,the Company and the Bank at the periods indicated:
 CompanyBank
 September 30, 2023December 31, 2022September 30, 2023December 31, 2022
Common equity Tier 1 capital ratio12.9 %12.8 %12.9 %12.9 %
Leverage ratio9.9 9.7 9.7 9.4 
Tier 1 capital ratio13.3 13.2 12.9 12.9 
Total capital ratio14.1 14.0 13.8 13.7 
Capital conservation buffer6.1 6.0 5.8 5.7 
As of which $10.5 million had no specific valuation allowance as their estimated collateral value or discounted estimated cash flow was equal to or exceeds their carrying value. The remaining $20.5 million of impaired loans atboth September 30, 2017 had related specific valuation allowances totaling $3.1 million. Impaired loans totaled $33.2 million at2023 and December 31, 2016, of which $10.1 million had no specific valuation allowance2022, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and $23.1 million had $2.7 million of specific valuation allowance.

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Based on the established comprehensive methodology, management deemedFDIC that allowed the allowanceBank the option to delay for loan losses of $31.4 million at September 30, 2017 appropriate to provide for probable incurred credit losses based on an evaluation of known and inherent risks in the loan portfolio at that date. This compares to an allowance for loan losses attwo years until December 31, 20162021 an estimate of $31.1 million. AtCECL’s effect on regulatory capital, relative to the applicable acquisition or merger dates, no allowanceincurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.

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 losses was established on purchased loansgrowth objectives and to fund operations. Our funding strategy has been to acquire 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 Bank's total deposits as the loans were accounteda secondary source for at their fair value and a discount was established for the loans.funding. At September 30, 2017 and December 31, 2016, the remaining fair value discount for these purchased loans was $11.72023, we had $107.5 million and $13.5 million, respectively.
The following table outlines the allowance for loan losses and related loan balances at September 30, 2017 and December 31, 2016:
 September 30, 2017 December 31, 2016
 (Dollars in thousands)
General Valuation Allowance:   
Allowance for loan losses$24,113
 $21,791
Gross loans, excluding PCI and impaired loans$2,719,813
 $2,540,751
Percentage0.89% 0.86%
    
PCI Allowance:   
Allowance for loan losses$4,176
 $6,558
Gross PCI loans$43,696
 $64,448
Percentage9.56% 10.18%
    
Specific Valuation Allowance:   
Allowance for loan losses$3,111
 $2,734
Gross impaired loans$30,996
 $33,198
Percentage10.04% 8.24%
    
Total Allowance for Loan Losses:   
Allowance for loan losses$31,400
 $31,083
Gross loans receivable$2,794,505
 $2,638,397
Percentage1.12% 1.18%
While the Bank believes it has established its existing allowances for loan losses in accordance with U.S. GAAP, there can be no assurance that bank regulators, in reviewing the Bank’s loan portfolio, will not request the Bank to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is appropriate or that increased provisions will not be necessary should the credit qualitybrokered deposits, which constituted 1.91% of the loans deteriorate. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.
Based on management’s assessment of loan quality and current economic conditions, the Company believes that its allowance for loan losses was appropriate to absorb the probable incurred losses and inherent risks of loss in the loan portfolio at September 30, 2017.


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Deposits and Other Borrowings
As indicated in the table below, total deposits were $3.32 billion at September 30, 2017, an increase of $91.2 million, or 2.8%, from $3.23 billion at December 31, 2016.
 September 30, 2017 December 31, 2016
 Balance % of Total Balance % of Total
 (Dollars in thousands)
Noninterest bearing demand deposits$916,265
 27.6% $882,091
 27.3%
Interest bearing demand deposits1,031,449
 31.0
 963,821
 29.8
Money market accounts480,899
 14.5
 523,875
 16.2
Savings accounts497,024
 15.0
 502,460
 15.6
Total non-maturity deposits2,925,637
 88.1
 2,872,247
 88.9
Certificates of deposit395,181
 11.9
 357,401
 11.1
Total deposits$3,320,818
 100.0% $3,229,648
 100.0%
Non-maturity deposits (total deposits less certificates of deposit) increased $53.4 million, or 1.9%, to $2.93 billion at September 30, 2017 from $2.87 billion at December 31, 2016. Certificate of deposit accounts increased $37.8 million, or 10.6%, to $395.2 million at September 30, 2017 from $357.4 million at December 31, 2016 due primarily to the addition of $44.1 million of brokered certificates of deposit, which were used to supplement deposit growth in the funding of loan growth. Based on the change in the mix and volume of deposits, the percentage of certificates of deposit to total deposits increased to 11.9% at September 30, 2017 from 11.1% at December 31, 2016.
deposits. 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. The Bank is utilizing securities sold under agreement to repurchase as a supplement to its funding sources. Our repurchase agreements are secured by available for sale investment securities. At September 30, 2017, the Bank had securities sold under agreement to repurchase of $28.7 million, an increase of $6.6 million, or 29.7%, from $22.1 million at December 31, 2016. The increase was the result of customer activity during the period.
The Company also has junior subordinated debentures with a par value of $25.0 million which pay quarterly interest based on three-month LIBOR plus 1.56%. The debentures mature in 2037. The balance of the junior subordinated debentures was $19.9 million at September 30, 2017, which reflects the fair value of the debentures established during the Washington Banking Merger, adjusted for the accretion of discount from purchase accounting fair value adjustment.
At September 30, 2017, the Bank maintained credit facilities with the FHLB of Des Moines for $662.4 million and credit facilities with the Federal Reserve Bank of San Francisco for $50.6 million. The Company had FHLB advances outstanding of $117.4 million and $79.6 million at September 30, 2017 and December 31, 2016, respectively. The average cost of the FHLB advances during the nine months ended September 30, 2017 was1.09%. The Bank also maintains lines of credit with four correspondent banks to purchase federal funds totaling $90.0 million as of September 30, 2017. There were no federal funds purchased as of September 30, 2017 or December 31, 2016.
We are required to maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, satisfy other financial commitments and fund operations. We generally maintain sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, 2017, cash and cash equivalents totaled $111.3 million, or 2.7% of total assets. The fair value of investment securities available for sale totaled $800.1 million at September 30, 2017 of which $257.0 million were pledged to secure public deposits or borrowing arrangements. The fair value of investment securities available for sale that were not pledged totaled $543.1 million, or 13.4%, of total assets at September 30, 2017. The fair value of investment securities available for sale with maturities of one year or less were $6.6 million, or 0.2%, of total assets at September 30, 2017.

Liquidity and Cash Flows
Our primary sources of funds are customer and local government deposits, loan principal and interest payments, loan sales and interest earned on and proceeds from sales and maturities of investment securities. These funds, together with retained earnings, equity and other borrowed funds, are used to make loans, acquire investment

65

securities and other assets, and fund continuing operations. 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.competition so we adhere to internal management targets assigned to the loan to deposit ratio,
Heritage Bank:
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liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position. The principal objectiveCompany 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 Bank’s liquidity management programdates indicated:
September 30,
2023		December 31
2022
(Dollars in thousands)
FRB borrowing availability$823,117 $46,827 
FHLB borrowing availability(1)
1,202,172 1,226,234 
Unencumbered investment securities available for sale(2)
779,871 1,323,947 
Cash and cash equivalents220,503 103,590 
Fed funds line borrowing availability with correspondent banks145,000 215,000 
Total sources of liquidity3,170,663 2,915,598 
Less: Borrowings outstanding(450,000)— 
Total available liquidity$2,720,663 $2,915,598 
(1) Includes FHLB borrowing availability of $1.20 billion at September 30, 2023 based on pledged assets, however, maximum credit capacity is to maintain the ability to meet day-to-day cash flow requirements of its customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayment and maturities of loans, the Bank can utilize established credit facilities and lines with correspondent banks or sale of investment securities.
Heritage Financial Corporation: The Company is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all45% of the Company’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. However, management believes that such restrictions will not have an adverse impact on the ability of the Company to meets its ongoing cash obligations. At September 30, 2017, the Company (on an unconsolidated basis) had cash and cash equivalents and investmentBank's total assets one quarter in arrears or $3.10 billion.
(2) Investment securities available for sale with no stated maturities of $11.6 million.at fair value.
Consolidated Cash Flows: AsManagement 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 2022 Annual Form 10-K. We are not aware of any reasonably likely material changes in the Condensed Consolidated Statementsmix and relative cost of Cash Flows, net cash provided by operating activities was $53.8 million forsuch resources.

Critical Accounting Estimates
Our critical accounting estimates are described in detail in the "Critical Accounting Estimates" section within Item 7 of our 2022 Annual Form the 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, 2017, and primarily consisted of net income of $31.8 million, net proceeds from origination and sale of loans held for sale of $2.2 million and net change in accrued interest receivable, prepaid expenses and other assets, accrued expenses and other liabilities of $8.3 million. During the nine months ended September 30, 2017, net cash used in investing activities was $169.9 million, which consisted primarily of net loan originations of $178.8 million, investment in low income housing tax credit partnerships of $8.5 million and net proceeds from purchase and sale of investment securities available for sale of $3.4 million. Net cash provided by financing activities was $123.6 million for the nine months ended September 30, 2017, and primarily consisted of a net increase in deposits of $91.2 million, net FHLB advances of $37.8 million and a net increase in securities sold under agreements to repurchase of $6.6 million, offset partially by cash dividends on common stock of $11.4 million during the period.2023.


Capital and Capital Requirements
Stockholders’ equity at September 30, 2017 was $507.6 million compared with $481.8 million at December 31, 2016. During the nine months ended September 30, 2017, the Company realized net income of $31.8 million, declared cash dividends of $11.4 million, recorded other comprehensive income of $4.4 million, recognized stock-based compensation expense of $1.6 million, and recorded a net decrease to common stock due to common stock repurchases and exercises of stock options, net of tax, of $515,000.
Pursuant to minimum capital requirements of the FDIC effective on January 1, 2015, all FDIC-insured financial institutions, including Heritage Bank, are required to maintain a minimum common equity Tier 1 risk-based capital to risk-weighted assets ratio of 4.5%, a minimum Tier 1 leverage ratio to average assets of 4.0% and minimum risk-based capital ratios of Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets of 6.0% and 8.0%, respectively.
As of September 30, 2017 and December 31, 2016, the most recent regulatory notifications categorized Heritage 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 provides our capital requirements and actual results.

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  Minimum Requirements Well-Capitalized Requirements Actual
  (Dollars in thousands)
As of September 30, 2017:            
The Company consolidated            
Common equity Tier 1 capital to risk-weighted assets $151,086
 4.5% N/A
 N/A
 $383,546
 11.4%
Tier 1 leverage capital to average assets 155,761
 4.0
 N/A
 N/A
 403,444
 10.4
Tier 1 capital to risk-weighted assets 201,448
 6.0
 N/A
 N/A
 403,444
 12.0
Total capital to risk-weighted assets 268,598
 8.0
 N/A
 N/A
 435,119
 13.0
Heritage Bank            
Common equity Tier 1 capital to risk-weighted assets 150,874
 4.5
 $217,929
 6.5% 388,852
 11.6
Tier 1 leverage capital to average assets 155,582
 4.0
 194,478
 5.0
 388,852
 10.0
Tier 1 capital to risk-weighted assets 201,165
 6.0
 268,221
 8.0
 388,852
 11.6
Total capital to risk-weighted assets 268,221
 8.0
 335,276
 10.0
 420,422
 12.5
             
As of December 31, 2016:            
The Company consolidated            
Common equity Tier 1 capital to risk-weighted assets $142,688
 4.5% N/A
 N/A
 $362,350
 11.4%
Tier 1 leverage capital to average assets 148,144
 4.0
 N/A
 N/A
 381,989
 10.3
Tier 1 capital to risk-weighted assets 190,250
 6.0
 N/A
 N/A
 381,989
 12.0
Total capital to risk-weighted assets 253,667
 8.0
 N/A
 N/A
 413,320
 13.0
Heritage Bank            
Common equity Tier 1 capital to risk-weighted assets 142,573
 4.5
 $205,938
 6.5% 369,915
 11.7
Tier 1 leverage capital to average assets 148,024
 4.0
 185,030
 5.0
 369,915
 10.0
Tier 1 capital to risk-weighted assets 190,097
 6.0
 253,462
 8.0
 369,915
 11.7
Total capital to risk-weighted assets 253,462
 8.0
 316,828
 10.0
 401,168
 12.7
Although new capital requirements were effective on January 1, 2015, certain provisions of the new rule will be phased-in from the effective date through 2019, including, among others, a new capital conservation buffer requirement, which requires financial institutions to maintain a common equity capital ratio more than 2.5% above the required minimum levels in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments based on percentages of eligible retained income that could be utilized for such actions. The new capital conservation buffer requirement began to be phased-in on January 1, 2016 at 0.625% of risk-weighted assets and will continue to increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. At September 30, 2017, the capital conservation buffer was 5.07% and 4.65% for the Company and the Bank, respectively, and the minimum conservation buffer requirement was 1.25%.
Quarterly, the Company reviews the potential payment of cash dividends to its common shareholders. The timing and amount of cash dividends paid on our 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. On October 25, 2017, the Company’s Board of Directors declared a regular dividend of $0.13 per common share and a special dividend of $0.10 per common share payable on November 22, 2017 to shareholders of record on November 8, 2017.

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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 results of operations are highly dependent upon our ability to manage interest rate risk. We considerprimary market risk is interest rate risk, to be a significantwhich is the risk of loss of net interest income or net interest margin resulting from changes in market risk that could have a material effect on our financial condition and results of operations.interest rates. Interest rate risk is measuredresults primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and assessedextending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on a quarterly basis. In our opinion, there has not been a material changeassets and the interest paid on our liabilities. Management regularly reviews our exposure to changes in ourinterest rates. Among the factors considered are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and repricing periods. The risk committee of the Board of Directors oversees market risk management, including the monitoring of risk measures and limits and policy guidelines, for the amount of interest rate risk exposure sinceand its effect on net interest income and capital.
Neither we, nor the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
We do notBank, maintain a trading account for any class of financial instrument, nor do we, or the Bank, engage in hedging activities or purchase high-riskhigh risk derivative instruments. Moreover, neither we, have no materialnor the Bank, are subject to foreign currency exchange rate risk or commodity price risk.

Net interest income simulation
An income simulation model is the primary tool we use 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 pricing on investment securities, loans, and borrowings. In order to measure the interest rate risk sensitivity, this simulation model uses a “no balance sheet growth” assumption and assumes an instantaneous and sustained uniform change in market interest rates at all maturities. These assumptions are inherently uncertain and, as a result, the net interest income projections should be viewed as an estimate of the net interest income sensitivity at the time of the analysis. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.
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Based on the results of the simulation model, the following table presents the change in our net interest income as a result of parallel rate shock scenarios for the presented periods after the dates shown:
September 30, 2023December 31, 2022
Amount% Change in Net Interest IncomeAmount% Change in Net Interest Income
(Dollars in thousands)
Modeled increase in market interest rates of 100 basis points
Increase in net interest income in Year 1$2,420 1.1 %$5,113 2.0 %
Increase in net interest income in Year 24,104 1.6 11,147 4.1 
Modeled increase in market interest rates of 200 basis points
Increase in net interest income in Year 13,184 1.4 8,181 3.2 
Increase in net interest income in Year 26,266 2.4 19,889 7.3 
Modeled decrease in market interest rates of 100 basis points
Increase (decrease) in net interest income in Year 13,125 1.4 (5,433)(2.1)
Decrease in net interest income in Year 2318 0.1 (10,534)(3.9)
Modeled decrease in market interest rates of 200 basis points
Increase (decrease) in net interest income in Year 12,812 1.2 (16,840)(6.6)
Decrease in net interest income in Year 2$(4,113)(1.6)%$(29,942)(11.0)%
These scenarios are based on market interest rates as of the last day of a reporting period published by independent sources that are actively traded in the open market. The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of reprice characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and actual results will differ, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower net interest income.

ITEM 4.     CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedureprocedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and the Company’s Disclosure Committee as of the end of the period covered by this quarterly report. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. 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, 2017 are2023 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act iswas (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 Act) that occurred during the quarterthree months ended September 30, 2017,2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II.    OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS
Heritage and HeritageNeither the Company nor the Bank are notis a party to any material pending legal proceedings other than ordinary routine litigation incidental to the business of the Bank.


ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s 2022 Annual Report on Form 10-K for the year ended December 31, 2016.10-K.


68


ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Not applicable.
(b) Not applicable.
50
Table of Contents
(c) Repurchase Plans
The following table provides information about repurchases of common stock by the Company has had variousduring the three months ended September 30, 2023:
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 yet be purchased under the plans or programs (2)
July 1, 2023—July 31, 2023— $— 10,169,168 455,909 
August 1, 2023— August 31, 2023— — 10,169,168 455,909 
September 1, 2023—September 30, 2023148,454 17.08 10,317,287 307,790 
Total148,454 $17.08 
(1)Of the common shares repurchased by the Company between July1, 2023 and September 30, 2023, a total of 335 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 programs sinceprogram.
(2)On March 1999. On October 23, 2014,12, 2020 the Company's Board of Directors authorizedannounced the repurchase of up to 5% of the Company's outstanding common shares, or approximately 1,513,0001,799,054 shares, under the eleventhtwelfth stock repurchase plan. The number, timingrepurchase program does not have a set expiration date and pricewill expire upon repurchase of the full amount of authorized shares, repurchased will depend on business and market conditions, and other factors, including opportunities to deployunless terminated sooner by the Company's capital.board of directors. The repurchase program may be suspended or discontinued at any time by the Company’s board of directors.


The following table provides total repurchased shares and average share prices under the
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
None

ITEM 4.     MINE SAFETY DISCLOSURES
Not applicable plan for the periods indicated:

ITEM 5.    OTHER INFORMATION
 Three Months Ended September 30, Nine Months Ended September 30,  
 2017 2016 2017 2016 Plan Total (1)
Eleventh Plan         
Repurchased shares—
 38,000
 —
 138,000
 579,996
Stock repurchase average share price$—
 $17.46
 $—
 $17.16
 $16.76
(a) None
(1)Represents shares repurchased and average price per share paid during the duration of the plan.
In addition to the stock repurchases disclosed in the table above, the Company repurchased shares to pay withholding taxes on the vesting of restricted stock. (b) None
(c) During the three and nine months ended September 30, 2017,2023, there were no Rule 10b5‑1 trading arrangements (as defined in Item 408(a) of Regulation S-K) or non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K) adopted or terminated by any director or officer (as defined in Rule 16a‑1(f) under the Company repurchased 344 and 27,711 sharesExchange Act) of common stock at an average price per share of $25.80 and $24.61 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods. During the three and nine months ended September 30, 2016, the Company repurchased 5,276 and 29,206 shares of common stock at an average price per share of $18.64 and $17.77 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods.Company.
The following table sets forth information about the Company’s purchases of its outstanding common stock during the quarter ended September 30, 2017.
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
Yet Be Purchased
Under the Plans or
Programs
July 1, 2017— July 31, 2017 —
 $—
 7,893,389
 935,034
August 1, 2017— August 31, 2017 —
 —
 7,893,389
 935,034
September 1, 2017— September 30, 2017 344
 25.80
 7,893,389
 935,034
Total 344
 $25.80
 7,893,389
 935,034
(1)All of the common shares repurchased by the Company between July 1, 2017 and September 30, 2017 were shares of restricted stock that represented the cancellation of stock to pay withholding taxes.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
None

ITEM 4.     MINE SAFETY DISCLOSURES
Not applicable

ITEM 5.        OTHER INFORMATION
None

69

ITEM 6.     EXHIBITS

Incorporated by Reference
Exhibit No.Description of ExhibitFormExhibitFiling Date/Period End Date
10.1*DEF 14A4.403/22/2023
10.2*S-84.505/08/23
10.3*S-84.605/08/23
31.1
31.2
32.1
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)
51
Table of Contents
    Incorporated by Reference
Exhibit No. Description of Exhibit Form Exhibit Filing Date/Period End Date
         
2.5
 
Agreement and Plan of Merger with Puget Sound Bank
 8-K 2.1 7/27/17
         
31.1
 
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      
         
31.2
 
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      
         
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      
         
101
 The following financial information from Heritage Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 is formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity, (v) the Unaudited Condensed Consolidated Statements of Cash Flows and (vi) the Unaudited Notes to Condensed Consolidated Financial Statements.      
Incorporated by Reference
Exhibit No.Description of ExhibitFormExhibitFiling Date/Period End Date
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)
104Cover 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:
Date:November 8, 2023/S/ JEFFREY J. DEUEL
November 9, 2017/S/ BRIAN L. VANCEJeffrey J. Deuel
Brian L. Vance
President and Chief Executive Officer
Date:(Duly Authorized Officer)
November 8, 2023
Date:
November 9, 2017/S/ DONALD J. HINSON
Donald J. Hinson
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)



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