UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, ~~2022~~2023 or

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

For the transition period from __________ to __________

Commission File Number 000-29480

HERITAGE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-1857900

(State or other jurisdiction of
incorporation or organization)

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

201 Fifth Avenue SW,

Olympia

98501

(Address of principal executive offices)

(Zip Code)

(360) 943-1500

(Registrant’s telephone number, including area code)

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


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	HFWA	NASDAQ

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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

As of October ~~31, 2022,~~25, 2023, there were ~~35,104,248~~34,901,076 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

September 30, ~~2022~~2023

TABLE OF CONTENTS


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

PART I.	FINANCIAL INFORMATION		5
ITEM 1.	FINANCIAL STATEMENTS		5
	CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF SEPTEMBER 30, ~~2022~~2023 AND DECEMBER 31, ~~2021~~2022		5
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2022~~2023 AND ~~2021~~2022		6
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ~~INCOME~~ (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2022~~2023 AND ~~2021~~2022		7
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2022~~2023 AND ~~2021~~2022		8
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2022~~2023 AND ~~2021~~2022		10
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		12
	NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	12
	NOTE 2.	INVESTMENT SECURITIES	13
	NOTE 3.	LOANS RECEIVABLE	1516
	NOTE 4.	ALLOWANCE FOR CREDIT LOSSES ON LOANS	2324

	NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	2527
	NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	2527
	NOTE 7.	STOCKHOLDERS’ EQUITY	2628
	NOTE 8.	FAIR VALUE MEASUREMENTS	2729
	NOTE 9.	CASH RESTRICTION	3233
	NOTE 10.	COMMITMENTS AND CONTINGENCIES	3233

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3233
	OVERVIEW		3233
	RECENT DEVELOPMENTS		34
	RESULTS OF OPERATIONS		33
		~~AVERAGE BALANCES, YIELDS AND RATES PAID~~	3335
		NET INTEREST INCOME AND MARGIN OVERVIEW	3435
		PROVISION FOR CREDIT LOSSES OVERVIEW	3739
		NONINTEREST INCOME OVERVIEW	3840
		NONINTEREST EXPENSE OVERVIEW	3941
		INCOME TAX EXPENSE OVERVIEW	4042
	FINANCIAL CONDITION OVERVIEW		4043
		INVESTMENT ACTIVITIES OVERVIEW	4143
		LOAN PORTFOLIO OVERVIEW	4244
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	4346
		DEPOSITS OVERVIEW	4447
		BORROWINGS OVERVIEW	47
		STOCKHOLDERS' EQUITY OVERVIEW	4448
	REGULATORY REQUIREMENTS OVERVIEW		4448
	LIQUIDITY AND CAPITAL RESOURCES		4548
	CRITICAL ACCOUNTING ~~POLICIES~~ESTIMATES		4549
	~~RECONCILIATIONS OF NON-GAAP MEASURES~~	45
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		4649
ITEM 4.	CONTROLS AND PROCEDURES		4750

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PART II.	OTHER INFORMATION	4750
ITEM 1.	LEGAL PROCEEDINGS	4750
ITEM 1A.	RISK FACTORS	4750
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES ~~AND~~, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES	4750
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4751
ITEM 4.	MINE SAFETY DISCLOSURES	4751
ITEM 5.	OTHER INFORMATION	4751
ITEM 6.	EXHIBITS	4851
	SIGNATURES	4852

GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS

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


~~2021~~2022 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022
ACL			Allowance for credit losses
AOCI			Accumulated other comprehensive income (loss), net

ASU			Accounting Standards Update
Bank			Heritage Bank
BTFP			Bank Term Funding Program
CECL			Current Expected Credit Loss
CMO			Collateralized Mortgage ~~Obligation~~Obligations
Company			Heritage Financial Corporation
~~COVID-19 Pandemic~~			~~Coronavirus Disease of 2019 pandemic~~
CRE			Commercial real estate
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
Federal Reserve			Board of Governors of the Federal Reserve System
~~Federal Reserve Bank~~FRB			Federal Reserve Bank of San Francisco
FHLB			Federal Home Loan Bank of Des Moines
GAAP			U.S. Generally Accepted Accounting Principles
LIBOR			London Interbank Offering Rate
LIHTC			Low-Income Housing Tax Credit
MBS			Mortgage-backed ~~security~~
~~PPP~~			~~Paycheck Protection Program~~securities
SBA			Small Business Administration
SEC			Securities and Exchange Commission
SM			Special Mention
SS			Substandard
TDR			Troubled debt restructured

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

~~Table of Contents~~

any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price ~~performance including,~~performance. These risks include, but are not limited to:

•potential adverse impacts to economic conditions nationally or in our local market areas, other markets where the 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 caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal responses togrowth;

•changes in the ~~COVID-19 pandemic,~~interest rate environment, including the ~~possibility~~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 ~~new COVID-19 variants~~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 ~~as a result of the COVID-19 Pandemic;~~

•~~implementing regulations,~~ changes in banking, securities, and tax law, regulatory policies and principles, or the interpretation of regulatory capital or other rules;

•our ability to attract and retain 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 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 ~~growth strategies;~~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;~~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; ~~and~~

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

•other risks detailed from time to time in our ~~filings~~reports filed with or furnished to the SEC, including our ~~2021~~2022 Annual Form ~~10-K.~~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)

(InDollars in thousands, except shares)


		September 30, 2022		December 31, 2021			September 30, 2023		December 31 2022
ASSETS	ASSETS					ASSETS
Cash on hand and in banks	Cash on hand and in banks	$	100,428	$	61,377	Cash on hand and in banks	$	61,568	$	74,295
Interest earning deposits	Interest earning deposits	306,896		1,661,915		Interest earning deposits	158,935		29,295
Cash and cash equivalents	Cash and cash equivalents	407,324		1,723,292		Cash and cash equivalents	220,503		103,590
Investment securities available for sale, at fair value, net (amortized cost of $1,491,440 and $883,832, respectively)		1,356,142		894,335
Investment securities held to maturity, at amortized cost, net (fair value of $677,335 and $376,331, respectively)		773,319		383,393
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 securities	Total investment securities	2,129,461		1,277,728		Total investment securities	1,894,392		2,097,839
Loans held for sale	Loans held for sale	—		1,476		Loans held for sale	263		—
Loans receivable	Loans receivable	4,001,295		3,815,662		Loans receivable	4,266,858		4,050,858
Allowance for credit losses on loans	Allowance for credit losses on loans	(42,089)		(42,361)		Allowance for credit losses on loans	(46,947)		(42,986)
Loans receivable, net	Loans receivable, net	3,959,206		3,773,301		Loans receivable, net	4,219,911		4,007,872

Premises and equipment, net	Premises and equipment, net	76,683		79,370		Premises and equipment, net	76,436		76,930
Federal Home Loan Bank stock, at cost	Federal Home Loan Bank stock, at cost	8,916		7,933		Federal Home Loan Bank stock, at cost	8,373		8,916
Bank owned life insurance	Bank owned life insurance	121,369		120,196		Bank owned life insurance	123,639		122,059
Accrued interest receivable	Accrued interest receivable	17,812		14,657		Accrued interest receivable	18,794		18,547
Prepaid expenses and other assets	Prepaid expenses and other assets	230,704		183,543		Prepaid expenses and other assets	341,952		296,181
Other intangible assets, net	Other intangible assets, net	7,898		9,977		Other intangible assets, net	5,386		7,227
Goodwill	Goodwill	240,939		240,939		Goodwill	240,939		240,939
Total assets	Total assets	$	7,200,312	$	7,432,412	Total assets	$	7,150,588	$	6,980,100
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	Deposits	$	6,214,964	$	6,394,290	Deposits	$	5,635,187	$	5,907,420
Deposits held for sale	Deposits held for sale	22,771		—		Deposits held for sale	—		17,420
Total deposits	Total deposits	6,237,735		6,394,290		Total deposits	5,635,187		5,924,840
Federal Home Loan Bank advances		—		—
Borrowings						Borrowings	450,000		—
Junior subordinated debentures	Junior subordinated debentures	21,399		21,180		Junior subordinated debentures	21,692		21,473
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	40,449		50,839		Securities sold under agreement to repurchase	23,158		46,597
Accrued expenses and other liabilities	Accrued expenses and other liabilities	124,027		111,671		Accrued expenses and other liabilities	207,005		189,297
Total liabilities	Total liabilities	6,423,610		6,577,980		Total liabilities	6,337,042		6,182,207
Commitments and contingencies (Note 10)	Commitments and contingencies (Note 10)					Commitments and contingencies (Note 10)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively	Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively	—		—		Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively	—		—
Common stock, no par value, 50,000,000 shares authorized; 35,104,248 and 35,105,779 shares issued and outstanding, respectively		551,419		551,798
Common stock, no par value, 50,000,000 shares authorized; 34,901,076 and 35,106,697 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, respectively	548,652		552,397
Retained earnings	Retained earnings	330,284		293,238		Retained earnings	377,522		345,346
Accumulated other comprehensive (loss) income, net		(105,001)		9,396
Accumulated other comprehensive loss, net						Accumulated other comprehensive loss, net	(112,628)		(99,850)
Total stockholders’ equity	Total stockholders’ equity	776,702		854,432		Total stockholders’ equity	813,546		797,893
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	7,200,312	$	7,432,412	Total liabilities and stockholders’ equity	$	7,150,588	$	6,980,100

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(InDollars in thousands, except shares and per share ~~amounts and shares outstanding)~~amounts)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
INTEREST INCOME:	INTEREST INCOME:									INTEREST INCOME:
Interest and fees on loans	Interest and fees on loans	$	43,847	$	46,863	$	125,762	$	147,137	Interest and fees on loans	$	56,119	$	43,847	$	160,192	$	125,762
Taxable interest on investment securities	Taxable interest on investment securities	12,362		4,711		25,972		12,295		Taxable interest on investment securities	14,590		12,362		44,021		25,972
Nontaxable interest on investment securities	Nontaxable interest on investment securities	892		931		2,645		2,836		Nontaxable interest on investment securities	448		892		1,554		2,645
Interest on interest earning deposits	Interest on interest earning deposits	4,009		537		7,057		975		Interest on interest earning deposits	2,310		4,009		4,436		7,057
Total interest income	Total interest income	61,110		53,042		161,436		163,243		Total interest income	73,467		61,110		210,203		161,436
INTEREST EXPENSE:	INTEREST EXPENSE:									INTEREST EXPENSE:
Deposits	Deposits	1,478		1,444		4,315		4,696		Deposits	11,877		1,478		25,012		4,315
Junior subordinated debentures	Junior subordinated debentures	312		184		745		557		Junior subordinated debentures	540		312		1,521		745
Other borrowings		34		36		98		109
Securities sold under agreement to repurchase										Securities sold under agreement to repurchase	38		34		148		98
Borrowings										Borrowings	5,394		—		12,238		—
Total interest expense	Total interest expense	1,824		1,664		5,158		5,362		Total interest expense	17,849		1,824		38,919		5,158
Net interest income	Net interest income	59,286		51,378		156,278		157,881		Net interest income	55,618		59,286		171,284		156,278
Provision for (reversal of) credit losses		1,945		(3,149)		(2,836)		(24,335)
Net interest income after provision for (reversal of) credit losses		57,341		54,527		159,114		182,216
(Reversal of) provision for credit losses										(Reversal of) provision for credit losses	(878)		1,945		2,856		(2,836)
Net interest income after (reversal of) provision for credit losses										Net interest income after (reversal of) provision for credit losses	56,496		57,341		168,428		159,114
NONINTEREST INCOME:	NONINTEREST INCOME:									NONINTEREST INCOME:
Service charges and other fees	Service charges and other fees	2,688		2,400		7,739		6,728		Service charges and other fees	2,856		2,688		8,162		7,739
Card revenue	Card revenue	2,365		2,150		6,774		6,216		Card revenue	2,273		2,365		6,396		6,774
Gain on sale of investment securities, net		—		—		—		29
Loss on sale of investment securities, net										Loss on sale of investment securities, net	(1,940)		—		(2,226)		—
Gain on sale of loans, net	Gain on sale of loans, net	133		765		593		3,138		Gain on sale of loans, net	157		133		307		593
Interest rate swap fees	Interest rate swap fees	78		126		383		487		Interest rate swap fees	62		78		230		383
Bank owned life insurance income	Bank owned life insurance income	723		647		3,182		2,020		Bank owned life insurance income	734		723		2,280		3,182
Gain on sale of other assets, net	Gain on sale of other assets, net	265		942		469		1,688		Gain on sale of other assets, net	—		265		2		469
Other income	Other income	1,201		1,198		3,867		4,470		Other income	2,129		1,201		6,659		3,867
Total noninterest income	Total noninterest income	7,453		8,228		23,007		24,776		Total noninterest income	6,271		7,453		21,810		23,007
NONINTEREST EXPENSE:	NONINTEREST EXPENSE:									NONINTEREST EXPENSE:
Compensation and employee benefits	Compensation and employee benefits	24,206		21,963		67,236		65,967		Compensation and employee benefits	25,008		24,206		75,325		67,236
Occupancy and equipment	Occupancy and equipment	4,422		4,373		12,924		12,918		Occupancy and equipment	4,814		4,422		14,372		12,924
Data processing	Data processing	4,185		4,029		12,431		11,839		Data processing	4,366		4,185		13,208		12,431
Marketing	Marketing	358		486		968		1,566		Marketing	389		358		1,232		968
Professional services	Professional services	639		776		1,867		3,083		Professional services	582		639		1,961		1,867
State/municipal business and use taxes	State/municipal business and use taxes	963		1,071		2,626		3,034		State/municipal business and use taxes	1,088		963		3,150		2,626
Federal deposit insurance premium	Federal deposit insurance premium	500		550		1,525		1,478		Federal deposit insurance premium	818		500		2,465		1,525

Amortization of intangible assets	Amortization of intangible assets	671		758		2,079		2,352		Amortization of intangible assets	595		671		1,841		2,079
Other expense	Other expense	3,203		3,160		8,918		8,567		Other expense	3,310		3,203		10,346		8,918
Total noninterest expense	Total noninterest expense	39,147		37,166		110,574		110,804		Total noninterest expense	40,970		39,147		123,900		110,574
Income before income taxes	Income before income taxes	25,647		25,589		71,547		96,188		Income before income taxes	21,797		25,647		66,338		71,547
Income tax expense	Income tax expense	4,657		4,997		12,216		17,550		Income tax expense	3,578		4,657		10,816		12,216
Net income	Net income	$	20,990	$	20,592	$	59,331	$	78,638	Net income	$	18,219	$	20,990	$	55,522	$	59,331
Basic earnings per share	Basic earnings per share	$	0.60	$	0.58	$	1.69	$	2.19	Basic earnings per share	$	0.52	$	0.60	$	1.58	$	1.69
Diluted earnings per share	Diluted earnings per share	$	0.59	$	0.58	$	1.67	$	2.18	Diluted earnings per share	$	0.51	$	0.59	$	1.57	$	1.67
Dividends declared per share	Dividends declared per share	$	0.21	$	0.20	$	0.63	$	0.60	Dividends declared per share	$	0.22	$	0.21	$	0.66	$	0.63
Average number of basic shares outstanding	Average number of basic shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258		Average number of basic shares outstanding	35,022,676		35,103,984		35,062,760		35,103,048
Average number of diluted shares outstanding	Average number of diluted shares outstanding	35,468,890		35,929,518		35,438,672		36,152,052		Average number of diluted shares outstanding	35,115,165		35,468,890		35,305,456		35,438,672

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ~~INCOME~~ (Unaudited)

(InDollars in thousands thousands)

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
Net Income $ 20,990 $ 20,592 $ 59,331 $ 78,638
Change in fair value of investment securities available for sale, net of tax of $(12,027), $(362), $(31,778) and $(2,844), respectively (43,143) (1,305) (114,022) (10,239)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(20), $(6), $(103) and $(6), respectively (75) (22) (375) (22)
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $0, $0, $0 and $(6), respectively — — — (23)
Other comprehensive loss (43,218) (1,327) (114,397) (10,284)
Comprehensive (loss) income $ (22,228) $ 19,265 $ (55,066) $ 68,354


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
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, respectively	1,514		—		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 (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(InDollars in thousands, except shares and per share amounts)


		Three Months Ended September 30, 2022										Three Months Ended September 30, 2023
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at June 30, 2022		35,103,929	$	550,417	$	316,732	$	(61,783)	$	805,366
Balance at June 30, 2023											Balance at June 30, 2023	35,047,800	$	550,103	$	367,085	$	(97,455)	$	819,733

Restricted stock units vested	Restricted stock units vested	419	—		—		—		—		Restricted stock units vested	1,730
Stock-based compensation expense	Stock-based compensation expense	—	1,004		—		—		1,004		Stock-based compensation expense		1,120						1,120
Common stock repurchased	Common stock repurchased	(100)	(2)		—		—		(2)		Common stock repurchased	(148,454)	(2,571)						(2,571)
Net income	Net income	—	—		20,990		—		20,990		Net income				18,219				18,219
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(43,218)		(43,218)		Other comprehensive loss, net of tax						(15,173)		(15,173)

Cash dividends declared on common stock ($0.21 per share)		—	—		(7,438)		—		(7,438)
Balance at September 30, 2022		35,104,248	$	551,419	$	330,284	$	(105,001)	$	776,702
Cash dividends declared on common stock ($0.22 per share)											Cash dividends declared on common stock ($0.22 per share)				(7,782)				(7,782)
Balance at September 30, 2023											Balance at September 30, 2023	34,901,076	$	548,652	$	377,522	$	(112,628)	$	813,546


		Nine Months Ended September 30, 2022										Nine Months Ended September 30, 2023
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2021		35,105,779	$	551,798	$	293,238	$	9,396	$	854,432
Balance at December 31, 2022											Balance at December 31, 2022	35,106,697	$	552,397	$	345,346	$	(99,850)	$	797,893

Restricted stock units vested	Restricted stock units vested	124,839	—		—		—		—		Restricted stock units vested	156,370
Stock-based compensation expense	Stock-based compensation expense	—	2,797		—		—		2,797		Stock-based compensation expense	—	3,204						3,204
Common stock repurchased	Common stock repurchased	(126,370)	(3,176)		—		—		(3,176)		Common stock repurchased	(361,991)	(6,949)						(6,949)
Net income	Net income	—	—		59,331		—		59,331		Net income				55,522				55,522
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(114,397)		(114,397)		Other comprehensive loss, net of tax						(12,778)		(12,778)

Cash dividends declared on common stock ($0.63 per share)		—	—		(22,285)		—		(22,285)
Balance at September 30, 2022		35,104,248	$	551,419	$	330,284	$	(105,001)	$	776,702
Cash dividends declared on common stock (0.66 per share)											Cash dividends declared on common stock (0.66 per share)				(23,346)				(23,346)
Balance at September 30, 2023											Balance at September 30, 2023	34,901,076	$	548,652	$	377,522	$	(112,628)	$	813,546

Three Months Ended September 30, 2021
Number of
common
shares Common
stock Retained
earnings AOCI Total
stockholders’
equity
Balance at June 30, 2021 36,006,560 $ 572,060 $ 267,863 $ 16,061 $ 855,984
Restricted stock units vested 1,347 — — — —
Stock-based compensation expense — 966 — — 966
Common stock repurchased (841,308) (20,641) — — (20,641)
Net income — — 20,592 — 20,592
Other comprehensive loss, net of tax — — — (1,327) (1,327)
Cash dividends declared on common stock ($0.20 per share) — — (7,170) — (7,170)
Balance at September 30, 2021 35,166,599 $ 552,385 $ 281,285 $ 14,734 $ 848,404


	Three Months Ended September 30, 2022
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at June 30, 2022	35,103,929	$	550,417	$	316,732	$	(61,783)	$	805,366

Restricted stock units vested	419
Stock-based compensation expense	—	1,004						1,004
Common stock repurchased	(100)	(2)						(2)
Net income				20,990				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, 2022	35,104,248	$	551,419	$	330,284	$	(105,001)	$	776,702

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		Nine Months Ended September 30, 2021
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			Nine Months Ended September 30, 2022
Balance at December 31, 2020		35,912,243	$	571,021	$	224,400	$	25,018	$	820,439
												Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2021											Balance at December 31, 2021	35,105,779	$	551,798	$	293,238	$	9,396	$	854,432

Restricted stock units vested	Restricted stock units vested	121,467	—		—		—		—		Restricted stock units vested	124,839
Stock-based compensation expense	Stock-based compensation expense	—	2,762		—		—		2,762		Stock-based compensation expense		2,797						2,797
Common stock repurchased	Common stock repurchased	(867,111)	(21,398)		—		—		(21,398)		Common stock repurchased	(126,370)	(3,176)						(3,176)
Net income	Net income	—	—		78,638		—		78,638		Net income				59,331				59,331
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(10,284)		(10,284)		Other comprehensive loss, net of tax						(114,397)		(114,397)

Cash dividends declared on common stock ($0.60 per share)		—	—		(21,753)		—		(21,753)
Balance at September 30, 2021		35,166,599	$	552,385	$	281,285	$	14,734	$	848,404
Cash dividends declared on common stock ($0.63 per share)											Cash dividends declared on common stock ($0.63 per share)				(22,285)				(22,285)
Balance at September 30, 2022											Balance at September 30, 2022	35,104,248	$	551,419	$	330,284	$	(105,001)	$	776,702

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(InDollars in thousands)


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2022		2021			2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	59,331	$	78,638	Net income	$	55,522	$	59,331
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	Depreciation, amortization and accretion	(620)		(18,356)		Depreciation, amortization and accretion	2,370		(620)
Reversal of provision for credit losses		(2,836)		(24,335)
Provision for (reversal of) credit losses						Provision for (reversal of) credit losses	2,856		(2,836)
Stock-based compensation expense	Stock-based compensation expense	2,797		2,762		Stock-based compensation expense	3,204		2,797
Amortization of intangible assets	Amortization of intangible assets	2,079		2,352		Amortization of intangible assets	1,841		2,079
Origination of mortgage loans held for sale	Origination of mortgage loans held for sale	(15,190)		(74,325)		Origination of mortgage loans held for sale	(13,685)		(15,190)
Proceeds from sale of mortgage loans held for sale	Proceeds from sale of mortgage loans held for sale	17,259		79,759		Proceeds from sale of mortgage loans held for sale	13,729		17,259
Bank owned life insurance income	Bank owned life insurance income	(3,182)		(2,020)		Bank owned life insurance income	(2,280)		(3,182)

Valuation adjustment on interest rate swaps	Valuation adjustment on interest rate swaps	(67)		(296)		Valuation adjustment on interest rate swaps	—		(67)
Gain on sale of mortgage loans held for sale, net	Gain on sale of mortgage loans held for sale, net	(593)		(3,138)		Gain on sale of mortgage loans held for sale, net	(307)		(593)
Gain on sale of investment securities available for sale, net		—		(29)
Loss on sale of investment securities available for sale, net						Loss on sale of investment securities available for sale, net	2,226		—

Gain on sale of assets held for sale		(403)		(1,691)
Gain on sale of premises and equipment						Gain on sale of premises and equipment	—		(403)
Gain on sale of branch including related deposits, net						Gain on sale of branch including related deposits, net	(610)		—
Other	Other	3,865		11,332		Other	13,698		3,865
Net cash provided by operating activities	Net cash provided by operating activities	62,440		50,653		Net cash provided by operating activities	78,564		62,440
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Loan originations and purchases, net of payments	Loan originations and purchases, net of payments	(176,700)		555,784		Loan originations and purchases, net of payments	(212,222)		(176,700)
Maturities and repayments of investment securities available for sale	Maturities and repayments of investment securities available for sale	132,854		200,242		Maturities and repayments of investment securities available for sale	135,084		132,854
Maturities and repayments of investment securities held to maturity	Maturities and repayments of investment securities held to maturity	21,620		423		Maturities and repayments of investment securities held to maturity	18,876		21,620
Purchase of investment securities available for sale	Purchase of investment securities available for sale	(742,801)		(421,566)		Purchase of investment securities available for sale	(37,724)		(742,801)
Purchase of investment securities held to maturity	Purchase of investment securities held to maturity	(412,835)		(66,821)		Purchase of investment securities held to maturity	—		(412,835)
Purchase of premises and equipment	Purchase of premises and equipment	(2,295)		(2,148)		Purchase of premises and equipment	(9,250)		(2,295)
Purchases of bank owned life insurance		(105)		(104)
Purchase of bank owned life insurance						Purchase of bank owned life insurance	—		(105)
Proceeds from bank owned life insurance death benefit	Proceeds from bank owned life insurance death benefit	2,114		—		Proceeds from bank owned life insurance death benefit	—		2,114
Purchases of Federal Home Loan Bank stock	Purchases of Federal Home Loan Bank stock	(985)		(1,272)		Purchases of Federal Home Loan Bank stock	(45,588)		(985)

Proceeds from sales of investment securities available for sale	Proceeds from sales of investment securities available for sale	—		1,248		Proceeds from sales of investment securities available for sale	67,900		—
Proceeds from redemption of Federal Home Loan Bank stock	Proceeds from redemption of Federal Home Loan Bank stock	2		—		Proceeds from redemption of Federal Home Loan Bank stock	46,131		2
Proceeds from sales of assets held for sale		2,102		5,642

Proceeds from sales of premises and equipment	Proceeds from sales of premises and equipment	106		12		Proceeds from sales of premises and equipment	2		2,208
Capital contributions to low-income housing tax credit partnerships	Capital contributions to low-income housing tax credit partnerships	(9,245)		(23,349)		Capital contributions to low-income housing tax credit partnerships	(32,517)		(9,245)
Cash received from return of New Market Tax Credit equity method investment		—		9,642

Net cash (used) provided by investing activities		(1,186,168)		257,733
Net cash paid related to branch divestiture						Net cash paid related to branch divestiture	(13,826)		—
Net cash used by investing activities						Net cash used by investing activities	(83,134)		(1,186,168)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net (decrease) increase in deposits		(156,555)		617,568
Federal Home Loan Bank advances		50		10
Repayment of Federal Home Loan Bank advances		(50)		(10)
Net decrease in deposits						Net decrease in deposits	(274,988)		(156,555)
Proceeds from borrowings						Proceeds from borrowings	1,789,700		50
Repayment of borrowings						Repayment of borrowings	(1,339,700)		(50)
Common stock cash dividends paid	Common stock cash dividends paid	(22,119)		(21,552)		Common stock cash dividends paid	(23,141)		(22,119)
Net (decrease) increase in securities sold under agreement to repurchase		(10,390)		8,413
Net decrease in securities sold under agreement to repurchase						Net decrease in securities sold under agreement to repurchase	(23,439)		(10,390)
Repurchase of common stock	Repurchase of common stock	(3,176)		(21,398)		Repurchase of common stock	(6,949)		(3,176)
Net cash (used) provided by financing activities		(192,240)		583,031
Net (decrease) increase in cash and cash equivalents		(1,315,968)		891,417
Net cash provided (used) by financing activities						Net cash provided (used) by financing activities	121,483		(192,240)
Net increase (decrease) in cash and cash equivalents						Net increase (decrease) in cash and cash equivalents	116,913		(1,315,968)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	1,723,292		743,322		Cash and cash equivalents at beginning of period	103,590		1,723,292
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	407,324	$	1,634,739	Cash and cash equivalents at end of period	$	220,503	$	407,324

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		Nine Months Ended September 30,					Nine Months Ended September 30,
		2022		2021			2023		2022

Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Cash paid for interest	Cash paid for interest	$	4,939	$	5,162	Cash paid for interest	$	29,921	$	4,939
Cash paid for income taxes, net of refunds	Cash paid for income taxes, net of refunds	1,987		10,944		Cash paid for income taxes, net of refunds	1,634		1,987

Supplemental non-cash disclosures of cash flow information:	Supplemental non-cash disclosures of cash flow information:					Supplemental non-cash disclosures of cash flow information:

Transfer of investment securities available for sale to held to maturity		—		244,778

Investment in LIHTC partnership and related funding commitment	Investment in LIHTC partnership and related funding commitment	10,728		17,458		Investment in LIHTC partnership and related funding commitment	37,042		10,728
Right of use assets obtained in exchange for new operating lease liabilities	Right of use assets obtained in exchange for new operating lease liabilities	2,869		12,134		Right of use assets obtained in exchange for new operating lease liabilities	6,663		2,869
Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued						Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued	700		—
Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net						Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net	5,074		910

Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net		910		3,556
Loans received from return of New Market Tax Credit equity method investment		—		15,596

Transfer of deposits to deposits held for sale	Transfer of deposits to deposits held for sale	22,771		—		Transfer of deposits to deposits held for sale	—		22,771

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

(a) Description of Business

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 50 branch offices located throughout Washington State, the greater Portland, Oregon area, Eugene, Oregon and ~~Eugene, Oregon.~~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. The Bank's deposits are insured by the ~~FDIC.~~FDIC subject to limitations.

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the ~~2021~~2022 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023.

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

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.

There have been reclassifications in certain prior year amounts in the unaudited Condensed Consolidated Statements of ~~Financial Condition, the unaudited Condensed Consolidated Statements of Income and the unaudited Condensed Consolidated Statements of Cash Flows.~~Income. Reclassifications had no effect on the prior year's net income or stockholders’ equity.

The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the ~~2021~~2022 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the ~~2021~~2022 Annual Form 10-K during the nine months ended September 30, ~~2022.~~2023.

(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, and ASU 2022-06 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, ~~2020 through~~2020. In December 2022, FASB amended this ASU and deferred the sunset date of Topic 848 from December 31, ~~2022.~~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. ~~The Bank’s interest rate swap-related transactions are the majority of the Company's LIBOR exposure.~~ 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. ~~Additionally, effective January 1, 2022,~~The majority of the ~~Bank is no longer initiating~~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 ~~renewing loans using LIBOR as an index.~~will transition to a new index at the next repricing date. The Company does not expect the adoption of this ASU to have a material impact on its business operations ~~and the~~or Consolidated Statements of Financial ~~Statements.~~Condition.

FASB ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, was issued in March 2022. The ASU eliminates the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, the entity 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 ASU requires public business entities to disclose current-period gross write-offs

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by year of origination for financing receivables and net investments in leases. These amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal ~~years, since Heritage previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020.~~years. Early adoption is permitted in any interim period if an entity has adopted ASU 2016-13 and ~~should~~such election may be ~~applied prospectively; however,~~made 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 ~~method~~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

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measurement of TDRs may be adopted on a prospective or modified retrospective transition method.

The Company adopted ASU 2022-02 on a prospective basis January 1, 2023. The Company elected at the date of adoption to account for existing TDR loans ~~may~~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 in ASC 310-20. The adoption of this ASU did not have a material impact on business operations or the Consolidated Statements of Financial Condition.

FASB ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), was issued in February 2023. The amendments in this ASU permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the statement of operations as a component of income tax expense (benefit). The amendments also require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understand the investments that generate income tax credits and other income tax benefits from a tax credit program. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The amendments in the ASU can be applied ~~under~~either on a modified retrospective ~~transition method.~~or a retrospective basis. The Company ~~is evaluating~~does not expect the ~~effect~~adoption of this ASU ~~will~~to have a material impact on its business operations or Consolidated Statements of Financial ~~Statements and related disclosures.~~Condition.

(2)Investment Securities

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

There were no investment securities classified as trading at September 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

(a) Investment Securities by Classification, Type and Maturity

The following tables present the amortized cost and fair value of investment securities, ~~at the dates indicated~~ 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:~~AOCI, at the dates indicated:


		September 30, 2022									September 30, 2023
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(In thousands)									(Dollars in thousands)
Investment securities available for sale:	Investment securities available for sale:									Investment securities available for sale:
U.S. government and agency securities	U.S. government and agency securities	$	68,912	$	—	$	(5,163)	$	63,749	U.S. government and agency securities	$	23,533	$	—	$	(3,109)	$	20,424
Municipal securities	Municipal securities	206,767		51		(21,105)		185,713		Municipal securities	126,763		7		(19,965)		106,805
Residential CMO and MBS		494,330		6		(55,966)		438,370
Commercial CMO and MBS		691,836		29		(52,424)		639,441
Residential CMO and MBS(1)										Residential CMO and MBS(1)	468,174		—		(66,993)		401,181
Commercial CMO and MBS(1)										Commercial CMO and MBS(1)	651,713		5		(54,505)		597,213
Corporate obligations	Corporate obligations	6,001		—		(167)		5,834		Corporate obligations	4,000		—		(220)		3,780
Other asset-backed securities	Other asset-backed securities	23,594		19		(578)		23,035		Other asset-backed securities	18,317		62		(235)		18,144
Total	Total	$	1,491,440	$	105	$	(135,403)	$	1,356,142	Total	$	1,292,500	$	74	$	(145,027)	$	1,147,547

Investment securities held to maturity:
U.S. government and agency securities		$	150,948	$	—	$	(32,916)	$	118,032

Residential CMO and MBS		296,432		—		(19,168)		277,264
Commercial CMO and MBS		325,939		—		(43,900)		282,039

Total		$	773,319	$	—	$	(95,984)	$	677,335

December 31, 2021
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
(In thousands)
Investment securities available for sale:
U.S. government and agency securities $ 21,494 $ 55 $ (176) $ 21,373
Municipal securities 213,158 8,908 (854) 221,212
Residential CMO and MBS 307,366 2,111 (2,593) 306,884
Commercial CMO and MBS 313,169 3,891 (1,199) 315,861
Corporate obligations 2,007 7 — 2,014
Other asset-backed securities 26,638 369 (16) 26,991
Total $ 883,832 $ 15,341 $ (4,838) $ 894,335
Investment securities held to maturity:
U.S. government and agency securities $ 141,011 $ 120 $ (1,768) $ 139,363
Residential CMO and MBS 24,529 — (153) 24,376
Commercial CMO and MBS 217,853 — (5,261) 212,592
Total $ 383,393 $ 120 $ (7,182) $ 376,331
(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 securities	171,087		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 obligations	4,000		—		(166)		3,834
Other asset-backed securities	22,425		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 ~~at September 30, 2022,~~ 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 Sale				Securities Held to Maturity					Securities Available for Sale				Securities Held to Maturity
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(In thousands)									(Dollars in thousands)
Due in one year or less	Due in one year or less	$	26,280	$	25,952	$	—	$	—	Due in one year or less	$	14,139	$	14,016	$	—	$	—
Due after one year through five years	Due after one year through five years	63,151		60,858		—		—		Due after one year through five years	4,983		4,714		—		—
Due after five years through ten years	Due after five years through ten years	67,834		63,738		83,219		68,150		Due after five years through ten years	43,247		38,366		83,252		66,660
Due after ten years	Due after ten years	124,415		104,748		67,729		49,882		Due after ten years	91,927		73,913		67,788		49,159
Total investment securities due at a single maturity date	Total investment securities due at a single maturity date	281,680		255,296		150,948		118,032		Total investment securities due at a single maturity date	154,296		131,009		151,040		115,819
Mortgage-backed securities (1)		1,209,760		1,100,846		622,371		559,303
Total investment securities		$	1,491,440	$	1,356,142	$	773,319	$	677,335

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	September 30, 2023
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair 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) ~~Mortgage-backed securities,~~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, ~~2022~~2023 and December 31, ~~2021.~~2022.

(b) Unrealized Losses on Investment Securities Available for Sale

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


	September 30, 2023
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. government and agency securities	$	—	$	—	$	20,424	$	(3,109)	$	20,424	$	(3,109)
Municipal securities	17,390		(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 securities	466		—		7,469		(235)		7,935		(235)
Total	$	98,004	$	(1,785)	$	1,031,088	$	(143,242)	$	1,129,092	$	(145,027)

September 30, 2022
Less than 12 Months 12 Months or Longer Total
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
(In thousands)
U.S. government and agency securities $ 58,025 $ (4,176) $ 5,724 $ (987) $ 63,749 $ (5,163)
Municipal securities 148,054 (12,031) 27,731 (9,074) 175,785 (21,105)
Residential CMO and MBS 308,142 (28,668) 128,304 (27,298) 436,446 (55,966)
Commercial CMO and MBS 611,399 (49,077) 18,636 (3,347) 630,035 (52,424)
Corporate obligations 5,834 (167) — — 5,834 (167)
Other asset-backed securities 17,410 (563) 834 (15) 18,244 (578)
Total $ 1,148,864 $ (94,682) $ 181,229 $ (40,721) $ 1,330,093 $ (135,403)
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


		December 31, 2021													December 31, 2022
		Less than 12 Months				12 Months or Longer				Total					Less than 12 Months				12 Months or Longer				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
		(In thousands)													(Dollars in thousands)
U.S. government and agency securities	U.S. government and agency securities	$	14,828	$	(176)	$	—	$	—	$	14,828	$	(176)	U.S. government and agency securities	$	51,900	$	(2,031)	$	11,959	$	(3,022)	$	63,859	$	(5,053)
Municipal securities	Municipal securities	29,774		(619)		9,351		(235)		39,125		(854)		Municipal securities	82,580		(5,585)		40,945		(12,648)		123,525		(18,233)
Residential CMO and MBS(1)	Residential CMO and MBS(1)	204,039		(2,470)		19,862		(123)		223,901		(2,593)		Residential CMO and MBS(1)	217,949		(14,770)		206,437		(40,317)		424,386		(55,087)
Commercial CMO and MBS(1)	Commercial CMO and MBS(1)	83,283		(1,161)		1,936		(38)		85,219		(1,199)		Commercial CMO and MBS(1)	473,580		(16,971)		181,692		(32,763)		655,272		(49,734)

Corporate obligations														Corporate obligations	3,834		(166)		—		—		3,834		(166)
Other asset-backed securities	Other asset-backed securities	2,763		(9)		1,118		(7)		3,881		(16)		Other asset-backed securities	16,489		(510)		721		(12)		17,210		(522)
Total	Total	$	334,687	$	(4,435)	$	32,267	$	(403)	$	366,954	$	(4,838)	Total	$	846,332	$	(40,033)	$	441,754	$	(88,762)	$	1,288,086	$	(128,795)

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

The Company evaluated investment securities available for sale as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all

~~Table of Contents~~

rated investment securities and none of these securities had a below investment grade credit rating as of both September 30, ~~2022~~2023 and December 31, ~~2021.~~2022. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of September 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

The Company also evaluated investment securities held to maturity for current expected credit losses as of September 30, ~~2022~~2023 and December 31, ~~2021.~~2022. There were no investment securities held to maturity classified as nonaccrual or past due as of September 30, ~~2022~~2023 and December 31, ~~2021~~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, ~~2022~~2023 and December 31, ~~2021.~~2022.

(d) Realized Gains and Losses

NoThe following table presents the gross realized gains orand losses on the sale of investment securities available for sale ~~were recognized during~~determined using the ~~three months ended September 30, 2022 and 2021. No realized gains or losses and $29,000 in gross realized gains on~~specific identification method for the ~~sale of investment securities available for sale were recognized during the nine months ended September 30, 2022 and 2021, respectively.~~dates indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(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 that ~~are~~were pledged as collateral for the following obligations at the dates indicated:


		September 30, 2022				December 31, 2021					September 30, 2023				December 31, 2022
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(In thousands)									(Dollars in thousands)
Washington and Oregon state public deposits		$	158,082	$	138,003	$	128,216	$	130,217
Federal Reserve Bank credit facility		60,763		49,037		61,057		59,674
State and local governments public deposits										State and local governments public deposits	$	242,616	$	220,348	$	156,784	$	137,931
FRB										FRB	852,720		712,009		60,660		49,506
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	64,087		55,825		59,887		59,655		Securities sold under agreement to repurchase	28,104		25,654		63,685		55,836
Other securities pledged	Other securities pledged	55,600		48,785		56,419		55,633		Other securities pledged	53,883		45,922		54,910		48,358
Total	Total	$	338,532	$	291,650	$	305,579	$	305,179	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 ~~$4.7~~$3.8 million and ~~$3.5~~$4.8 million at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $2.3 million and ~~$1.1~~$2.4 million at September 30, ~~2022~~2023 and December 31, ~~2021,~~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 ~~three or~~ 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 ~~2021.~~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

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

(a) Loan Origination/Risk Management

The Bank categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; real estate construction and land development; and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the ~~2021~~2022 Annual Form 10-K.

The Bank has certain lending policies and ~~procedures~~guidelines in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and ~~procedures~~guidelines 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 criticized loans. The Bank 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.

~~Table of Contents~~

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


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
		(In thousands)					(Dollars in thousands)
Commercial business:	Commercial business:					Commercial business:
Commercial and industrial	Commercial and industrial	$	735,028	$	621,567	Commercial and industrial	$	691,318	$	693,568
SBA PPP		3,593		145,840
Owner-occupied CRE	Owner-occupied CRE	959,486		931,150		Owner-occupied CRE	953,779		937,040
Non-owner occupied CRE	Non-owner occupied CRE	1,547,114		1,493,099		Non-owner occupied CRE	1,690,099		1,586,632
Total commercial business	Total commercial business	3,245,221		3,191,656		Total commercial business	3,335,196		3,217,240
Residential real estate	Residential real estate	296,019		164,582		Residential real estate	377,448		343,631
Real estate construction and land development:	Real estate construction and land development:					Real estate construction and land development:
Residential	Residential	92,297		85,547		Residential	70,804		80,074
Commercial and multifamily	Commercial and multifamily	160,723		141,336		Commercial and multifamily	310,024		214,038
Total real estate construction and land development	Total real estate construction and land development	253,020		226,883		Total real estate construction and land development	380,828		294,112
Consumer	Consumer	207,035		232,541		Consumer	173,386		195,875
Loans receivable	Loans receivable	4,001,295		3,815,662		Loans receivable	4,266,858		4,050,858
Allowance for credit losses on loans		(42,089)		(42,361)
ACL on loans						ACL on loans	(46,947)		(42,986)
Loans receivable, net	Loans receivable, net	$	3,959,206	$	3,773,301	Loans receivable, net	$	4,219,911	$	4,007,872

Balances included in the amortized cost of loans receivable:	Balances included in the amortized cost of loans receivable:					Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans	Unamortized net discount on acquired loans	$	2,686	$	3,938	Unamortized net discount on acquired loans	$	(2,036)	$	(2,501)
Unamortized net deferred fee	Unamortized net deferred fee	$	5,479	$	7,954	Unamortized net deferred fee	$	(10,949)	$	(10,016)

(b) Concentrations of Credit

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

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

The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the ~~2021~~2022 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the 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.

Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The SM loan grade is

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transitory in that the Bank is waiting on additional information to determine the likelihood and extent of any potential loss. The likelihood of loss for SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a SS grade ~~are generally~~have further credit deterioration and include both accrual loans ~~at risk of being classified as~~and nonaccrual ~~loans and includes all of~~

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~~our loans classified as nonaccrual.~~loans. For Doubtful and Loss graded loans, the Bank is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value.

The following ~~table presents~~tables present the amortized 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:~~indicated. The Bank adopted the vintage disclosure requirements of ASU 2022-02 prospectively as described in Note 1 beginning January 1, 2023.


		September 30, 2022																					September 30, 2023																		Revolving Loans			Revolving Loans Converted(1)				Loans Receivable
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (1)				Loans Receivable		Term Loans Amortized Cost Basis by Origination Year
		2022		2021		2020		2019		2018		Prior								2023				2022				2021			2020			2019			Prior
		(In thousands)																					(Dollars in thousands)
Commercial business:	Commercial business:																					Commercial business:
Commercial and industrial	Commercial and industrial																					Commercial and industrial
Pass	Pass	$	133,352	$	97,240	$	89,078	$	68,237	$	36,505	$	83,371		$	193,558		$	108				$	701,449	Pass	$	72,204		$	157,851		$	80,225		$	72,575		$	44,139	$			87,318			$	141,690			$	290	$	656,292
SM	SM	223		—		715		4,759		1,898		5,311		6,678			—				19,584	SM	—				201			254			1,748			4,413			3,911			846			—				11,373
SS	SS	764		275		1,057		3,141		687		5,381		2,322			368				13,995	SS	—				1,239			2,667			1,541			1,220			5,137		11,849			—				23,653

Total	Total	134,339		97,515		90,850		76,137		39,090		94,063		202,558			476				735,028	Total	72,204				159,291			83,146			75,864			49,772			96,366		154,385			290				691,318
SBA PPP
Pass		—		3,455		138		—		—		—		—			—				3,593

Owner-occupied CRE	Owner-occupied CRE																					Owner-occupied CRE
Pass	Pass	111,751		168,437		93,272		172,494		71,795		302,107		—			—				919,856	Pass	67,181				139,102			161,632			84,403			149,576			311,216		—			—				913,110
SM	SM	—		1,009		—		1,237		2,558		16,313		—			—				21,117	SM	—				—			3,565			2,012			710			16,108		—			—				22,395
SS	SS	—		259		675		—		3,739		13,840		—			—				18,513	SS	—				—			3,090			658			—			14,526		—			—				18,274

Total	Total	111,751		169,705		93,947		173,731		78,092		332,260		—			—				959,486	Total	67,181				139,102			168,287			87,073			150,286			341,850		—			—				953,779
Non-owner occupied CRE	Non-owner occupied CRE																					Non-owner occupied CRE
Pass	Pass	182,804		189,307		162,954		240,088		133,478		571,457		—			—				1,480,088	Pass	137,013				260,502			206,919			154,132			242,200			647,754		—			—				1,648,520
SM	SM	—		8,392		—		3,619		—		24,127		—			—				36,138	SM	—				601			8,217			—			575			19,479		—			—				28,872
SS	SS	—		—		—		—		3,627		27,261		—			—				30,888	SS	—				—			—			—			—			12,707		—			—				12,707

Total	Total	182,804		197,699		162,954		243,707		137,105		622,845		—			—				1,547,114	Total	137,013				261,103			215,136			154,132			242,775			679,940		—			—				1,690,099
Total commercial business	Total commercial business																					Total commercial business
Pass	Pass	427,907		458,439		345,442		480,819		241,778		956,935		193,558			108				3,104,986	Pass	276,398				557,455			448,776			311,110			435,915			1,046,288		141,690			290				3,217,922
SM	SM	223		9,401		715		9,615		4,456		45,751		6,678			—				76,839	SM	—				802			12,036			3,760			5,698			39,498		846			—				62,640
SS	SS	764		534		1,732		3,141		8,053		46,482		2,322			368				63,396	SS	—				1,239			5,757			2,199			1,220			32,370		11,849			—				54,634

Total	Total	428,894		468,374		347,889		493,575		254,287		1,049,168		202,558			476				3,245,221	Total	276,398				559,496			466,569			317,069			442,833			1,118,156		154,385			290				3,335,196
Commercial business gross charge-offs																						Commercial business gross charge-offs
Current period																						Current period	—				—			15			61			—			100		—			—				176
Residential real estate	Residential real estate																					Residential real estate
Pass(1)	Pass(1)	94,144		140,093		24,191		17,030		4,501		15,885		—			—				295,844	Pass(1)	37,158				139,887			143,647			24,868			15,134			16,590		—			—				377,284

SS	SS	—		—		—		—		—		175		—			—				175	SS	—				—			—			—			—			164		—			—				164
Total																						Total	37,158				139,887			143,647			24,868			15,134			16,754		—			—				377,448

Total		94,144		140,093		24,191		17,030		4,501		16,060		—			—				296,019

Real estate construction and land development:	Real estate construction and land development:																					Real estate construction and land development:
Residential	Residential																					Residential
Pass	Pass	33,244		37,666		7,617		11,810		885		1,075		—			—				92,297	Pass	26,212				30,529			5,024			1,488			822			732		—			—				64,807

SS																						SS	997				319			4,495			—			—			186		—			—				5,997
Total																						Total	27,209				30,848			9,519			1,488			822			918		—			—				70,804
Commercial and multifamily
Pass	Pass	36,362		103,541		7,601		1,096		2,565		1,513		—			—				152,678	Pass	26,072				158,782			106,134			5,391			764			3,369		—			—				300,512
SM	SM	—		—		1,913		5,687		—		—		—			—				7,600	SM	—				—			—			3,452			5,687			373		—			—				9,512
SS		—		—		—		45		—		400		—			—				445

Total	Total	36,362		103,541		9,514		6,828		2,565		1,913		—			—				160,723	Total	26,072				158,782			106,134			8,843			6,451			3,742		—			—				310,024
Total real estate construction and land development
Pass		69,606		141,207		15,218		12,906		3,450		2,588		—			—				244,975
SM		—		—		1,913		5,687		—		—		—			—				7,600
SS		—		—		—		45		—		400		—			—				445

Total		69,606		141,207		17,131		18,638		3,450		2,988		—			—				253,020
Consumer
Pass		3,266		616		11,078		31,077		18,201		22,828		117,070			539				204,675

1718

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		September 30, 2022																						September 30, 2023																			Revolving Loans				Revolving Loans Converted(1)				Loans Receivable
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (1)				Loans Receivable			Term Loans Amortized Cost Basis by Origination Year
		2022		2021		2020		2019		2018		Prior								2023					2022				2021			2020			2019			Prior
																								(Dollars in thousands)
Total real estate construction and land development																							Total real estate construction and land development
Pass																							Pass	52,284				189,311			111,158			6,879			1,586			4,101					—				—				365,319
SM																							SM	—				—			—			3,452			5,687			373				—				—				9,512
SS	SS	—		—		164		582		361		1,241				11			1					2,360		SS	997			319			4,495			—			—			186				—				—				5,997
Total																							Total	53,281				189,630			115,653			10,331			7,273			4,660			—				—				380,828

Consumer																							Consumer
Pass																							Pass	1,713				2,314			332			7,016			18,305			23,514			117,681				653				171,528

SS																							SS	—				—			—			150			286			1,023			375				24				1,858
Total	Total	3,266		616		11,242		31,659		18,562		24,069		117,081			540				207,035		Total	1,713				2,314			332			7,166			18,591			24,537			118,056				677				173,386
Consumer gross charge-offs:																							Consumer gross charge-offs:
Current period																							Current period	7				10			12			21			54			122			194				—				420
Loans receivable	Loans receivable																						Loans receivable
Pass	Pass	594,923		740,355		395,929		541,832		267,930		998,236		310,628			647				3,850,480		Pass	367,553				888,967			703,913			349,873			470,940			1,090,493			259,371				943				4,132,053
SM	SM	223		9,401		2,628		15,302		4,456		45,751		6,678			—				84,439		SM	—				802			12,036			7,212			11,385			39,871			846				—				72,152
SS	SS	764		534		1,896		3,768		8,414		48,298		2,333			369				66,376		SS	997				1,558			10,252			2,349			1,506			33,743			12,224				24				62,653

Total	Total	$	595,910	$	750,290	$	400,453	$	560,902	$	280,800	$	1,092,285	$	319,639		$	1,016			$	4,001,295	Total	$	368,550			$	891,327		$	726,201		$	359,434		$	483,831		$	1,164,107		$	272,441			$	967			$	4,266,858
Gross charge-offs:																							Gross charge-offs:
Total																							Total	$	7			$	10		$	27		$	82		$	54		$	222		$	194			$	—			$	596

(1) Represents the loans receivable balance at September 30, ~~2022~~2023 which was converted from a revolving loan to ana non-revolving amortizing loan during the nine months ended September 30, ~~2022.~~2023.


		December 31, 2021																					December 31, 2022																		Revolving Loans			Revolving Loans Converted(1)				Loans Receivable
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (1)				Loans Receivable		Term Loans Amortized Cost Basis by Origination Year
		2021		2020		2019		2018		2017		Prior								2022				2021				2020			2019			2018			Prior
		(In thousands)																					(Dollars in thousands)
Commercial business:	Commercial business:																					Commercial business:
Commercial and industrial	Commercial and industrial																					Commercial and industrial
Pass	Pass	$	95,960	$	100,193	$	94,657	$	54,707	$	28,558	$	77,294		$	127,651		$	1,035				$	580,055	Pass	$	168,818		$	94,653		$	82,554		$	61,160		$	33,957	$			74,181			$	146,795			$	172	$	662,290
SM	SM	326		884		5,998		1,425		2,223		2,401		2,048			353				15,658	SM	212				109			443			4,637			362			4,447			5,433			—				15,643
SS	SS	1,443		1,287		5,912		2,809		2,526		6,907		4,402			568				25,854	SS	773				188			1,710			3,465			559			5,098		3,674			168				15,635

Total	Total	97,729		102,364		106,567		58,941		33,307		86,602		134,101			1,956				621,567	Total	169,803				94,950			84,707			69,262			34,878			83,726		155,902			340				693,568
SBA PPP
Pass		139,253		6,587		—		—		—		—		—			—				145,840

Owner-occupied CRE	Owner-occupied CRE																					Owner-occupied CRE
Pass	Pass	182,742		90,609		188,380		73,714		66,039		273,518		—			72				875,074	Pass	134,432				167,927			93,834			157,096			62,876			282,212		—			—				898,377
SM	SM	264		—		3,079		7,521		3,937		16,724		—			—				31,525	SM	—				1,744			—			—			2,540			16,664		—			247				21,195
SS	SS	—		1,332		—		3,787		3,014		16,418		—			—				24,551	SS	—				—			671			—			3,722			13,075		—			—				17,468

Total	Total	183,006		91,941		191,459		85,022		72,990		306,660		—			72				931,150	Total	134,432				169,671			94,505			157,096			69,138			311,951		—			247				937,040
Non-owner-occupied CRE	Non-owner-occupied CRE																					Non-owner-occupied CRE
Pass	Pass	187,860		185,650		244,863		149,090		144,896		499,486		—			—				1,411,845	Pass	240,151				189,300			160,930			258,778			121,369			561,645		—			—				1,532,173
SM	SM	—		—		5,674		—		15,482		2,400		—			—				23,556	SM	—				8,349			—			4,172			—			12,190		—			—				24,711
SS	SS	—		—		—		3,379		—		54,319		—			—				57,698	SS	—				—			—			—			3,627			26,121		—			—				29,748

Total	Total	187,860		185,650		250,537		152,469		160,378		556,205		—			—				1,493,099	Total	240,151				197,649			160,930			262,950			124,996			599,956		—			—				1,586,632
Total commercial business
Pass		605,815		383,039		527,900		277,511		239,493		850,298		127,651			1,107				3,012,814
SM		590		884		14,751		8,946		21,642		21,525		2,048			353				70,739
SS		1,443		2,619		5,912		9,975		5,540		77,644		4,402			568				108,103

Total		607,848		386,542		548,563		296,432		266,675		949,467		134,101			2,028				3,191,656
Residential real estate
Pass		85,089		27,090		23,295		5,672		6,141		16,891		—			—				164,178

SS		—		—		—		—		—		404		—			—				404

Total		85,089		27,090		23,295		5,672		6,141		17,295		—			—				164,582
Real estate construction and land development:
Residential
Pass		44,892		23,728		12,266		2,921		389		1,351		—			—				85,547

1819

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		December 31, 2021																					December 31, 2022													Revolving Loans			Revolving Loans Converted(1)			Loans Receivable
																							Term Loans Amortized Cost Basis by Origination Year
																							2022			2021		2020		2019		2018		Prior
																							(Dollars in thousands)
Total commercial business																						Total commercial business
Pass																						Pass	543,401			451,880		337,318		477,034		218,202		918,038				146,795			172			3,092,840
SM																						SM	212			10,202		443		8,809		2,902		33,301				5,433			247			61,549
SS																						SS	773			188		2,381		3,465		7,908		44,294		3,674			168			62,851
Total																						Total	544,386			462,270		340,142		489,308		229,012		995,633		155,902			587			3,217,240
Residential real estate																						Residential real estate
Pass																						Pass	132,510			149,934		24,668		16,803		4,207		15,337		—			—			343,459

SS																						SS	—			—		—		—		—		172		—			—			172
Total																						Total	132,510			149,934		24,668		16,803		4,207		15,509		—			—			343,631
Real estate construction and land development:																						Real estate construction and land development:
Residential																						Residential
Pass																						Pass	45,521			26,675		2,891		3,061		871		1,055		—			—			80,074
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (1)			Loans Receivable
		2021		2020		2019		2018		2017		Prior
		(In thousands)
Commercial and multifamily
Pass	Pass	56,448		41,616		34,117		5,794		710		1,379				—			—					140,064	Pass	71,168		123,626		6,272		1,084		2,562		995			—			—			205,707
SM	SM	—		—		68		—		—		213		—			—			281		SM	—			—		2,213		5,687		—		—		—			—			7,900
SS	SS	—		571		—		—		—		420		—			—			991		SS	—			—		—		37		—		394		—			—			431

Total	Total	56,448		42,187		34,185		5,794		710		2,012		—			—			141,336		Total	71,168			123,626		8,485		6,808		2,562		1,389		—			—			214,038
Total real estate construction and land development	Total real estate construction and land development																					Total real estate construction and land development
Pass	Pass	101,340		65,344		46,383		8,715		1,099		2,730		—			—			225,611		Pass	116,689			150,301		9,163		4,145		3,433		2,050		—			—			285,781
SM	SM	—		—		68		—		—		213		—			—			281		SM	—			—		2,213		5,687		—		—		—			—			7,900
SS	SS	—		571		—		—		—		420		—			—			991		SS	—			—		—		37		—		394		—			—			431

Total	Total	101,340		65,915		46,451		8,715		1,099		3,363		—			—			226,883		Total	116,689			150,301		11,376		9,869		3,433		2,444		—			—			294,112
Consumer	Consumer																					Consumer
Pass	Pass	1,286		15,737		46,041		29,819		15,068		13,026		108,492			120			229,589		Pass	3,379			509		9,848		27,370		15,563		19,855		116,605			435			193,564

SS	SS	—		181		657		476		542		1,043		36			17			2,952		SS	—			—		168		559		320		1,120		44			100			2,311

Total	Total	1,286		15,918		46,698		30,295		15,610		14,069		108,528			137			232,541		Total	3,379			509		10,016		27,929		15,883		20,975		116,649			535			195,875
Loans receivable	Loans receivable																					Loans receivable
Pass	Pass	793,530		491,210		643,619		321,717		261,801		882,945		236,143			1,227			3,632,192		Pass	795,979			752,624		380,997		525,352		241,405		955,280		263,400			607			3,915,644
SM	SM	590		884		14,819		8,946		21,642		21,738		2,048			353			71,020		SM	212			10,202		2,656		14,496		2,902		33,301		5,433			247			69,449
SS	SS	1,443		3,371		6,569		10,451		6,082		79,511		4,438			585			112,450		SS	773			188		2,549		4,061		8,228		45,980		3,718			268			65,765

Total	Total	$	795,563	$	495,465	$	665,007	$	341,114	$	289,525	$	984,194	$	242,629		$	2,165		$	3,815,662	Total	$	796,964		$	763,014	$	386,202	$	543,909	$	252,535	$	1,034,561	$	272,551		$	1,122		$	4,050,858

(1) Represents the loans receivable balance at December 31, ~~2021~~2022 which was converted from a revolving loan to annon-revolving amortizing loan during the year ended December 31, ~~2021.~~2022.

(d) Nonaccrual Loans

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

September 30, 2022
Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial $ 5,060 $ 299 $ 5,359
Owner-occupied CRE — 875 875
Total $ 5,060 $ 1,174 $ 6,234

December 31, 2021
Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial $ 6,454 $ 3,827 $ 10,281
Owner-occupied CRE 3,036 5,138 8,174
Non-owner occupied CRE 1,273 3,379 4,652
Total commercial business 10,763 12,344 23,107
Residential real estate — 47 47
Real estate construction and land development:
Commercial and multifamily — 571 571
Consumer — 29 29
Total $ 10,763 $ 12,991 $ 23,754


	September 30, 2023
	Nonaccrual without ACL		Nonaccrual with ACL		Total 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

1920

Table of Contents


	December 31, 2022
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	4,503	$	1,154	$	5,657
Owner-occupied CRE	—		212		212

Total commercial business	4,503		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,
		Three Months Ended September 30, 2022				Three Months Ended September 30, 2021					2023				2022
		Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized			Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
		(In thousands)									(Dollars in thousands)
Commercial business:	Commercial business:									Commercial business:
Commercial and industrial	Commercial and industrial	$	—	$	31	$	(1)	$	184	Commercial and industrial	$	(10)	$	18	$	—	$	31

Consumer		—		—		—		32

Total	Total	$	—	$	31	$	(1)	$	216	Total	$	(10)	$	18	$	—	$	31

Nine Months Ended
September 30, 2022 Nine Months Ended
September 30, 2021
Interest Income Reversed Interest Income Recognized Interest Income Reversed Interest Income Recognized
(in thousands)
Commercial business:
Commercial and industrial $ (14) $ 260 $ (11) $ 2,228
Owner-occupied CRE — 53 — 117
Non-owner occupied CRE — 774 — 313
Total commercial business (14) 1,087 (11) 2,658
Residential real estate — 19 — —
Real estate construction and land development:
Residential — — — 73
Consumer — 68 — 32
Total $ (14) $ 1,174 $ (11) $ 2,763


	Nine Months Ended September 30,
	2023				2022
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest 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, ~~2022~~2023 and ~~2021,~~2022, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.

(e) Past due loans

The Bank performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The following tables present the amortized cost of past due loans ~~as of September 30, 2022 and December 31, 2021 were as follows:~~at the dates indicated:

September 30, 2022
30-89 Days 90 Days or
Greater Total Past
Due Current Loans Receivable
(In thousands)
Commercial business:
Commercial and industrial $ 1,774 $ 4,130 $ 5,904 $ 729,124 $ 735,028
SBA PPP 167 — 167 3,426 3,593
Owner-occupied CRE 30 189 219 959,267 959,486
Non-owner occupied CRE 296 — 296 1,546,818 1,547,114
Total commercial business 2,267 4,319 6,586 3,238,635 3,245,221
Residential real estate — — — 296,019 296,019
Real estate construction and land development:
Residential — — — 92,297 92,297
Commercial and multifamily — — — 160,723 160,723
Total real estate construction and land development — — — 253,020 253,020


	September 30, 2023
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	1,126	$	2,883	$	4,009	$	687,309	$	691,318

2021

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September 30, 2022
30-89 Days 90 Days or
Greater Total Past
Due Current Loans Receivable
(In thousands)
Consumer 736 20 756 206,279 207,035
Total $ 3,003 $ 4,339 $ 7,342 $ 3,993,953 $ 4,001,295

December 31, 2021
30-89 Days 90 Days or
Greater Total Past
Due Current Loans Receivable
(In thousands)
Commercial business:
Commercial and industrial $ 1,858 $ 6,821 $ 8,679 $ 612,888 $ 621,567
SBA PPP 223 293 516 145,324 145,840
Owner-occupied CRE 2,397 112 2,509 928,641 931,150
Non-owner occupied CRE — — — 1,493,099 1,493,099
Total commercial business 4,478 7,226 11,704 3,179,952 3,191,656
Residential real estate 420 10 430 164,152 164,582
Real estate construction and land development:
Residential 792 — 792 84,755 85,547
Commercial and multifamily 3,474 571 4,045 137,291 141,336
Total real estate construction and land development 4,266 571 4,837 222,046 226,883
Consumer 1,026 — 1,026 231,515 232,541
Total $ 10,190 $ 7,807 $ 17,997 $ 3,797,665 $ 3,815,662


	September 30, 2023
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(Dollars in thousands)
Owner-occupied CRE	426		635		1,061		952,718		953,779
Non-owner occupied CRE	—		—		—		1,690,099		1,690,099
Total commercial business	1,552		3,518		5,070		3,330,126		3,335,196
Residential real estate	—		—		—		377,448		377,448
Real estate construction and land development:
Residential	505		—		505		70,299		70,804
Commercial and multifamily	—		—		—		310,024		310,024
Total real estate construction and land development	505		—		505		380,323		380,828
Consumer	635		325		960		172,426		173,386
Total	$	2,692	$	3,843	$	6,535	$	4,260,323	$	4,266,858


	December 31, 2022
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans 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 business	822		6,293		7,115		3,210,125		3,217,240
Residential real estate	3,066		—		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
Consumer	1,561		—		1,561		194,314		195,875
Total	$	5,449	$	6,293	$	11,742	$	4,039,116	$	4,050,858

Loans 90 days or more past due and still accruing interest were ~~$20,000~~$2.2 million and ~~$293,000~~$1.6 million as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

(f) Collateral-dependent Loans

The following tables present the type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral ~~as of September 30, 2022 and December 31, 2021 was as follows,~~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:

September 30, 2022
CRE Farmland Residential Real Estate Total
(In thousands)
Commercial business:
Commercial and industrial $ 1,239 $ 2,082 $ 1,271 $ 4,592
Owner-occupied CRE 189 — — 189
Total $ 1,428 $ 2,082 $ 1,271 $ 4,781


		December 31, 2021											September 30, 2023
		CRE		Farmland		Residential Real Estate		Other		Total			CRE		Farmland		Residential Real Estate		Equipment		Total
		(In thousands)											(Dollars in thousands)
Commercial business:	Commercial business:											Commercial business:
Commercial and industrial	Commercial and industrial	$	1,499	$	4,362	$	1,036	$	245	$	7,142	Commercial and industrial	$	260	$	389	$	630	$	541	$	1,820
Owner-occupied CRE	Owner-occupied CRE	3,035		—		—		—		3,035		Owner-occupied CRE	189		—		—		—		189
Non-owner occupied CRE		1,273		—		—		—		1,273
Total commercial business		5,807		4,362		1,036		245		11,450

Real estate construction and land development:

Total												Total	$	449	$	389	$	630	$	541	$	2,009

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		December 31, 2021											December 31, 2022
		CRE		Farmland		Residential Real Estate		Other		Total			CRE		Farmland		Residential Real Estate		Equipment		Total
		(In thousands)											(Dollars in thousands)
Commercial and multifamily		571		—		—		—		571
Commercial business:												Commercial business:
Commercial and industrial												Commercial and industrial	$	1,239	$	1,977	$	929	$	—	$	4,145
Owner-occupied CRE												Owner-occupied CRE	189		—		—		—		189

Total	Total	$	6,378	$	4,362	$	1,036	$	245	$	12,021	Total	$	1,428	$	1,977	$	929	$	—	$	4,334

There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the nine months ended September 30, ~~2022,~~2023, except changes due to additions or removals of loans ~~from~~in this classification.

(g) Modification of Loans

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt ~~Restructured Loans~~Restructurings 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.

~~Loans~~Modifications of loans to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

The following table presents loan modifications by type of modification at amortized cost that were modified as ~~TDR loans are set forth in the following table for the periods indicated:~~

Three Months Ended September 30,
2022 2021
Number of
Contracts
Amortized Cost (1) (2)
Number of
Contracts
Amortized Cost (1) (2)
(Dollars in thousands)
Commercial business:
Commercial and industrial 4 $ 2,150 5 $ 1,861
Owner-occupied CRE — — 2 7,124
Non-owner occupied CRE — — — —
Total commercial business 4 2,150 7 8,985
Real estate construction and land development:
Commercial and multifamily 1 5,687 1 450
Consumer 2 238 5 94
Total 7 $ 8,075 13 $ 9,529

Nine Months Ended September 30,
2022 2021
Number of
Contracts
Amortized Cost (1) (2)
Number of
Contracts
Amortized Cost (1) (2)
(Dollars in thousands)
Commercial business:
Commercial and industrial 8 $ 3,119 32 $ 10,380
Owner-occupied CRE — — 6 16,710
Non-owner occupied CRE — — 3 5,673
Total commercial business 8 3,119 41 32,763
Residential real estate — — 1 180
Real estate construction and land development:
Commercial and multifamily 1 5,687 1 450
Consumer 9 307 22 487
Total 18 $ 9,113 65 $ 33,880

~~(1)~~ Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the nine months ended September 30, 2022 and 2021.

~~(2)~~ As the Bank did not forgive any principal or interest balance as part of the loan modifications, the Bank’s amortized cost in each loan at the date of modification (pre-modification) did not change as a result of ~~the modification (post-modification).~~

~~The Bank had an ACL on loans of~~ ~~$30,000~~ an~~d $3.4 million at September 30, 2022~~experiencing both financial difficulty and ~~September 30, 2021, respectively, related to these TDR loans which were restructured~~modified during the ~~nine months ended September 30, 2022 and September 30, 2021, respectively.~~period indicated:

~~The unfunded commitment to borrowers related to TDR loans was $5.9 million and $5.7 million at September 30, 2022 and December 31, 2021, respectively.~~


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

	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	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 Extension		Term Extension & Int. Rate Reduction		Total Modified Loans		% of Modified Loans to Loans Receivable, net

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

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

Real estate construction and land development:

Commercial and multifamily	3,452		—		3,452		1.11	%

Consumer	28		17		45		0.03	%
Total	$	12,712	$	256	$	12,968	0.30	%

2223

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The following ~~table presents loans that were modified~~tables present the financial effect of the loan modifications presented in ~~a TDR and subsequently defaulted within twelve months from~~ the ~~modification date~~preceding table during the periods indicated:


		Three Months Ended September 30,
		2022			2021
		Number of Contracts (1)	Amortized Cost (1)		Number of Contracts (1)	Amortized Cost (1)			Three Months Ended September 30, 2023			Nine Months Ended September 30, 2023
		(Dollars in thousands)							Weighted Average % of Interest Rate Reductions		Weighted Average Years of Term Extensions	Weighted Average % of Interest Rate Reductions		Weighted Average Years of Term Extensions
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	—	$	—	1	$	336	Commercial and industrial	—	%	1.82	—	%	0.58
Owner-occupied CRE								Owner-occupied CRE	—	%		—	%
Non-owner occupied CRE								Non-owner occupied CRE	3.00		2.00	3.00		1.09
Total commercial business								Total commercial business	3.00		1.90	3.00		0.74

Real estate construction and land development:								Real estate construction and land development:

Commercial and multifamily								Commercial and multifamily	—			—		0.42

Consumer								Consumer	—			1.00		2.62
Total								Total	3.00	%	1.90	3.00	%	0.66

Nine Months Ended September 30,
2022 2021
Number of
Contracts (1)
Amortized Cost (1)
Number of
Contracts (1)
Amortized Cost (1)
(Dollars in thousands)
Commercial business:
Commercial and industrial — $ — 3 $ 976
Owner-occupied CRE 1 189 — —

~~(1)~~ ~~Number of contracts and amortized cost represent TDR~~There were no modified loans ~~which have balances~~included in the tables above that were past due or on nonaccrual as of ~~period end, net of subsequent payments after modifications. Certain TDR~~September 30, 2023.

There were no modified loans ~~may have been paid-down or charged-off~~made during the three and nine months ended September 30, ~~2022 and 2021.~~

~~The Bank had $4,000 ACL on loans at September 30, 2022 and $13,000 at September 30, 2021 related to these TDR loans which defaulted during the nine months ended September 30, 2022 and 2021.~~2023, that subsequently defaulted.

(h) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled ~~$10.5~~$12.5 million and ~~$10.1~~$11.3 million at September 30, ~~2022~~2023 and December 31, ~~2021, respectively. It~~2022, respectively, and is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.

(i) Foreclosure proceedings in process

At September 30, ~~2022,~~2023, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

(4)Allowance for Credit Losses on Loans

The Company's methodology for determining the ACL on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. For a description of the Company's ACL policy, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 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 ~~on loans at September 30, 2022 utilized the Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date. There were no~~for collectively evaluated loans. This new version includes changes to ~~this assumption during~~ the ~~nine months ended September 30, 2022.~~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 changed to look back to 2000 as compared to 1991 to improve data relevance. The ~~Bank believes~~most significant changes to macroeconomic variables were in the ~~historic loss rates are viable inputs~~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 ~~current CECL model~~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 ~~Bank's lending practice~~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 ~~business has remained relatively stable throughout the periods. While the Bank's assets have grown, the credit culture has stayed relatively consistent.~~

~~Prepayments included in the CECL model at September 30, 2022 were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation~~include, but not be limited to, factors such as: (i) management’s assessment of ~~future prepayment activity. There were no changes to this assumption during the nine months ended September 30, 2022.~~

~~The reasonable and supportable period and subsequent reversion period~~economic forecasts used in the ~~CECL~~ model ~~was five quarters~~ and ~~two quarters, respectively, at December 31, 2021. There were no~~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 ~~these assumptions during~~determine the ~~nine months ended~~ACL.

As of September 30, ~~2022. Management believes forecasts beyond this seven quarter time period tend~~2023, qualitative adjustments primarily relate to ~~diverge in economic assumptions and may be less comparable to actual future events. As the length~~certain segments of the ~~reasonable~~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 ~~supportable period increases,~~ the ~~degree~~related impact on certain loan segments. Management reviews the need for an appropriate level of ~~judgment involved~~qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in ~~estimating the allowance increases.~~future periods.

During the nine months ended September 30, ~~2022,~~2023, the ACL on loans ~~decreased$272,000, or 0.6%,~~increased $3.9 million to $46.9 million from $43.0 million at December 31, 2022 due primarily to a ~~reversal of~~ provision for credit losses on loans of ~~$1.3~~$3.1 million driven by ~~a $3.4 million reduction in the ACL on loans individually evaluated for losses and their related ACL offset partially by an increase related to the~~ growth in loans ~~receivable. The ACL on loans at September 30, 2022~~receivable, net and ~~December 31, 2021 did not include~~secondarily due to net recoveries of $895,000 as a ~~reserve for SBA PPP loans as these loans are fully guaranteed by~~result of a $1.1 million recovery from the ~~SBA.~~

~~During the nine months ended September 30, 2021, the ACL on loans decreased $21.9 million or 31.2%, due primarily to~~payoff of a ~~reversal of provision for credit losses on loans of $21.8 million. The reversal of provision for credit losses was primarily driven~~ by ~~improvements in the economic forecast at September 30, 2021 as compared to the forecast at December 31, 2020.~~

~~Table of Contents~~

~~A summary of the changes in the ACL on loans during the nine months ended September 30, 2022 and 2021 is as follows:~~

Nine Months Ended
September 30,
2022 2021
(In thousands)
Beginning balance $ 42,361 $ 70,185
Charge-offs (742) (1,267)
Recoveries of loans previously charged-off 1,722 1,207
Reversal of provision for credit losses on loans (1,252) (21,808)
Ending balance $ 42,089 $ 48,317
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, 2022
Beginning Balance Charge-offs Recoveries Provision for (Reversal of) Credit Losses Ending Balance
(In thousands)
Commercial business:
Commercial and industrial $ 14,033 $ — $ 455 $ 180 $ 14,668
Owner-occupied CRE 8,162 — — (443) 7,719
Non-owner occupied CRE 9,512 — — 41 9,553
Total commercial business 31,707 — 455 (222) 31,940
Residential real estate 2,137 — — 408 2,545
Real estate construction and land development:
Residential 1,081 — 5 208 1,294
Commercial and multifamily 2,203 — 102 1,505 3,810
Total real estate construction and land development 3,284 — 107 1,713 5,104
Consumer 2,568 (138) 50 20 2,500
Total $ 39,696 $ (138) $ 612 $ 1,919 $ 42,089

Nine Months Ended September 30, 2022
Beginning Balance Charge-offs Recoveries Provision for (Reversal of) Credit Losses Ending Balance
(In thousands)
Commercial business:
Commercial and industrial $ 17,777 $ (280) $ 876 $ (3,705) $ 14,668
Owner-occupied CRE 6,411 (36) — 1,344 7,719
Non-owner occupied CRE 8,861 — — 692 9,553
Total commercial business 33,049 (316) 876 (1,669) 31,940
Residential real estate 1,409 (30) 3 1,163 2,545
Real estate construction and land development:
Residential 1,304 — 19 (29) 1,294
Commercial and multifamily 3,972 — 155 (317) 3,810
Total real estate construction and land development 5,276 — 174 (346) 5,104
Consumer 2,627 (396) 669 (400) 2,500
Total $ 42,361 $ (742) $ 1,722 $ (1,252) $ 42,089


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


	Nine Months Ended September 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	13,962	$	(176)	$	1,342	$	(3,383)	$	11,745
Owner-occupied CRE	7,480		—		—		1,214		8,694
Non-owner occupied CRE	9,276		—		—		1,390		10,666
Total commercial business	30,718		(176)		1,342		(779)		31,105

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		Three Months Ended September 30, 2021											Nine Months Ended September 30, 2023
		Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance			Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
		(In thousands)											(Dollars in thousands)
Commercial business:
Commercial and industrial		$	17,485	$	(743)	$	373	$	1,531	$	18,646
Owner-occupied CRE		8,562		—		12		(1,644)		6,930
Non-owner occupied CRE		10,630		—		—		(1,133)		9,497
Total commercial business		36,677		(743)		385		(1,246)		35,073
Residential real estate	Residential real estate	1,153		—		—		(67)		1,086		Residential real estate	2,872		—		—		677		3,549
Real estate construction and land development:	Real estate construction and land development:											Real estate construction and land development:
Residential	Residential	1,636		—		8		136		1,780		Residential	1,654		—		—		(146)		1,508
Commercial and multifamily	Commercial and multifamily	8,835		—		—		(1,530)		7,305		Commercial and multifamily	5,409		—		—		3,042		8,451
Total real estate construction and land development	Total real estate construction and land development	10,471		—		8		(1,394)		9,085		Total real estate construction and land development	7,063		—		—		2,896		9,959
Consumer	Consumer	3,261		(204)		161		(145)		3,073		Consumer	2,333		(420)		149		272		2,334
Total	Total	$	51,562	$	(947)	$	554	$	(2,852)	$	48,317	Total	$	42,986	$	(596)	$	1,491	$	3,066	$	46,947


		Nine Months Ended September 30, 2021											Three Months Ended September 30, 2022
		Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance			Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
		(In thousands)											(Dollars in thousands)
Commercial business:	Commercial business:											Commercial business:
Commercial and industrial	Commercial and industrial	$	30,010	$	(757)	$	710	$	(11,317)	$	18,646	Commercial and industrial	$	14,033	$	—	$	455	$	180	$	14,668
Owner-occupied CRE	Owner-occupied CRE	9,486		—		25		(2,581)		6,930		Owner-occupied CRE	8,162		—		—		(443)		7,719
Non-owner occupied CRE	Non-owner occupied CRE	10,112		—		—		(615)		9,497		Non-owner occupied CRE	9,512		—		—		41		9,553
Total commercial business	Total commercial business	49,608		(757)		735		(14,513)		35,073		Total commercial business	31,707		—		455		(222)		31,940
Residential real estate	Residential real estate	1,591		—		—		(505)		1,086		Residential real estate	2,137		—		—		408		2,545
Real estate construction and land development:	Real estate construction and land development:											Real estate construction and land development:
Residential	Residential	1,951		—		28		(199)		1,780		Residential	1,081		—		5		208		1,294
Commercial and multifamily	Commercial and multifamily	11,141		(1)		—		(3,835)		7,305		Commercial and multifamily	2,203		—		102		1,505		3,810
Total real estate construction and land development	Total real estate construction and land development	13,092		(1)		28		(4,034)		9,085		Total real estate construction and land development	3,284		—		107		1,713		5,104
Consumer	Consumer	5,894		(509)		444		(2,756)		3,073		Consumer	2,568		(138)		50		20		2,500
Total	Total	$	70,185	$	(1,267)	$	1,207	$	(21,808)	$	48,317	Total	$	39,696	$	(138)	$	612	$	1,919	$	42,089


	Nine Months Ended September 30, 2022
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	17,777	$	(280)	$	876	$	(3,705)	$	14,668
Owner-occupied CRE	6,411		(36)		—		1,344		7,719
Non-owner occupied CRE	8,861		—		—		692		9,553
Total commercial business	33,049		(316)		876		(1,669)		31,940
Residential real estate	1,409		(30)		3		1,163		2,545
Real estate construction and land development:
Residential	1,304		—		19		(29)		1,294
Commercial and multifamily	3,972		—		155		(317)		3,810
Total real estate construction and land development	5,276		—		174		(346)		5,104
Consumer	2,627		(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,
	2023		2022		2023		2022
	(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

There were no additions to goodwill during the ~~three and~~ nine months ended September 30, ~~2022~~2023 and ~~2021.~~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, ~~2021~~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, 2023, the Company determined that no material adverse changes had occurred since the quantitative assessment was performed as of May 31, 2023 and concluded that there continues to be no impairment of goodwill.

(b) Other Intangible Assets

Other 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 during the ~~three and~~ nine months ended September 30, ~~2022~~2023 and ~~2021.~~2022.

(6)Derivative Financial Instruments

The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap

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with another financial institution. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate loan, or a fixed rate loan to a variable rate loan, and the Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third-party. These interest rate swaps are not designated as hedging instruments.

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

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

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


		September 30, 2022			December 31, 2021					September 30, 2023			December 31, 2022
		Notional Amounts		Estimated Fair Value	Notional Amounts		Estimated Fair Value			Notional Amounts		Estimated Fair Value	Notional Amounts		Estimated Fair Value
		(In thousands)								(Dollars in thousands)
Non-hedging interest rate derivatives	Non-hedging interest rate derivatives								Non-hedging interest rate derivatives
Interest rate swap asset (1)	Interest rate swap asset (1)	$	298,601	32,523	$	322,726	$	15,219	Interest rate swap asset (1)	$	289,978	33,840	$	288,785	$	30,107
Interest rate swap liability (1)	Interest rate swap liability (1)	298,601		(32,523)	322,726		(15,286)		Interest rate swap liability (1)	289,978		(33,840)	288,785		(30,107)

(1) The estimated fair value of derivatives with customers was ~~$(32.5)~~$(33.7) million and ~~$9.8~~$(30.1) million as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The estimated fair value of derivatives with third-parties was ~~$32.5~~$33.7 million and ~~$(9.8)~~$30.1 million as of September 30, ~~2022~~2023 and December 31, ~~2021,~~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.

(7)Stockholders’ Equity

(a) Earnings Per Common Share

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
		(In thousands, except shares)									(Dollars in thousands, except shares)

Net income		$	20,990	$	20,592	$	59,331	$	78,638

Net income allocated to common shareholders										Net income allocated to common shareholders	$	18,219	$	20,990	$	55,522	$	59,331

Basic:	Basic:									Basic:
Weighted average common shares outstanding	Weighted average common shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258		Weighted average common shares outstanding	35,022,676		35,103,984		35,062,760		35,103,048

Diluted:	Diluted:									Diluted:
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258		Basic weighted average common shares outstanding	35,022,676		35,103,984		35,062,760		35,103,048
Effect of potentially dilutive common shares (1)	Effect of potentially dilutive common shares (1)	364,906		285,326		335,624		297,794		Effect of potentially dilutive common shares (1)	92,489		364,906		242,696		335,624
Total diluted weighted average common shares outstanding	Total diluted weighted average common shares outstanding	35,468,890		35,929,518		35,438,672		36,152,052		Total diluted weighted average common shares outstanding	35,115,165		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)	Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)	3,026		16,002		13,662		7,083		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

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

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

(b) Dividends

The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings,

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capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.

The following table summarizes the dividend activity during the nine months ended September 30, ~~2022~~2023 and the calendar year ~~2021:~~2022:

Declared

Cash Dividend per Share

Record Date

Paid Date

~~January 27, 2021~~

~~$0.20~~

~~February 10, 2021~~

~~February 24, 2021~~

~~April 21, 2021~~

~~$0.20~~

~~May 5, 2021~~

~~May 19, 2021~~

~~July 21, 2021~~

~~$0.20~~

~~August 4, 2021~~

~~August 18, 2021~~

~~October 20, 2021~~

~~$0.21~~

~~November 3, 2021~~

~~November 17, 2021~~

January 26, 2022

$0.21

February 9, 2022

February 23, 2022

April 20, 2022

$0.21

May 4, 2022

May 18, 2022

July 20, 2022

$0.21

August 3, 2022

August 17, 2022

October 19, 2022

$0.21

November 2, 2022

November 16, 2022

January 25, 2023

$0.22

February 8, 2023

February 22, 2023

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Declared

Cash Dividend per Share

Record Date

Paid Date

April 19, 2023

$0.22

May 4, 2023

May 18, 2023

July 19, 2023

$0.22

August 2, 2023

August 16, 2023

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

The Company has had various stock repurchase programs since March 1999. On March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth 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,							Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021		Plan Total(1)			2023		2022		2023		2022		Plan Total(1)

Twelfth Stock Repurchase Plan												Twelfth Stock Repurchase Plan
Repurchased shares	Repurchased shares	—		841,088		100,090		841,088		1,160,840		Repurchased shares	148,119		—		330,424		100,090		1,491,264
Stock repurchase average share price	Stock repurchase average share price	$	—	$	24.54	$	25.07	$	24.54	$	23.94	Stock repurchase average share price	$	17.08	$	—	$	18.82	$	25.07	$	22.80

(1)Represents total shares repurchased and average price per share paid during the duration of the repurchase plan.

In addition to the stock repurchases under a stock repurchase plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock ~~awards and~~ units. The following table provides total shares repurchased to pay withholding taxes during the periods indicated:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Repurchased shares to pay withholding taxes	Repurchased shares to pay withholding taxes	100		220		26,280		26,023		Repurchased shares to pay withholding taxes	335		100		31,567		26,280
Stock repurchase to pay withholding taxes average share price	Stock repurchase to pay withholding taxes average share price	$	26.94	$	23.91	$	25.40	$	29.29	Stock repurchase to pay withholding taxes average share price	$	17.26	$	26.94	$	22.03	$	25.40

(8)Fair Value Measurements

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

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

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.

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(a) Recurring and Nonrecurring Basis

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

Investment Securities:

The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar

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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). Investment security valuations are obtained from third-party pricing services.

Collateral-Dependent Loans:

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

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

Derivative Financial Instruments:

The Bank 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, ~~2022~~2023 and December 31, ~~2021,~~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.

~~Branches held for sale~~:

Branches held for sale are recorded at fair value less costs to sell when transferred from premises and equipment, net to prepaid expenses and other assets on the unaudited Condensed Consolidated Statements of Financial Condition with any valuation adjustment recorded within other noninterest expense on the unaudited Condensed Consolidated Statements of Income. The fair value of branches held for sale is determined based on a real estate appraisal or broker price opinion. Adjustments are routinely made in the appraisal and broker price opinion process by independent appraisers and commercial real estate brokers, respectively, 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. Additionally, the fair value of branches held for sale can be adjusted based on executed agreements of sale to be completed at a future date.

Recurring Basis

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


		September 30, 2022									September 30, 2023
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3
		(In thousands)									(Dollars in thousands)
Assets	Assets									Assets
Investment securities available for sale:	Investment securities available for sale:									Investment securities available for sale:
U.S. government and agency securities	U.S. government and agency securities	$	63,749	$	19,770	$	43,979	$	—	U.S. government and agency securities	$	20,424	$	—	$	20,424	$	—
Municipal securities	Municipal securities	185,713		—		185,713		—		Municipal securities	106,805		5,137		101,668		—
Residential CMO and MBS	Residential CMO and MBS	438,370		—		438,370		—		Residential CMO and MBS	401,181		—		401,181		—
Commercial CMO and MBS										Commercial CMO and MBS	597,213		—		597,213		—
Corporate obligations										Corporate obligations	3,780		—		3,780		—
Other asset-backed securities										Other asset-backed securities	18,144		—		18,144		—
Total investment securities available for sale										Total investment securities available for sale	1,147,547		5,137		1,142,410		—
Equity security										Equity security	256		256		—		—
Derivative assets - interest rate swaps										Derivative assets - interest rate swaps	33,840		—		33,840		—
Liabilities										Liabilities
Derivative liabilities - interest rate swaps										Derivative liabilities - interest rate swaps	$	33,840	$	—	$	33,840	$	—


	December 31, 2022
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities	$	63,859	$	19,779	$	44,080	$	—

2830

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September 30, 2022
Total Level 1 Level 2 Level 3
(In thousands)
Commercial CMO and MBS 639,441 — 639,441 —
Corporate obligations 5,834 — 5,834 —
Other asset-backed securities 23,035 — 23,035 —
Total investment securities available for sale 1,356,142 19,770 1,336,372 —
Equity security 192 192 — —
Derivative assets - interest rate swaps 32,523 — 32,523 —
Liabilities
Derivative liabilities - interest rate swaps $ 32,523 $ — $ 32,523 $ —


		December 31, 2021									December 31, 2022
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3
		(In thousands)									(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities		$	21,373	$	—	$	21,373	$	—
Municipal securities	Municipal securities	221,212		—		221,212		—		Municipal securities	153,026		5,399		147,627		—
Residential CMO and MBS	Residential CMO and MBS	306,884		—		306,884		—		Residential CMO and MBS	424,386		—		424,386		—
Commercial CMO and MBS	Commercial CMO and MBS	315,861		—		315,861		—		Commercial CMO and MBS	664,421		—		664,421		—
Corporate obligations	Corporate obligations	2,014		—		2,014		—		Corporate obligations	3,834		—		3,834		—
Other asset-backed securities	Other asset-backed securities	26,991		—		26,991		—		Other asset-backed securities	21,917		—		21,917		—
Total investment securities available for sale	Total investment securities available for sale	894,335		—		894,335		—		Total investment securities available for sale	1,331,443		25,178		1,306,265		—
Equity security	Equity security	240		240		—		—		Equity security	185		185		—		—
Derivative assets - interest rate swaps	Derivative assets - interest rate swaps	15,219		—		15,219		—		Derivative assets - interest rate swaps	30,107		—		30,107		—
Liabilities	Liabilities									Liabilities
Derivative liabilities - interest rate swaps	Derivative liabilities - interest rate swaps	$	15,286	$	—	$	15,286	$	—	Derivative liabilities - interest rate swaps	$	30,107	$	—	$	30,107	$	—

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 represent assets measured at fair value on a nonrecurring basis at the dates indicated:


				Fair Value at September 30, 2022											Fair Value at September 30, 2023
		Basis(1)		Total		Level 1		Level 2		Level 3			Basis(1)		Total		Level 1		Level 2		Level 3
		(In thousands)											(Dollars in thousands)
Collateral-dependent loans:	Collateral-dependent loans:											Collateral-dependent loans:
Commercial business:	Commercial business:											Commercial business:

Owner-occupied CRE	Owner-occupied CRE	613		186		—		—		186		Owner-occupied CRE	613		178		—		—		178

Total assets measured at fair value on a nonrecurring basis	Total assets measured at fair value on a nonrecurring basis	$	613	$	186	$	—	$	—	$	186	Total assets measured at fair value on a nonrecurring basis	$	613	$	178	$	—	$	—	$	178

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

Fair Value at December 31, 2021
Basis(1)
Total Level 1 Level 2 Level 3
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial $ 1,911 $ 1,049 $ — $ — $ 1,049
Owner-occupied CRE 613 189 — — 189
Total commercial business 2,524 1,238 — — 1,238
Real estate construction and land development:

~~Table of Contents~~

Fair Value at December 31, 2021
Basis(1)
Total Level 1 Level 2 Level 3
(In thousands)
Commercial and multifamily 991 $ 534 — — 534
Total 3,515 1,772 — — 1,772
Prepaid expenses and other assets:
Branch held for sale (2)
698 698 — — 698
Total assets measured at fair value on a nonrecurring basis $ 4,213 $ 2,470 $ — $ — $ 2,470


			Fair Value at December 31, 2022
	Basis(1)		Total		Level 1		Level 2		Level 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

(1) Basis represents the outstanding principal balance of collateral-dependent ~~loans and the carrying value of the branch held for sale.~~loans.

~~(2)~~ ~~In December 2021, one branch was written down to its net realizable value concurrent with the signing of an agreement for sale and was sold during the three months ended March 31, 2022.~~

~~The following table represents the net (loss) gain recorded in earnings as a result of nonrecurring fair value adjustments recorded during the periods indicated:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial $ — $ (54) $ 24 $ (563)
Owner-occupied CRE — 15 (4) (61)
Total commercial business — (39) 20 (624)
Real estate construction and land development:
Commercial and multifamily — — — (38)
Total — (39) 20 (662)
Prepaid expenses and other assets:
Branch held for sale — (38) — (38)
Net (loss) gain from nonrecurring fair value adjustments $ — $ (77) $ 20 $ (700)

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

~~September 30, 2022~~

Fair
Value

Valuation
Technique(s)

~~Unobservable Input(s)~~

Range of Inputs; Weighted
Average

~~(Dollars in thousands)~~

~~Collateral-dependent loans~~

~~186~~

~~Market approach~~

~~Adjustment for differences between the comparable sales~~

~~N/A(1)~~

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 approach

Adjustments to reflect current conditions and selling costs

16.7% - 16.7%

16.7%

(1)~~Quantitative disclosures are not provided for collateral-dependent loans because there were no adjustments made~~Weighted by net discount to ~~the~~net appraisal ~~or stated values during the current period.~~fair value

~~December 31, 2021~~

Fair
Value

Valuation
Technique(s)

~~Unobservable Input(s)~~

Range of Inputs; Weighted
Average

~~(Dollars in thousands)~~

~~Collateral-dependent loans~~

~~1,772~~

~~Market approach~~

~~Adjustment for differences between the comparable sales~~

~~35.0% - (11.0%); 13.8%~~

~~Branch held for sale~~

~~698~~

~~Market approach~~

~~Sale agreement~~

~~N/A~~

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 approach

Adjustments to reflect current conditions and selling costs

14.6% - 14.6%

14.6%

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

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(b) Fair Value of Financial Instruments

Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in

~~Table of Contents~~

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.

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


		September 30, 2022															September 30, 2023
		Carrying Value			Fair Value			Fair Value Measurements Using:									Carrying Value			Fair Value			Fair Value Measurements Using:
							Level 1			Level 2			Level 3									Level 1			Level 2			Level 3
				(In thousands)															(Dollars in thousands)
Financial Assets:	Financial Assets:															Financial Assets:
Cash and cash equivalents	Cash and cash equivalents	$	407,324		$	407,324		$	407,324		$	—		$	—	Cash and cash equivalents	$	220,503		$	220,503		$	220,503		$	—		$	—
Investment securities available for sale	Investment securities available for sale	1,356,142			1,356,142			19,770			1,336,372			—		Investment securities available for sale	1,147,547			1,147,547			5,137			1,142,410			—
Investment securities held to maturity	Investment securities held to maturity	773,319			677,335			—			677,335			—		Investment securities held to maturity	746,845			636,257			—			636,257			—
Loans held for sale	Loans held for sale	—			—			—			—			—		Loans held for sale	263			268			—			268			—
Loans receivable, net	Loans receivable, net	3,959,206			3,848,546			—			—			3,848,546		Loans receivable, net	4,219,911			4,072,296			—			—			4,072,296
Accrued interest receivable	Accrued interest receivable	17,812			17,812			351			6,962			10,499		Accrued interest receivable	18,794			18,794			271			6,001			12,522
Derivative assets - interest rate swaps	Derivative assets - interest rate swaps	32,523			32,523			—			32,523			—		Derivative assets - interest rate swaps	33,840			33,840			—			33,840			—
Equity security	Equity security	192			192			192			—			—		Equity security	256			256			256			—			—
Financial Liabilities:	Financial Liabilities:															Financial Liabilities:
Non-maturity deposits	Non-maturity deposits	$	5,950,312		$	5,950,312		$	5,950,312		$	—		$	—	Non-maturity deposits	$	5,006,581		$	5,006,581		$	5,006,581		$	—		$	—
Certificates of deposit	Certificates of deposit	287,423			287,837			—			287,837			—		Certificates of deposit	628,606			637,048			—			637,048			—

Borrowings																Borrowings	450,000			447,952			—			447,952			—
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	40,449			40,449			40,449			—			—		Securities sold under agreement to repurchase	23,158			23,158			23,158			—			—
Junior subordinated debentures	Junior subordinated debentures	21,399			20,250			—			—			20,250		Junior subordinated debentures	21,692			19,750			—			—			19,750
Accrued interest payable	Accrued interest payable	101			101			36			13			52		Accrued interest payable	8,922			8,922			65			8,782			75
Derivative liabilities - interest rate swaps	Derivative liabilities - interest rate swaps	32,523			32,523			—			32,523			—		Derivative liabilities - interest rate swaps	33,840			33,840			—			33,840			—

December 31, 2021
Carrying
Value Fair
Value Fair Value Measurements Using:
Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents $ 1,723,292 $ 1,723,292 $ 1,723,292 $ — $ —
Investment securities available for sale 894,335 894,335 — 894,335 —
Investment securities held to maturity 383,393 376,331 — 376,331 —
Loans held for sale 1,476 1,527 — 1,527 —
Loans receivable, net 3,773,301 3,849,602 — — 3,849,602
Accrued interest receivable 14,657 14,657 14 4,582 10,061
Derivative assets - interest rate swaps 15,219 15,219 — 15,219 —
Equity security 240 240 240 — —
Financial Liabilities:
Non-maturity deposits $ 6,051,451 $ 6,051,451 $ 6,051,451 $ — $ —
Certificates of deposit 342,839 344,025 — 344,025 —
Securities sold under agreement to repurchase 50,839 50,839 50,839 — —
Junior subordinated debentures 21,180 18,750 — — 18,750
Accrued interest payable 73 73 33 19 21
Derivative liabilities - interest rate swaps 15,286 15,286 — 15,286 —


	December 31, 2022
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	103,590	$	103,590	$	103,590	$	—	$	—
Investment securities available for sale	1,331,443		1,331,443		25,178		1,306,265		—
Investment securities held to maturity	766,396		673,434		—		673,434		—

Loans receivable, net	4,007,872		3,841,821		—		—		3,841,821
Accrued interest receivable	18,547		18,547		349		6,892		11,306
Derivative assets - interest rate swaps	30,107		30,107		—		30,107		—
Equity security	185		185		185		—		—
Financial Liabilities:
Non-maturity deposits	$	5,617,267	$	5,617,267	$	5,617,267	$	—	$	—
Certificates of deposit	307,573		308,325		—		308,325		—

Securities sold under agreement to repurchase	46,597		46,597		46,597		—		—
Junior subordinated debentures	21,473		20,000		—		—		20,000

3132

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

(9)Cash Restriction

The Bank had no cash restrictions at September 30, ~~2022~~2023 and ~~had restricted cash included in interest earning deposits of $9.8 million at~~ December 31, 2021 relating to collateral required on interest rate swaps from third-parties as discussed in Note (6) Derivative Financial Instruments. The Bank does not have a collateral requirement with customers.2022.

(10)Commitments and Contingencies

In the ordinary course of business, the Bank may enter into various types of transactions that include commitments to extend credit that are not included in its unaudited Condensed Consolidated Financial Statements. The 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, at the dates indicated:

September 30,
2022 December 31, 2021
(In thousands)
Commercial business:
Commercial and industrial $ 528,690 $ 570,156
Owner-occupied CRE 4,260 2,252
Non-owner occupied CRE 12,334 7,487
Total commercial business 545,284 579,895
Real estate construction and land development:
Residential 52,098 51,838
Commercial and multifamily 237,204 209,217
Total real estate construction and land development 289,302 261,055
Consumer 314,216 285,010
Total outstanding commitments $ 1,148,802 $ 1,125,960

~~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,
2022 2021 2022 2021
(In thousands)
Balance, beginning of period $ 997 $ 2,451 $ 2,607 $ 4,681
Provision for (reversal of) credit losses on unfunded commitments 26 (297) (1,584) (2,527)
Balance, end of period $ 1,023 $ 2,154 $ 1,023 $ 2,154


	September 30, 2023		December 31, 2022
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	536,785	$	548,438
Owner-occupied CRE	9,477		3,083
Non-owner occupied CRE	32,680		13,396
Total commercial business	578,942		564,917

Real estate construction and land development:
Residential	49,008		43,460
Commercial and multifamily	345,464		348,956
Total real estate construction and land development	394,472		392,416
Consumer	336,206		323,016
Total outstanding commitments	$	1,309,620	$	1,280,349

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, ~~2022.~~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, ~~2021~~2022 audited Consolidated Financial Statements, and the accompanying Notes included in our ~~2021~~2022 Annual Form 10-K.

Overview

Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our local communities with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.

Our business consists primarily of commercial lending and deposit relationships with small to medium sized businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and

~~Table of Contents~~

land development loans and consumer loans. We additionally originate for sale or for investment purposes residential real estate loans on single 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 manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates including 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 in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.

Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on our methodology.

Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees, card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment, and ~~consists~~consist primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services ~~consists~~consist primarily of third-party service providers such as auditors, consultants and lawyers.

Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from ~~the COVID-19 Pandemic and~~ inflation and the governmental actions taken to address ~~these issues.~~this issue. Net income is also impacted by growth of operations through organic growth or acquisitions.

~~COVID-19 Pandemic Response~~

The Company maintains its commitment to supporting its community and customers during the COVID-19 Pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines. 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 level 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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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 potential liquidity pressures, reduced net interest margins, and potential 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 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.

Results of Operations

Net Income Overview

Comparison of the quarter ended September 30, ~~2022~~2023 to the comparable quarter in the prior year

Net ~~income was $21.0~~income decreased $2.8 million, or ~~$0.59~~13.2%, to $18.2 million, or $0.51 per diluted common share, for the three months ended September 30, ~~2022~~2023, compared to ~~$20.6~~$21.0 million, or ~~$0.58~~$0.59 per diluted common share, for the same period in ~~2021. Net~~2022.

The decrease in net income ~~increased $398,000, or 1.9%,~~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 ~~interest earned on interest earning assets following increases~~noninterest expense of $1.8 million.

The decrease in ~~market interest rates~~net income was partially offset by a ~~$1.9~~$2.8 million decrease in provision for credit losses, ~~compared to~~reflect a ~~$3.1 million~~$878,000 reversal of provision for credit losses for the three months ended September 30, ~~2021~~ ~~and increased noninterest expense.~~ ~~The Company’s efficiency ratio was~~ ~~58.66%~~ fo~~r the three months ended~~ ~~September 30, 2022~~2023 compared to ~~62.35%~~a $1.9 million provision for credit losses for the same period in ~~2021.~~2022.

Comparison of the nine months endedSeptember 30, ~~2022~~2023 to the comparable period in the prior year.

Net income ~~was~~decreased $~~59.3~~3.8 million, or 6.4%, to $55.5 million, or $1.57 per diluted common share, for the nine months ended September 30, 2023 compared to $59.3 million, or $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, ~~2022~~2023, compared t~~o $78.6 million, or $2.18~~ ~~per diluted common share, for the~~ ~~nine months endedSeptember 30, 2021. Net income decreased~~ ~~$19.3 million, or 24.6%, due primarily~~ to a ~~lower~~ $2.8 millionreversal ofof provision for credit ~~losses. The Company’s efficiency ratio was 61.67% for the~~ ~~nine months endedSeptember 30, 2022~~ ~~compared to 60.66%~~losses for the same period in ~~2021~~2022. The decrease in net income was partially offset by an increase in net interest income of $15.0 million, or 9.6%.

~~Average Balances, Yields and Rates Paid~~

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

~~Table of Contents~~

Three Months Ended September 30,
2022 2021 Change

Average
Balance(1)
Interest
Earned/
Paid Average
Yield/
Rate
Average
Balance(1)
Interest
Earned/
Paid Average
Yield/
Rate
Average
Balance(1)
Interest
Earned/
Paid Average
Yield/
Rate
(Dollars in thousands)
Loans receivable, net (2)(3)
$ 3,859,839 $ 43,847 4.51 % $ 4,005,585 $ 46,863 4.64 % $ (145,746) $ (3,016) (0.13) %
Taxable securities 1,868,900 12,362 2.62 893,374 4,711 2.09 975,526 7,651 0.53
Nontaxable securities (3)
133,022 892 2.66 157,907 931 2.34 (24,885) (39) 0.32
Interest earning deposits 730,600 4,009 2.18 1,417,661 537 0.15 (687,061) 3,472 2.03
Total interest earning assets 6,592,361 61,110 3.68 % 6,474,527 53,042 3.25 % 117,834 8,068 0.43 %
Noninterest earning assets 775,375 740,433 34,942
Total assets $ 7,367,736 $ 7,214,960 $ 152,776
Interest Bearing Liabilities:
Certificates of Deposit $ 297,786 $ 290 0.39 % $ 365,278 $ 407 0.44 % $ (67,492) $ (117) (0.05) %
Savings accounts 654,697 99 0.06 609,818 90 0.06 44,879 9 —
Interest bearing demand and money market accounts 3,065,007 1,089 0.14 2,881,567 947 0.13 183,440 142 0.01
Total interest bearing deposits 4,017,490 1,478 0.15 3,856,663 1,444 0.15 160,827 34 —
Junior subordinated debentures 21,356 312 5.80 21,060 184 3.47 296 128 2.33
Securities sold under agreement to repurchase 42,959 34 0.31 52,197 36 0.27 (9,238) (2) 0.04
Total interest bearing liabilities 4,081,805 1,824 0.18 % 3,929,920 1,664 0.17 % 151,885 160 0.01 %
Noninterest bearing demand deposits 2,356,688 2,313,145 43,543
Other noninterest bearing liabilities 118,191 116,187 2,004
Stockholders’ equity 811,052 855,708 (44,656)
Total liabilities and stock-holders’ equity $ 7,367,736 $ 7,214,960 $ 152,776
Net interest income and spread $ 59,286 3.50 % $ 51,378 3.08 % $ 7,908 0.42 %
Net interest margin 3.57 % 3.15 % 0.42 %

~~(1)~~ ~~Average balances are calculated using daily balances.~~

~~(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 $857,000 and $7.8 million for the three months ended September 30, 2022 and 2021, respectively.

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

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, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.

The following table provides the changes in net interest income for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 due to changes in average asset and liability balances (volume), changes in average rates (rate) and changes attributable to the combined effect of volume and interest rates allocated proportionately to the absolute value of changes due to volume and changes due to interest rates:

Increase (Decrease) Due to Changes In:
Volume Yield/Rate Total % Change
(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net $ (1,678) $ (1,338) $ (3,016) (6.4) %
Taxable securities 6,206 1,445 7,651 162.4
Nontaxable securities (158) 119 (39) (4.2)
Interest earning deposits (382) 3,854 3,472 646.6
Total interest income $ 3,988 $ 4,080 $ 8,068 15.2 %

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Increase (Decrease) Due to Changes In:
Volume Yield/Rate Total % Change
(Dollars in thousands)
Interest Bearing Liabilities:
Certificates of deposit $ (70) $ (47) $ (117) (28.7) %
Savings accounts 7 2 9 10.0
Interest bearing demand and money market accounts 62 80 142 15.0
Total interest bearing deposits (1) 35 34 2.4
Junior subordinated debentures 3 125 128 69.6
Securities sold under agreement to repurchase (7) 5 (2) (5.6)
Total interest expense $ (5) $ 165 $ 160 9.6 %
Net interest income $ 3,993 $ 3,915 $ 7,908 15.4 %

~~Comparison~~Market rates impact the results of ~~quarter ended September 30, 2022 to~~ the ~~comparable quarter~~Company's net interest income, including the significant increases in the ~~prior year~~

~~Net interest income increased primarily as a result of higher yields earned on interest earning assets following increases~~federal funds target rate by the Federal Reserve in ~~market interest rates as well as an increased average balance of taxable investment securities, offset partially by a decrease in deferred SBA PPP loan fees recognized due~~response to ~~a decline in the volume of forgiven SBA PPP loans. SBA PPP interest~~inflation during 2023 and ~~fee income decreased $7.8 million compared to the three months ended September 30, 2021.~~

Net interest margin increased due to a shift in the mix of interest-earning assets towards higher yielding loans and taxable investment securities as well as increased average yields on all interest earning assets, excluding the impact from SBA PPP loans.

2022.The following table ~~presents~~provides the ~~loan yield~~federal funds target rate history and ~~the impacts of SBA PPP loans and the incremental accretion on acquired loans on this financial measure for the periods presented below:~~

Three Months Ended
September 30,
2022 September 30,
2021
Loan yield (GAAP) 4.51 % 4.64 %
Exclude impact from SBA PPP loans (0.02) (0.38)
Exclude impact from incremental accretion on acquired loans (0.05) (0.07)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1)
4.44 % 4.19 %

~~(1)~~changes from each period since December 31, 2021~~For additional information, see the "Reconciliations of Non-GAAP Measures" section below.~~:

There was no impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual during the three months ended September 30, 2022 compared to two basis points during the same period in 2021.


Change Date	Rate (%)	Rate Change (%)
December 31, 2021	0.00% - 0.25%	N/A
March 17, 2022	0.25% - 0.50%	0.25	%
May 5, 2022	0.75% - 1.00%	0.50	%
June 16, 2022	1.50% - 1.75%	0.75	%
July 28, 2022	2.25% - 2.50%	0.75	%
September 22, 2022	3.00% - 3.25%	0.75	%
November 3, 2022	3.75% - 4.00%	0.75	%
December 15, 2022	4.25% - 4.50%	0.50	%
February 2, 2023	4.50% - 4.75%	0.25	%
March 23, 2023	4.75% - 5.00%	0.25	%
May 4, 2023	5.00% - 5.25%	0.25	%
July 27, 2023	5.25% - 5.50%	0.25	%

Comparison of ~~nine months~~the quarter ended September 30, ~~2022~~2023 to the comparable ~~period~~quarter in the prior year

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


		Nine Months Ended September 30,																			Three Months Ended September 30,
		2022						2021						Change							2023						2022						Change
		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate			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)																			(Dollars in thousands)
Interest Earning Assets:	Interest Earning Assets:																			Interest Earning Assets:
Loans receivable, net (2)(3)	Loans receivable, net (2)(3)	$	3,815,387	$	125,762	4.41	%	$	4,297,875	$	147,137	4.58	%	$	(482,488)	$	(21,375)	(0.17)	%	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 securities	Taxable securities	1,532,450		25,972		2.27		789,691		12,295		2.08		742,759		13,677		0.19		Taxable securities	1,931,649		14,590		3.00		1,868,900		12,362		2.62		62,749		2,228		0.38
Nontaxable securities (3)	Nontaxable securities (3)	138,904		2,645		2.55		160,748		2,836		2.36		(21,844)		(191)		0.19		Nontaxable securities (3)	60,654		448		2.93		133,022		892		2.66		(72,368)		(444)		0.27
Interest earning deposits	Interest earning deposits	1,146,183		7,057		0.82		1,034,690		975		0.13		111,493		6,082		0.69		Interest earning deposits	169,186		2,310		5.42		730,600		4,009		2.18		(561,414)		(1,699)		3.24
Total interest earning assets	Total interest earning assets	6,632,924		161,436		3.25	%	6,283,004		163,243		3.47	%	349,920		(1,807)		(0.22)	%	Total interest earning assets	6,363,043		73,467		4.58	%	6,592,361		61,110		3.68	%	(229,318)		12,357		0.90	%
Noninterest earning assets	Noninterest earning assets	762,877						749,781						13,096						Noninterest earning assets	849,689						775,375						74,314
Total assets	Total assets	$	7,395,801					$	7,032,785					$	363,016					Total assets	$	7,212,732					$	7,367,736					$	(155,004)
Interest Bearing Liabilities:																				Interest Bearing Liabilities:
Certificates of Deposit																				Certificates of Deposit	$	553,015	$	4,585	3.29	%	$	297,786	$	290	0.39	%	$	255,229	$	4,295	2.90	%
Savings accounts																				Savings accounts	523,882		172		0.13		654,697		99		0.06		(130,815)		73		0.07
Interest bearing demand and money market accounts																				Interest bearing demand and money market accounts	2,764,251		7,120		1.02		3,065,007		1,089		0.14		(300,756)		6,031		0.88
Total interest bearing deposits																				Total interest bearing deposits	3,841,148		11,877		1.23		4,017,490		1,478		0.15		(176,342)		10,399		1.08
Junior subordinated debentures																				Junior subordinated debentures	21,649		540		9.90		21,356		312		5.80		293		228		4.10
Securities sold under agreement to repurchase																				Securities sold under agreement to repurchase	31,729		38		0.48		42,959		34		0.31		(11,230)		4		0.17
Borrowings																				Borrowings	451,032		5,394		4.74		—		—		—		451,032		5,394		4.74
Total interest bearing liabilities																				Total interest bearing liabilities	4,345,558		17,849		1.63	%	4,081,805		1,824		0.18	%	263,753		16,025		1.45	%
Noninterest bearing demand deposits																				Noninterest bearing demand deposits	1,859,374						2,356,688						(497,314)

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Nine Months Ended September 30,
2022 2021 Change

Average
Balance(1)
Interest
Earned/
Paid Average
Yield/
Rate
Average
Balance(1)
Interest
Earned/
Paid Average
Yield/
Rate
Average
Balance(1)
Interest
Earned/
Paid Average
Yield/
Rate
(Dollars in thousands)
Interest Bearing Liabilities:
Certificates of Deposit $ 318,547 $ 952 0.40 % $ 379,885 $ 1,447 0.51 % $ (61,338) $ (495) (0.11) %
Savings accounts 651,292 274 0.06 587,358 274 0.06 63,934 — —
Interest bearing demand and money market accounts 3,066,229 3,089 0.13 2,817,353 2,975 0.14 248,876 114 (0.01)
Total interest bearing deposits 4,036,068 4,315 0.14 3,784,596 4,696 0.17 251,472 (381) (0.03)
Junior subordinated debentures 21,286 745 4.68 20,987 557 3.55 299 188 1.13
Securities sold under agreement to repurchase 47,057 98 0.28 45,221 109 0.32 1,836 (11) (0.04)
Total interest bearing liabilities 4,104,411 5,158 0.17 % 3,850,804 5,362 0.19 % 253,607 (204) (0.02) %
Noninterest bearing demand deposits 2,355,285 2,227,281 128,004
Other noninterest bearing liabilities 113,534 115,098 (1,564)
Stockholders’ equity 822,571 839,602 (17,031)
Total liabilities and stock-holders’ equity $ 7,395,801 $ 7,032,785 $ 363,016
Net interest income and spread $ 156,278 3.08 % $ 157,881 3.28 % $ (1,603) (0.20) %
Net interest margin 3.15 % 3.36 % (0.21) %


	Three Months Ended September 30,
	2023						2022						Change
	Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate(1)		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Other noninterest bearing liabilities	186,306						118,191						68,115
Stockholders’ equity	821,494						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 margin					3.47	%					3.57	%					(0.10)	%

(1) Average balances are calculated using daily balances. Average yield/rate is annualized.

(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of ~~$6.7~~$940,000 and $857,000 for the three months ended September 30, 2023 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 changes in net interest income for 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:
	Volume		Yield/Rate		Total		% Change
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net	$	4,110	$	8,162	$	12,272	28.0	%
Taxable securities	426		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 deposits	301		10,098		10,399		703.6
Junior subordinated debentures	4		224		228		73.1
Securities sold under agreement to repurchase	(11)		15		4		11.8
Borrowings	5,394		—		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 6.2%, to $55.6 million for the three months ended September 30, 2023 as compared to $59.3 million for the same period in 2022 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 interest bearing deposits to 1.23% for the three months ended September 30, 2023, 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, 2023 as compared to no interest expense on borrowings during the same period in 2022.

Total interest income increased to $73.5 million for the three months ended September 30, 2023, compared to $61.1 million for the same period in 2022 primarily due to a 90 basis point increase to the yield on interest earning assets to 4.58% for the three months ended September 30, 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, 2023 compared to 3.57% for the same period in 2022.

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Comparison of nine months ended September 30, 2023 to the comparable period in the prior year

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


	Nine Months Ended September 30,
	2023						2022						Change
	Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate(1)		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2)(3)	$	4,129,429	$	160,192	5.19	%	$	3,815,387	$	125,762	4.41	%	$	314,042	$	34,430	0.78	%
Taxable securities	1,975,818		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 deposits	114,753		4,436		5.17		1,146,183		7,057		0.82		(1,031,430)		(2,621)		4.35
Total interest earning assets	6,291,702		210,203		4.47	%	6,632,924		161,436		3.25	%	(341,222)		48,767		1.22	%
Noninterest earning assets	848,035						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 accounts	558,467		471		0.11		651,292		274		0.06		(92,825)		197		0.05
Interest bearing demand and money market accounts	2,791,695		16,249		0.78		3,066,229		3,089		0.13		(274,534)		13,160		0.65
Total interest bearing deposits	3,792,463		25,012		0.88		4,036,068		4,315		0.14		(243,605)		20,697		0.74
Junior subordinated debentures	21,576		1,521		9.43		21,286		745		4.68		290		776		4.75
Securities sold under agreement to repurchase	38,187		148		0.52		47,057		98		0.28		(8,870)		50		0.24
Borrowings	339,296		12,238		4.82		—		—		—	%	339,296		12,238		4.82
Total interest bearing liabilities	4,191,522		38,919		1.24	%	4,104,411		5,158		0.17	%	87,111		33,761		1.07	%
Noninterest bearing demand deposits	1,942,134						2,355,285						(413,151)
Other noninterest bearing liabilities	186,469						113,534						72,935
Stockholders’ equity	819,612						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 margin					3.64	%					3.15	%					0.49	%

(1) Average balances are calculated using daily balances. Average yield/rate is annualized.

(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $2.4 million and ~~$23.2~~$6.7 million for the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

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

The following table provides the changes in net interest income for the nine months ended September 30, ~~2022~~2023 compared to the ~~nine months ended September 30, 2021~~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 ~~interest~~ rates allocated proportionately to the absolute value of changes due to volume and changes due to ~~interest~~ rates:

Increase (Decrease) Due to Changes In:
Volume Yield/Rate Total % Change
(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net $ (16,057) $ (5,318) $ (21,375) (14.5) %
Taxable securities 12,500 1,177 13,677 111.2
Nontaxable securities (405) 214 (191) (6.7)
Interest earning deposits 116 5,966 6,082 623.8
Total interest income $ (3,846) $ 2,039 $ (1,807) (1.1) %
Interest Bearing Liabilities:
Certificates of deposit $ (212) $ (283) $ (495) (34.2) %
Savings accounts 28 (28) — —
Interest bearing demand and money market accounts 255 (141) 114 3.8
Total interest bearing deposits 71 (452) (381) (8.1)
Junior subordinated debentures 8 180 188 33.8
Securities sold under agreement to repurchase 4 (15) (11) (10.1)
Total interest expense $ 83 $ (287) $ (204) (3.8) %
Net interest income $ (3,929) $ 2,326 $ (1,603) (1.0) %

~~Comparison of nine months ended September 30, 2022 to the comparable period in the prior year~~

Net interest income decreased due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decline in the volume of forgiven SBA PPP loans, offset partially by a higher average balance of taxable investment securities and higher


	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total		% Change
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net	$	10,932	$	23,498	$	34,430	27.4	%
Taxable securities	8,646		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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~~yield earned on taxable securities and~~


	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total		% 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 deposits	159		20,538		20,697		479.7
Junior subordinated debentures	10		766		776		104.2
Securities sold under agreement to repurchase	(21)		71		50		51.0
Borrowings	12,238		—		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 ~~earning deposits following increases in market interest rates. SBA PPP interest and fee~~ income ~~decreased $22.0~~increased $15.0 million, ~~compared~~or 9.6%, to $171.3 million for the nine months ended September 30, ~~2021.~~

~~Net interest margin decreased~~2023 as compared to $156.3 million for the same period in 2022 due primarily to an increase in total interest income offset partially by an increase in total interest expense.

Total interest income increased $48.8 million, or 30.2%, to $210.2 million for the nine months ended September 30, 2023, compared to $161.4 million for the same period in 2022. The increase was the result of a 122 basis point increase on the yield on interest earning assets to 4.47% for the nine months ended September 30, 2023, as compared to 3.25% for the same period in 2022, due to an increase in market interest rates as well as change in the mix of total interest earning assets into a higher ~~proportion of lower~~ yielding ~~investment securities and~~assets.

Total interest ~~earning deposits.~~

~~The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on acquired loans on this financial measure for the periods presented below~~:

Nine Months Ended
September 30,
2022 2021
Loan yield (GAAP) 4.41 % 4.58 %
Exclude impact from SBA PPP loans (0.13) (0.17)
Exclude impact from incremental accretion on acquired loans (0.04) (0.08)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1) 4.24 % 4.33 %

~~(1)~~ ~~For additional information, see "Reconciliations of Non-GAAP Measures."~~

~~The impact~~expense increased $33.8 million, or 654.5%, to ~~loan yield from recoveries of interest and fees on loans classified as nonaccrual was four basis points~~$38.9 million during the nine months ended September 30, ~~2022~~2023 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 ~~basis points~~months ended September 30, 2023, as compared to 0.14% for the same period in 2022, due to competitive rate pressures as well as the addition of interest expense on borrowings during the nine months ended September 30, 2023 as compared to no interest expense on borrowings during the same period in ~~2021.~~2022.

Net interest margin increased 49 basis points to 3.64% for the nine months ended September 30, 2023 compared to 3.15% for the same period in 2022.

Provision for Credit Losses Overview

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

Comparison of the quarter ended September 30, ~~2022~~2023 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
	2023		2022		$		%
	(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 credit losses on loans reflects the amount required to maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The reversal of provision for credit losses on loans was $635,000 during the three months ended September 30, 2023 due primarily to net recoveries of $1.2 million 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, 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.

The $1.9 million provision for credit losses on loans recognized during the three months ended September 30, 2022 was due primarily to growth in loans receivable offset partially by a reduction to the ACL on loans individually evaluated for losses.

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Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year

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


		Three Months Ended September 30,									Nine Months Ended September 30,				Change
		2022		2021		Change		% Change			2023		2022		$		%
		(Dollars in thousands)									(Dollars in thousands)
Provision for (reversal of) credit losses on loans	Provision for (reversal of) credit losses on loans	$	1,919	$	(2,852)	$	4,771	(167.3)	%	Provision for (reversal of) credit losses on loans	$	3,066	$	(1,252)	$	4,318	(344.9)	%
Provision for (reversal of) credit losses on unfunded commitments		26		(297)		323		(108.8)
Reversal of provision for credit losses on unfunded commitments										Reversal of provision for credit losses on unfunded commitments	(210)		(1,584)		1,374		(86.7)
Provision for (reversal of) credit losses	Provision for (reversal of) credit losses	$	1,945	$	(3,149)	$	5,094	(161.8)	%	Provision for (reversal of) credit losses	$	2,856	$	(2,836)	$	5,692	(200.7)	%

The $3.1 million provision for credit ~~losses~~losses on loans ~~recognized~~ during the ~~three~~nine months ended September 30, ~~2022~~ 2023was due primarily to an increase ~~related to the growth~~ in loans receivable as well as a change in mix of loans offset partially by ~~a reduction to the ACL on loans individually evaluated for losses.~~

net recoveries of 895,000. The $210,000 reversal of provision for credit losses on ~~loans and~~ unfunded commitments ~~recognized~~recorded during the ~~three months ended September 30, 2021 was due primarily to continued improvements in the economic forecast at September 30, 2021 as compared to the forecast at June 30, 2021.~~

~~Comparison of~~ nine months ended September 30, ~~2022~~2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the ~~comparable period in the prior year~~

~~The following table presents the provision for credit losses for the periods indicated:~~

Nine Months Ended
September 30,
2022 2021 Change Percentage Change
(Dollars in thousands)
Reversal of provision for credit losses on loans $ (1,252) $ (21,808) $ 20,556 (94.3) %
Reversal of provision for credit losses on unfunded commitments (1,584) (2,527) 943 (37.3)
Reversal of provision for credit losses $ (2,836) $ (24,335) $ 21,499 (88.3) %

unfunded exposure.

~~Table of Contents~~

The $1.3 million reversal of provision for credit losses on loans recognized during the nine months endedSeptember 30, 2022 was 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, ~~2021~~2022 was due ~~substantially~~primarily to ~~continued improvements in the economic forecast at September 30, 2021 as compared to the forecast at December 31, 2020.~~higher loan utilization rates.

Noninterest Income Overview

Comparison of ~~quarter ended September 30, 2022 to the comparable quarter in the prior year~~

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

Three Months Ended
September 30,
2022 2021 Change % Change
(Dollars in thousands)
Service charges and other fees $ 2,688 $ 2,400 $ 288 12.0 %
Card revenue 2,365 2,150 215 10.0
Gain on sale of loans, net 133 765 (632) (82.6)
Interest rate swap fees 78 126 (48) (38.1)
Bank owned life insurance income 723 647 76 11.7
Gain on sale of other assets, net 265 942 (677) (71.9)
Other income 1,201 1,198 3 0.3
Total noninterest income $ 7,453 $ 8,228 $ (775) (9.4) %

Noninterest income decreased due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined and secondarily due to lower gain on sale of other assets, net due to a higher gain on sale of branches held for sale recognized during the three months ended September 30, ~~2021.~~

~~Comparison of nine months ended September 30, 2022~~2023 to the comparable period in the prior year

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


		Nine Months Ended September 30,									Three Months Ended September 30,				Change
		2022		2021		Change		% Change			2023		2022		$		%
		(Dollars in thousands)									(Dollars in thousands)
Service charges and other fees	Service charges and other fees	$	7,739	$	6,728	$	1,011	15.0	%	Service charges and other fees	$	2,856	$	2,688	$	168	6.3	%
Card revenue	Card revenue	6,774		6,216		558		9.0		Card revenue	2,273		2,365		(92)		(3.9)
Gain on sale of investment securities, net		—		29		(29)		(100.0)
Loss on sale of investment securities, net										Loss on sale of investment securities, net	(1,940)		—		(1,940)		100.0
Gain on sale of loans, net	Gain on sale of loans, net	593		3,138		(2,545)		(81.1)		Gain on sale of loans, net	157		133		24		18.0
Interest rate swap fees	Interest rate swap fees	383		487		(104)		(21.4)		Interest rate swap fees	62		78		(16)		(20.5)
Bank owned life insurance income	Bank owned life insurance income	3,182		2,020		1,162		57.5		Bank owned life insurance income	734		723		11		1.5
Gain on sale of other assets, net	Gain on sale of other assets, net	469		1,688		(1,219)		(72.2)		Gain on sale of other assets, net	—		265		(265)		(100.0)
Other income	Other income	3,867		4,470		(603)		(13.5)		Other income	2,129		1,201		928		77.3
Total noninterest income	Total noninterest income	$	23,007	$	24,776	$	(1,769)	(7.1)	%	Total noninterest income	$	6,271	$	7,453	$	(1,182)	(15.9)	%

Noninterest income decreased $1.2 million, or 15.9%, during the three months ended September 30, 2023 compared to the same period in 2022 due primarily to a $1.9 million loss on sale of investment securities available for sale partially offset by a $610,000 gain on sale of the Ellensburg branch and related deposits included in other income.

Comparison of nine months ended September 30, 2023 to the comparable period in the prior year

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


	Nine Months Ended September 30,				Change
	2023		2022		$		%
	(Dollars in thousands)
Service charges and other fees	$	8,162	$	7,739	$	423	5.5	%
Card revenue	6,396		6,774		(378)		(5.6)
Loss on sale of investment securities, net	(2,226)		—		(2,226)		(100.0)
Gain on sale of loans, net	307		593		(286)		(48.2)

Table of Contents


	Nine Months Ended September 30,				Change
	2023		2022		$		%
	(Dollars in thousands)
Interest rate swap fees	230		383		(153)		(39.9)
Bank owned life insurance income	2,280		3,182		(902)		(28.3)
Gain on sale of other assets, net	2		469		(467)		(99.6)
Other income	6,659		3,867		2,792		72.2
Total noninterest income	$	21,810	$	23,007	$	(1,197)	(5.2)	%

Noninterest income decreased ~~due primarily~~$1.2 million, or 5.2%, during the nine months ended September 30, 2023 compared to ~~reduced gain~~the same period in 2022. A loss on sale of ~~loans, net as sales volume~~investment securities of ~~secondary market mortgage loans declined and secondarily due to lower gain on sale of other assets, net due to a higher gain on sale of branches held for sale~~$2.2 million was recognized during the nine months ended September 30, ~~2021. The decrease was offset partially by an increase in bank owned life insurance~~2023 as a result of the sale of $67.9 million of investment securities available for sale. Other income increased due primarily to a one-time $1.6 million gain on sale of Visa Inc. Class B common stock recognized and a $610,000 gain on sale of the ~~recognition of a death benefit of $1.0 million~~Ellensburg branch and related deposits during the nine months ended September 30, ~~2022 as well as increases in service charges and other fees and card revenue reflecting increased customer transactions as businesses reopened in our market areas.~~2023. Bank owned life insurance income decreased due primarily to a $1.0 million death benefit recognized during the nine months ended September 30, 2022.

~~Table of Contents~~

Noninterest Expense Overview

Comparison of ~~quarter~~three months ended September 30, ~~2022~~2023 to the comparable ~~quarter~~period in the prior year

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


		Three Months Ended September 30,									Three Months Ended September 30,				Change
		2022		2021		Change		% Change			2023		2022		$		%
		(Dollars in thousands)									(Dollars in thousands)
Compensation and employee benefits	Compensation and employee benefits	$	24,206	$	21,963	$	2,243	10.2	%	Compensation and employee benefits	$	25,008	$	24,206	$	802	3.3	%
Occupancy and equipment	Occupancy and equipment	4,422		4,373		49		1.1		Occupancy and equipment	4,814		4,422		392		8.9
Data processing	Data processing	4,185		4,029		156		3.9		Data processing	4,366		4,185		181		4.3
Marketing	Marketing	358		486		(128)		(26.3)		Marketing	389		358		31		8.7
Professional services	Professional services	639		776		(137)		(17.7)		Professional services	582		639		(57)		(8.9)
State/municipal business and use tax	State/municipal business and use tax	963		1,071		(108)		(10.1)		State/municipal business and use tax	1,088		963		125		13.0
Federal deposit insurance premium	Federal deposit insurance premium	500		550		(50)		(9.1)		Federal deposit insurance premium	818		500		318		63.6

Amortization of intangible assets	Amortization of intangible assets	671		758		(87)		(11.5)		Amortization of intangible assets	595		671		(76)		(11.3)
Other expense	Other expense	3,203		3,160		43		1.4		Other expense	3,310		3,203		107		3.3
Total noninterest expense	Total noninterest expense	$	39,147	$	37,166	$	1,981	5.3	%	Total noninterest expense	$	40,970	$	39,147	$	1,823	4.7	%

Noninterest expense increased $1.8 million, or 4.7%, during the three months ended September 30, 2023 compared to the same period in 2022 due primarily to an increase in ~~salaries~~compensation and ~~wages effective July 1, 2022 due to upward market pressure~~employee benefits resulting from an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in 2023 and an increase in ~~accrual for incentive compensation.~~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.

Comparison of the nine months endedSeptember 30, ~~2022~~2023 to the comparable period in the prior year

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

Nine Months Ended
September 30,
2022 2021 Change % Change
(Dollars in thousands)
Compensation and employee benefits $ 67,236 $ 65,967 $ 1,269 1.9 %
Occupancy and equipment 12,924 12,918 6 —
Data processing 12,431 11,839 592 5.0
Marketing 968 1,566 (598) (38.2)
Professional services 1,867 3,083 (1,216) (39.4)
State/municipal business and use tax 2,626 3,034 (408) (13.4)
Federal deposit insurance premium 1,525 1,478 47 3.2
Amortization of intangible assets 2,079 2,352 (273) (11.6)
Other expense 8,918 8,567 351 4.1
Total noninterest expense $ 110,574 $ 110,804 $ (230) (0.2) %


	Nine Months Ended September 30,				Change
	2023		2022		$		%
	(Dollars in thousands)
Compensation and employee benefits	$	75,325	$	67,236	$	8,089	12.0	%
Occupancy and equipment	14,372		12,924		1,448		11.2
Data processing	13,208		12,431		777		6.3
Marketing	1,232		968		264		27.3

Table of Contents


	Nine Months Ended September 30,				Change
	2023		2022		$		%
	(Dollars in thousands)
Professional services	1,961		1,867		94		5.0
State/municipal business and use tax	3,150		2,626		524		20.0
Federal deposit insurance premium	2,465		1,525		940		61.6

Amortization of intangible assets	1,841		2,079		(238)		(11.4)
Other expense	10,346		8,918		1,428		16.0
Total noninterest expense	$	123,900	$	110,574	$	13,326	12.1	%

Noninterest expense ~~decreased due primarily to a decrease in professional services, which was elevated~~increased $13.3 million, or 12.1%, during the nine months ended September 30, ~~2021~~2023 compared to the same period in 2022 due primarily to ~~costs associated with our participation in the SBA PPP, as well as a decrease in marketing expenses due to less activity. This decrease was offset partially by~~ an increase in compensation and employee benefits ~~due to increases~~resulting from a 5.9% increase in ~~both~~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 ~~accrual~~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 ~~incentive compensation as noted above,~~the newly added teams, as well as ana general increase in ~~data processing as the Bank continues to invest in its technology platforms.~~operating costs.

~~Table of Contents~~

Income Tax Expense Overview

Comparison of ~~quarter~~the three months ended September 30, ~~2022~~ 2023to the comparable ~~quarter~~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,												Three Months Ended September 30,						Change
		2022			2021			Change			% Change			2023			2022			$			%
		(Dollars in thousands)												(Dollars in thousands)
Income before income taxes	Income before income taxes	$	25,647		$	25,589		$	58		0.2	%	Income before income taxes	$	21,797		$	25,647		$	(3,850)		(15.0)	%
Income tax expense	Income tax expense	$	4,657		$	4,997		$	(340)		(6.8)	%	Income tax expense	$	3,578		$	4,657		$	(1,079)		(23.2)	%
Effective income tax rate	Effective income tax rate	18.2		%	19.5		%	(1.3)		%	(6.7)	%	Effective income tax rate	16.4		%	18.2		%	(1.8)		%	(9.9)	%

Income tax expense and the effective income tax rate both decreased due primarily to ~~a lower effective tax rate as a result of~~ lower estimated ~~annual~~ pre-tax income ~~for the year ended December 31, 2022 as compared to year ended December 31, 2021,~~ which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and ~~LIHTC.~~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, ~~2022~~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,												Nine Months Ended September 30,
		2022			2021			Change			% Change			2023			2022			Change			% Change
		(Dollars in thousands)												(Dollars in thousands)
Income before income taxes	Income before income taxes	$	71,547		$	96,188		$	(24,641)		(25.6)	%	Income before income taxes	$	66,338		$	71,547		$	(5,209)		(7.3)	%
Income tax expense	Income tax expense	$	12,216		$	17,550		$	(5,334)		(30.4)	%	Income tax expense	$	10,816		$	12,216		$	(1,400)		(11.5)	%
Effective income tax rate	Effective income tax rate	17.1		%	18.2		%	(1.1)		%	(6.0)	%	Effective income tax rate	16.3		%	17.1		%	(0.8)		%	(4.7)	%

Income tax expense and the effective income rate both decreased ~~also~~ due primarily to ~~the change in income before income taxes earned between the periods and~~ lower estimated ~~annual~~ pre-tax income ~~for~~during the ~~year~~nine months ended ~~December 31, 2022.~~September 30, 2023 compared to the same period in 2022 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.

Table of Contents

Financial Condition Overview

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

September 30,
2022 December 31, 2021 Change % Change
(Dollars in thousands)
Assets
Cash and cash equivalents $ 407,324 $ 1,723,292 $ (1,315,968) (76.4) %
Investment securities available for sale, at fair value, net 1,356,142 894,335 461,807 51.6 %
Investment securities held to maturity, at amortized cost, net 773,319 383,393 389,926 101.7 %
Loans held for sale — 1,476 (1,476) (100.0) %
Loans receivable, net 3,959,206 3,773,301 185,905 4.9 %
Premises and equipment, net 76,683 79,370 (2,687) (3.4) %
Federal Home Loan Bank stock, at cost 8,916 7,933 983 12.4 %
Bank owned life insurance 121,369 120,196 1,173 1.0 %
Accrued interest receivable 17,812 14,657 3,155 21.5 %
Prepaid expenses and other assets 230,704 183,543 47,161 25.7 %
Other intangible assets, net 7,898 9,977 (2,079) (20.8) %
Goodwill 240,939 240,939 — —
Total assets $ 7,200,312 $ 7,432,412 $ (232,100) (3.1) %

~~Table of Contents~~

September 30,
2022 December 31, 2021 Change % Change
(Dollars in thousands)
Liabilities and Stockholders' Equity
Deposits $ 6,214,964 $ 6,394,290 $ (179,326) (2.8) %
Deposits held for sale 22,771 — $ 22,771 100.0 %
Total deposits 6,237,735 6,394,290 (156,555) (2.4)
Junior subordinated debentures 21,399 21,180 219 1.0
Securities sold under agreement to repurchase 40,449 50,839 (10,390) (20.4)
Accrued expenses and other liabilities 124,027 111,671 12,356 11.1
Total liabilities 6,423,610 6,577,980 (154,370) (2.3)
Common stock 551,419 551,798 (379) (0.1)
Retained earnings 330,284 293,238 37,046 12.6
Accumulated other comprehensive (loss) income, net (105,001) 9,396 (114,397) (1,217.5)
Total stockholders' equity 776,702 854,432 (77,730) (9.1)
Total liabilities and stockholders' equity $ 7,200,312 $ 7,432,412 $ (232,100) (3.1) %


	September 30, 2023		December 31, 2022		Change
					$		%
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	220,503	$	103,590	$	116,913	112.9	%
Investment securities available for sale, at fair value, net	1,147,547		1,331,443		(183,896)		(13.8)
Investment securities held to maturity, at amortized cost, net	746,845		766,396		(19,551)		(2.6)
Loans held for sale	263		—		263		100.0
Loans receivable, net	4,219,911		4,007,872		212,039		5.3

Premises and equipment, net	76,436		76,930		(494)		(0.6)
Federal Home Loan Bank stock, at cost	8,373		8,916		(543)		(6.1)
Bank owned life insurance	123,639		122,059		1,580		1.3
Accrued interest receivable	18,794		18,547		247		1.3
Prepaid expenses and other assets	341,952		296,181		45,771		15.5
Other intangible assets, net	5,386		7,227		(1,841)		(25.5)
Goodwill	240,939		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 deposits	5,635,187		5,924,840		(289,653)		(4.9)
Borrowings	450,000		—		450,000		100.0
Junior subordinated debentures	21,692		21,473		219		1.0
Securities sold under agreement to repurchase	23,158		46,597		(23,439)		(50.3)
Accrued expenses and other liabilities	207,005		189,297		17,708		9.4
Total liabilities	6,337,042		6,182,207		154,835		2.5
Common stock	548,652		552,397		(3,745)		(0.7)
Retained earnings	377,522		345,346		32,176		9.3
Accumulated other comprehensive loss, net	(112,628)		(99,850)		(12,778)		(12.8)
Total stockholders' equity	813,546		797,893		15,653		2.0
Total liabilities and stockholders' equity	$	7,150,588	$	6,980,100	$	170,488	2.4	%

Total assets ~~decreased~~increased due primarily to ~~a decrease~~an increase in loans receivable, net due to loan growth and an increase in cash and cash equivalents, ~~reflecting deployment of excess liquidity into purchases of higher yielding~~offset partially by a decrease in investment ~~securities and loans.~~securities. Total liabilities and stockholders' equity ~~decreased~~increased due primarily to an increase in borrowings offset partially by a decrease in deposits as well as an increased loss in AOCI following an increase in market interest rates during the nine months ended September 30, 2022, which negatively impacted the fair value of our investment securities available for sale portfolio at September 30, 2022.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.

Table of Contents

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


		September 30, 2022				December 31, 2021									September 30, 2023				December 31, 2022				Change
		Balance		% of Total		Balance		% of Total		Change		% Change			Balance		% of Total		Balance		% of Total		$		%
		(Dollars in thousands)													(Dollars in thousands)
Investment securities available for sale, at fair value:	Investment securities available for sale, at fair value:													Investment securities available for sale, at fair value:
U.S. government and agency securities	U.S. government and agency securities	$	63,749	3.0	%	$	21,373	1.7	%	$	42,376	198.3	%	U.S. government and agency securities	$	20,424	1.1	%	$	63,859	3.0	%	$	(43,435)	(68.0)	%
Municipal securities	Municipal securities	185,713		8.7		221,212		17.3	%	(35,499)		(16.0)		Municipal securities	106,805		5.6		153,026		7.3		(46,221)		(30.2)
Residential CMO and MBS		438,370		20.6		306,884		24.0	%	131,486		42.8
Commercial CMO and MBS		639,441		30.0		315,861		24.7	%	323,580		102.4
Residential CMO and MBS(1)														Residential CMO and MBS(1)	401,181		21.2		424,386		20.2		(23,205)		(5.5)
Commercial CMO and MBS(1)														Commercial CMO and MBS(1)	597,213		31.5		664,421		31.8		(67,208)		(10.1)
Corporate obligations	Corporate obligations	5,834		0.3		2,014		0.2	%	3,820		189.7		Corporate obligations	3,780		0.2		3,834		0.2		(54)		(1.4)
Other asset-backed securities	Other asset-backed securities	23,035		1.1		26,991		2.1	%	(3,956)		(14.7)		Other asset-backed securities	18,144		1.0		21,917		1.0		(3,773)		(17.2)
Total	Total	$	1,356,142	63.7	%	$	894,335	70.0	%	$	461,807	51.6	%	Total	$	1,147,547	60.6	%	$	1,331,443	63.5	%	$	(183,896)	(13.8)	%

Investment securities held to maturity, at amortized cost:	Investment securities held to maturity, at amortized cost:													Investment securities held to maturity, at amortized cost:
U.S. government and agency securities	U.S. government and agency securities	$	150,948	7.1	%	$	141,011	11.0	%	$	9,937	7.0	%	U.S. government and agency securities	$	151,040	8.0	%	$	150,936	7.2	%	$	104	0.07	%

Residential CMO and MBS		296,432		13.9		24,529		1.9		271,903		1,108.5
Commercial CMO and MBS		325,939		15.3		217,853		17.1		108,086		49.6
Residential CMO and MBS(1)														Residential CMO and MBS(1)	273,609		14.4		290,318		13.8		(16,709)		(5.8)
Commercial CMO and MBS(1)														Commercial CMO and MBS(1)	322,196		17.0		325,142		15.5		(2,946)		(0.9)

Total	Total	$	773,319	36.3	%	$	383,393	30.0	%	$	389,926	101.7	%	Total	$	746,845	39.4	%	$	766,396	36.5	%	$	(19,551)	(2.6)	%

Total investment securities	Total investment securities	$	2,129,461	100.0	%	$	1,277,728	100.0	%	$	851,733	66.7	%	Total investment securities	$	1,894,392	100.0	%	$	2,097,839	100.0	%	$	(203,447)	(9.7)	%

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

Total investment securities ~~increased~~decreased $203.4 million, or 9.7%, to $1.89 billion at September 30, 2023 from $2.10 billion at December 31, 2022 due primarily to maturities and prepayments of $154.0 million and sales of $67.9 million, partially offset by purchases ~~to deploy excess liquidity into higher yielding, longer duration assets. Purchases~~ of investment securities available for sale were offset partially by a $145.8 million decrease in the fair value of these investment securities as a result of an increase in market interest rates resulting in an unrealized loss at September 30, 2022 compared to an unrealized gain at December 31, 2021.$37.7 million.

~~Table of Contents~~

Loan Portfolio Overview

Changes by loan type

The ~~Bank~~Company originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases. The following table provides information about our loan portfolio by type of loan at the dates indicated:


		September 30, 2022				December 31, 2021									September 30, 2023				December 31, 2022				Change
		Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		Change		% Change			Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		$		%
		(Dollars in thousands)													(Dollars in thousands)
Commercial business:	Commercial business:													Commercial business:
Commercial and industrial	Commercial and industrial	$	735,028	18.4	%	$	621,567	16.3	%	$	113,461	18.3	%	Commercial and industrial	$	691,318	16.2	%	$	693,568	17.1	%	$	(2,250)	(0.3)	%
SBA PPP		3,593		0.1		145,840		3.8		(142,247)		(97.5)
Owner-occupied CRE	Owner-occupied CRE	959,486		24.0		931,150		24.4		28,336		3.0		Owner-occupied CRE	953,779		22.4		937,040		23.1		16,739		1.8
Non-owner occupied CRE	Non-owner occupied CRE	1,547,114		38.6		1,493,099		39.2		54,015		3.6		Non-owner occupied CRE	1,690,099		39.5		1,586,632		39.2		103,467		6.5
Total commercial business	Total commercial business	3,245,221		81.1		3,191,656		83.7		53,565		1.7		Total commercial business	3,335,196		78.1		3,217,240		79.4		117,956		3.7
Residential real estate	Residential real estate	296,019		7.4		164,582		4.3		131,437		79.9		Residential real estate	377,448		8.8		343,631		8.5		33,817		9.8
Real estate construction and land development:	Real estate construction and land development:													Real estate construction and land development:
Residential	Residential	92,297		2.3		85,547		2.2		6,750		7.9		Residential	70,804		1.7		80,074		2.0		(9,270)		(11.6)
Commercial and multifamily	Commercial and multifamily	160,723		4.0		141,336		3.7		19,387		13.7		Commercial and multifamily	310,024		7.3		214,038		5.3		95,986		44.8
Total real estate construction and land development	Total real estate construction and land development	253,020		6.3		226,883		5.9		26,137		11.5		Total real estate construction and land development	380,828		9.0		294,112		7.3		86,716		29.5
Consumer	Consumer	207,035		5.2		232,541		6.1		(25,506)		(11.0)		Consumer	173,386		4.1		195,875		4.8		(22,489)		(11.5)
Total	Total	$	4,001,295	100.0	%	$	3,815,662	100.0	%	$	185,633	4.9	%	Total	$	4,266,858	100.0	%	$	4,050,858	100.0	%	$	216,000	5.3	%

Table of Contents

Loans receivable increased $216.0 million, or 5.3%, to $4.27 billion at September 30, 2023 from $4.05 billion at December 31, 2022 primarily due ~~primarily~~ to ~~higher commercial~~new loan growth. New loans funded during the nine months ended September 30, 2023 were $370.2 million.

Owner-occupied CRE and ~~industrial loan demand including an~~non-owner occupied CRE loans increased ~~usage~~by $120.2 million to $2.64 billion at September 30, 2023, compared to $2.52 billion at December 31, 2022. The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:


	September 30, 2023				December 31, 2022				Change
	Amortized Cost		% of CRE Loans		Amortized Cost		% of CRE Loans		$		%
	(Dollars in thousands)
Owner occupied and non-owner occupied CRE loans by collateral type:
Office	$	566,916	21.4	%	$	579,762	22.9	%	$	(12,846)	(2.2)	%
Industrial	415,243		15.7		366,947		14.6		48,296		13.2
Retail store / shopping center	287,746		10.9		291,799		11.6		(4,053)		(1.4)
Multi-family	286,091		10.8		256,661		10.2		29,430		11.5
Mini-storage	158,475		6.0		148,580		5.9		9,895		6.7
Mixed use property	152,979		5.8		154,793		6.1		(1,814)		(1.2)
Warehouse	152,055		5.8		147,443		5.8		4,612		3.1
Motel / hotel	141,731		5.4		129,352		5.1		12,379		9.6
Single purpose	122,819		4.6		112,924		4.5		9,895		8.8
Recreational / school	68,469		2.6		70,565		2.8		(2,096)		(3.0)
Other	291,354		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	%

Office loans represented the largest segment of ~~lines~~owner-occupied and non-owner occupied CRE loans totaling $566.9 million, or 21.4% of ~~credit~~the total owner-occupied CRE and ~~an increase in residential real estate~~non-owner occupied CRE, at September 30, 2023. Of this total, $283.7 million, or 50.0%, were owner-occupied CRE loans. Owner-occupied CRE loans ~~including $98.5 million of purchased residential real estate loans~~have a lower risk profile as there is less tenant rollover risk and generally have guarantees from the company occupying the space as well as ~~lower prepayments. This increase~~the owners of the company. The average loan balance of owner-occupied CRE and non-owner occupied CRE was ~~offset partially by repayments of SBA PPP~~$1.2 million at September 30, 2023.

Commercial and multifamily construction loans increased $96.0 million or 44.8% due to new loan originations and ~~a decrease in consumer~~advances on outstanding loans. New commitments for commercial and multifamily construction loans were $209.5 million during the nine months ended September 30, 2023.

Consumer loans decreased $22.5 million primarily due ~~primarily~~ to a ~~$42.2~~$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 ~~TDR~~modified loans and nonperforming assets

The following table provides information about our nonaccrual loans, performing ~~TDR~~modified loans and nonperforming assets for the dates indicated:


														September 30, 2023				December 31, 2022				Change
		September 30, 2022			December 31, 2021			Change			% Change										$				%
		(Dollars in thousands)															(Dollars in thousands)
Nonaccrual loans: (1)	Nonaccrual loans: (1)												Nonaccrual loans: (1)
Commercial business	Commercial business	$	6,234		$	23,107		$	(16,873)		(73.0)	%	Commercial business	$	3,065			$	5,869			$	(2,804)			(47.8)	%
Residential real estate		—			47			(47)			(100.0)

Real estate construction and land development	Real estate construction and land development	—			571			(571)			(100.0)		Real estate construction and land development	—				37				(37)				(100.0)
Consumer		—			29			(29)			(100.0)

Total nonaccrual loans	Total nonaccrual loans	6,234			23,754			(17,520)			(73.8)		Total nonaccrual loans	3,065				5,906				(2,841)				(48.1)
Other real estate owned	Other real estate owned	—			—			—			n/a		Other real estate owned	—				—				—				—
Accruing loans past due 90 days or more													Accruing loans past due 90 days or more	$	2,158			$	1,615			$	543			33.6	%
Total nonperforming assets	Total nonperforming assets	$	6,234		$	23,754		$	(17,520)		(73.8)	%	Total nonperforming assets	$	5,223			$	7,521			$	(2,298)			(30.6)	%

Accruing loans past due 90 days or more		$	20		$	293		$	(273)		(93.2)	%

Credit quality ratios:	Credit quality ratios:												Credit quality ratios:
Nonaccrual loans to loans receivable	Nonaccrual loans to loans receivable	0.16		%	0.62		%	(0.46)		%	(74.2)	%	Nonaccrual loans to loans receivable	0.07		%		0.15		%		(0.08)		%		(53.3)	%
Nonaccrual loans to total assets		0.09			0.32			(0.23)			(71.9)
Performing TDR loans: (1)
Commercial business		$	64,739		$	57,142		$	7,597		13.3	%
Residential real estate		175			358			(183)			(51.1)
Real estate construction and land development		6,137			450			5,687			1,263.8
Nonperforming loans to loans receivable													Nonperforming loans to loans receivable	0.12				0.19				(0.07)				(36.8)
Nonperforming assets to total assets													Nonperforming assets to total assets	0.07				0.11				(0.04)				(36.4)

4245

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September 30,
2022 December 31, 2021 Change % Change
(Dollars in thousands)
Consumer 812 1,160 (348) (30.0)
Total performing TDR loans $ 71,863 $ 59,110 $ 12,753 21.6 %


	September 30, 2023		December 31, 2022	Change
				$	%
Modified loans:(2)
Commercial business	$	9,471

Real estate construction and land development	3,452
Consumer	45
Total performing modified loans	$	12,968

(1) At both September 30, ~~2022~~2023 and December 31, ~~2021, $1.7 million and $1.4~~2022, $1.5 million of nonaccrual loans, ~~respectively, and $2.2 million and $1.6 million of performing TDR loans, respectively,~~ 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 nine months ended September 30, ~~2022:~~2023:




			(InDollars in thousands)
Balance, beginning of period	$	~~23,754~~5,906
Additions	~~720~~908
Net principal payments, sales and transfers to accruing status	~~(13,784)~~(1,175)
Payoffs	~~(4,285)~~(2,574)
~~Charge-offs~~	~~(171)~~

Balance, end of period	$	~~6,234~~3,065

Nonaccrual loans decreased ~~$17.5~~$2.8 million, or ~~73.8%~~48.1%, due primarily to ongoing collection efforts including the ~~partial~~ payoff of ~~three large commercial and industrial loan relationships, the payoff of four~~a commercial business loan ~~relationships, and the transfer~~for $1.6 million which also included a recovery of ~~five commercial business loan relationships totaling $10.1~~$1.1 million ~~back to accruing status. The Bank also sold a pool of 14 nonaccrual loans totaling $1.0 million~~recognized during the ~~period ending March 31, 2022.~~three months ended September 30, 2023.

Allowance for Credit Losses on Loans Overview

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


		At or For the Nine Months Ended September 30,												At or For the Nine Months Ended September 30,						Change
		2022			2021			Change			% Change			2023			2022			$			%
		(Dollars in thousands)												(Dollars in thousands)
ACL on loans at the end of period	ACL on loans at the end of period	$	42,089		$	48,317		$	(6,228)		(12.9)	%	ACL on loans at the end of period	$	46,947		$	42,089		$	4,858		11.5	%

Credit quality ratios:	Credit quality ratios:												Credit quality ratios:
ACL on loans to loans receivable	ACL on loans to loans receivable	1.05		%	1.22		%	(0.06)		%	(5.4)		ACL on loans to loans receivable	1.10		%	1.05		%	0.05			4.8
ACL on loans to loans receivable, excluding SBA PPP loans (1)		1.05			1.31			(0.10)			(8.7)
ACL on loans to nonaccrual loans	ACL on loans to nonaccrual loans	675.15			186.60			496.82			278.60		ACL on loans to nonaccrual loans	1,531.71			675.15			856.56			126.9

Net (recoveries) charge-offs		$	(980)		$	60		$	(1,040)		0.02
Average loans receivable, net during the period (2)		3,815,387			4,297,875			(482,488)			(11.2)
Net recoveries on loans to average loans receivable, net(3)		(0.03)		%	—		%	(0.03)		%	—	%
Net recoveries													Net recoveries	$	(895)		$	(980)		$	85		(8.7)
Average balance of loans receivable, net during the period(1)													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)													Net recoveries on loans to average loans receivable, net(2)	(0.03)		%	(0.03)		%	—		%	—	%

(1)~~The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. See "Reconciliations of Non-GAAP Measures" section below.~~

~~(2)~~ Average ~~loan~~balance of loans receivable, net includes loans held for sale.

~~(3)~~(2) Annualized.

The ACL on loans ~~decreased~~ ~~during the~~ ~~nine months ended~~increased $4.0 million, or 9.2%, to $46.9 million at September 30, 2023 from $43.0 million at December 31, 2022 due primarily to ~~a reduction of~~an increase in loans ~~individually evaluated for losses and as a result, their related ACL of $3.9 million~~receivable, net as well as ~~improvements~~a change in ~~the economic forecast at September 30, 2022 as compared to the forecast at September 30, 2021 as the economic forecast as~~mix of ~~September 30, 2021 still considered a more significant impact as as a result of COVID-19 and related variants.~~loans.

~~Table of Contents~~

The following table presents the ACL on loans by loan portfolio segment at the indicated dates:


		September 30, 2022				December 31, 2021									September 30, 2023						December 31, 2022
		ACL on loans		% of Total (1)		ACL on loans		% of Total (1)		Change		% Change			ACL on Loans		ACL as a % of Loans in Loan Category		% of Loans in Loan Category to Total Loans		ACL on Loans		ACL as a % of Loans in Loan Category		% of Loans in Loan Category to Total Loans
		(Dollars in thousands)													(Dollars in thousands)
Commercial business	Commercial business	$	31,940	81.1	%	$	33,049	83.7	%	$	(1,109)	(3.4)	%	Commercial business	$	31,105	0.93	%	78.1	%	$	30,718	0.95	%	79.4	%
Residential real estate	Residential real estate	2,545		7.4		1,409		4.3		1,136		80.6		Residential real estate	3,549		0.94		8.8		2,872		0.84		8.5
Real estate construction and land development	Real estate construction and land development	5,104		6.3		5,276		5.9		(172)		(3.3)		Real estate construction and land development	9,959		2.62		9.0		7,063		2.40		7.3
Consumer		2,500		5.2		2,627		6.1		(127)		(4.8)
Total ACL on loans		$	42,089	100.0	%	$	42,361	100.0	%	$	(272)	(0.6)	%

~~(1)~~ ~~Represents the percent~~Table of ~~loans receivable by loan category to loans receivable.~~Contents


	September 30, 2023						December 31, 2022
	ACL on Loans		ACL as a % of Loans in Loan Category		% of Loans in Loan Category to Total Loans		ACL on Loans		ACL as a % of Loans in Loan Category		% of Loans in Loan Category to Total Loans
	(Dollars in thousands)
Consumer	2,334		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, 2022				December 31, 2021									September 30, 2023				December 31, 2022				Change
		Balance		% of Total		Balance		% of Total		Change		% Change			Balance (1)		% of Total Deposits		Balance (1)		% of Total Deposits		$		%
		(Dollars in thousands)													(Dollars in thousands)
Noninterest demand deposits	Noninterest demand deposits	$	2,308,583	37.0	%	$	2,343,909	36.7	%	$	(35,326)	(1.5)	%	Noninterest demand deposits	$	1,789,293	31.7	%	$	2,099,464	35.5	%	$	(310,171)	(14.8)	%
Interest bearing demand deposits	Interest bearing demand deposits	1,997,989		32.0	%	1,946,605		30.4		51,384		2.6		Interest bearing demand deposits	1,630,007		28.9		1,830,727		30.9		(200,720)		(11.0)
Money market accounts	Money market accounts	996,214		16.0	%	1,120,174		17.5		(123,960)		(11.1)		Money market accounts	1,081,253		19.2		1,063,243		17.9		18,010		1.7
Savings accounts	Savings accounts	647,526		10.4	%	640,763		10.0		6,763		1.1		Savings accounts	506,028		9.0		623,833		10.5		(117,805)		(18.9)
Total non-maturity deposits	Total non-maturity deposits	5,950,312		95.4		6,051,451		94.6		(101,139)		(1.7)		Total non-maturity deposits	5,006,581		88.8		5,617,267		94.8		(610,686)		(10.9)
Certificates of deposit	Certificates of deposit	287,423		4.6		342,839		5.4		(55,416)		(16.2)		Certificates of deposit	628,606		11.2		307,573		5.2		321,033		104.4
Total deposits	Total deposits	$	6,237,735	100.0	%	$	6,394,290	100.0	%	$	(156,555)	(2.4)	%	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 ~~competitive pricing pressures and customers~~an overall reduction in market liquidity, as well as interest rate sensitive clients moving ~~excess funds~~a portion of their non-operating deposits to ~~alternative~~ higher yielding ~~investments.~~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 sale agreement with a third party to sell and transfer certain assets, deposits and other liabilities of its branch in Ellensburg, ~~during~~WA in September 2022. During the three months ended September 30, ~~2022. As a result of entering into this purchase and sale agreement, $22.7~~2023, $13.8 million in deposits were ~~transferred to~~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. The lower of amortized cost or fair value adjustment upon transferring these deposits to held for sale was not material. The sale is expected to be completed during the three months ended March 31, 2023; however, the completion of this sale depends on many factors including regulatory approval.

Borrowings Overview

The FHLB functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB’s assessment of the institution’s creditworthiness. At September 30, 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.

Table of Contents

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 Company’s stockholders' equity to assets ratio was ~~10.8% and 11.5%~~11.4% at September 30, ~~2022~~2023 and December 31, ~~2021, respectively, and decreased~~2022. Total stockholders' equity increased $15.7 million, or 2.0%, to $813.5 million at September 30, 2023 from $797.9 million at December 31, 2022. The increase was due 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 ~~decrease in AOCI~~result of ~~$114.4~~declining fair values of investment securities available for sale, and $6.9 million ~~following increases in market interest rates~~for the repurchase of the Company's common stock during the nine months ended September 30, 2022, which negatively impacted the fair value of our investment securities available for sale. AOCI has no effect on our regulatory capital ratios as the Company opted to exclude it from our common equity tier 1 capital calculations as set forth below.2023.

The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. On October ~~19, 2022,~~18, 2023, the Company’s board of directors declared a regular quarterly dividend of ~~$0.21~~$0.22 per common share payable on November ~~16, 2022~~15, 2023 to shareholders of record on November ~~2, 2022.~~1, 2023.

Regulatory Requirements Overview

The Company is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. ~~Heritage~~The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC

~~Table of Contents~~

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, ~~2022,~~2023, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories. The following table presents the actual capital ratios of the Company and the Bank at the periods indicated:


		Company				Heritage Bank					Company				Bank
		September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Common equity Tier 1 capital ratio	Common equity Tier 1 capital ratio	12.8	%	13.5	%	13.0	%	13.8	%	Common equity Tier 1 capital ratio	12.9	%	12.8	%	12.9	%	12.9	%
Leverage ratio	Leverage ratio	9.2		8.7		9.0		8.6		Leverage ratio	9.9		9.7		9.7		9.4
Tier 1 capital ratio	Tier 1 capital ratio	13.3		13.9		13.0		13.8		Tier 1 capital ratio	13.3		13.2		12.9		12.9
Total capital ratio	Total capital ratio	14.0		14.8		13.8		14.7		Total capital ratio	14.1		14.0		13.8		13.7
Capital conservation buffer	Capital conservation buffer	6.0		6.8		5.8		6.7		Capital conservation buffer	6.1		6.0		5.8		5.7

As of both September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allowed the Bank the option to delay for two years until December 31, 2021 an estimate of CECL’s effect on regulatory capital, relative to the incurred 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 growth objectives and to fund operations. Our funding strategy has been to acquire non-maturity deposits from our retail accounts, ~~acquire~~and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. ~~We may also acquire~~Our liquidity policy permits the purchase of brokered deposits ~~when~~in an amount not to exceed 15% of the ~~cost~~Bank's total deposits as a secondary source for funding. At September 30, 2023, we had $107.5 million in brokered deposits, which constituted 1.91% of ~~funds is advantageous to other funding sources.~~total 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. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition so we adhere to internal management targets assigned to the loan to deposit ratio,

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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 Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.

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


	September 30, 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 equivalents	220,503		103,590
Fed funds line borrowing availability with correspondent banks	145,000		215,000
Total sources of liquidity	3,170,663		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 45% of the Bank's total assets one quarter in arrears or $3.10 billion.

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

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our ~~liquidity and~~ capital resources since the information disclosed in our ~~2021~~2022 Annual Form 10-K. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

Critical Accounting ~~Policies~~Estimates

Our critical accounting ~~policies~~estimates are described in detail in the "Critical Accounting ~~Policies"~~Estimates" section within Item 7 of our ~~2021~~2022 Annual Form the Form 10-K. The SEC defines "critical accounting ~~policies"~~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 ~~policies~~estimates include estimates of ~~the ACL on investment securities,~~ the ACL on loans, the ACL on unfunded commitments and goodwill. There have been no material changes in these ~~policies~~estimates during the nine months ended September 30, ~~2022.~~

~~Reconciliations of Non-GAAP Measures~~

This Form 10-Q contains certain financial measures not presented in accordance with GAAP in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this Form 10-Q because it believes they provide useful and comparative information to assess trends in the Company’s performance and asset quality and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.

~~Table of Contents~~

The Company believes presenting loan yield excluding the effect of discount accretion on acquired loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet. Incremental accretion on acquired loans represents the amount of interest income recorded on acquired loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of ASU 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the acquired loans decreases. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that have substantially decreased within a short time frame.

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(Dollars in thousands)
Loan yield, excluding SBA PPP Loans and Incremental Accretion on Acquired Loans, annualized:
Interest and fees on loans (GAAP) $ 43,847 $ 46,863 $ 125,762 $ 147,137
Exclude interest and fees on SBA PPP loans (275) (8,042) (5,138) (27,181)
Exclude incremental accretion on acquired loans (398) (681) (1,252) (2,250)
Adjusted interest and fees on loans (non-GAAP) $ 43,174 $ 38,140 $ 119,372 $ 117,706
Average loans receivable, net (GAAP) $ 3,859,839 $ 4,005,585 $ 3,815,387 $ 4,297,875
Exclude average SBA PPP loans (5,726) (392,570) (49,423) (665,681)
Adjusted average loans receivable, net (non-GAAP) $ 3,854,113 $ 3,613,015 $ 3,765,964 $ 3,632,194
Loan yield, annualized (GAAP) 4.51 % 4.64 % 4.41 % 4.58 %
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans, annualized (non-GAAP) 4.44 % 4.19 % 4.24 % 4.33 %

The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans was significant to the loan portfolio, and since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for SBA PPP loans.

September 30,
2022 December 31,
2021
(Dollars in thousands)
ACL on Loans to Loans Receivable, excluding SBA PPP Loans:
Allowance for credit losses on loans (GAAP) $ 42,089 $ 42,361
Loans receivable (GAAP) $ 4,001,295 $ 3,815,662
Exclude SBA PPP loans (3,593) (145,840)
Loans receivable, excluding SBA PPP (non-GAAP) $ 3,997,702 $ 3,669,822
ACL on loans to loans receivable (GAAP) 1.05 % 1.11 %
ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 1.05 % 1.15 %
2023.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

InMarket 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 ~~opinion, there has not been a material change in our~~exposure to market interest rates, equity prices and credit spreads. Our primary market risk is interest rate risk, which is the risk of loss of net interest income or net interest margin resulting from changes in market interest rates. Interest rate risk results primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on our assets and the interest paid on our liabilities. Management regularly reviews our exposure ~~since~~to changes in interest rates. Among the ~~information disclosed~~factors considered are changes in ~~our 2021 Annual Form 10-K.~~ 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 and its effect on net interest income and capital.

Neither we, nor the Bank, maintain a trading account for any class of financial instrument, nor do we, or the Bank, engage in hedging activities or purchase high risk derivative instruments. Moreover, neither we, nor 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.

4649

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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, 2023				December 31, 2022
	Amount		% Change in Net Interest Income		Amount		% 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 2	4,104		1.6		11,147		4.1
Modeled increase in market interest rates of 200 basis points
Increase in net interest income in Year 1	3,184		1.4		8,181		3.2
Increase in net interest income in Year 2	6,266		2.4		19,889		7.3
Modeled decrease in market interest rates of 100 basis points
Increase (decrease) in net interest income in Year 1	3,125		1.4		(5,433)		(2.1)
Decrease in net interest income in Year 2	318		0.1		(10,534)		(3.9)
Modeled decrease in market interest rates of 200 basis points
Increase (decrease) in net interest income in Year 1	2,812		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 procedures (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. 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, ~~2022 are~~2023 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 three months ended September 30, ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Neither the Company nor the Bank is 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 Item 1A of the Company’s ~~2021~~2022 Annual Form 10-K.

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

(a) Not applicable.

(b) Not applicable.

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The following table provides information about repurchases of common stock by the Company during the three months ended September 30, ~~2022:~~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, 2022—July 31, 2022 — $ — 9,986,863 638,214
August 1, 2022— August 31, 2022 — — 9,986,863 638,214
September 1, 2022—September 30, 2022 100 26.94 9,986,863 638,214
Total 100 $ 26.94


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, 2023	148,454	17.08		10,317,287	307,790
Total	148,454	$	17.08

(1)Of the common shares repurchased by the Company between July1, ~~2022~~2023 and September 30, ~~2022, all~~2023, a total of 335 shares represented the cancellation of stock to pay withholding taxes on vested restricted stock ~~awards or units.~~units and were not repurchased pursuant to the publicly announced stock repurchase program.

(2)On March 12, 2020 the Company's Board of Directors ~~authorized~~announced the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan. The repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares, unless terminated sooner by the board of directors. The repurchase program may be suspended or discontinued at any time by the Company’s board of directors.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

(a) None

(b) None

(c) During the three and nine months ended September 30, 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 Exchange Act) of the Company.

ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

10.1*

Heritage Financial Corporation 2023 Omnibus Equity Plan

DEF 14A

4.4

03/22/2023

10.2*

Form of Restricted Stock Unit Award Agreement under the Heritage Financial Corporation 2023 Omnibus Equity Plan

S-8

4.5

05/08/23

10.3*

Form of Performance-Based Restricted Stock Unit Award Agreement under the Heritage Financial Corporation 2023 Omnibus Equity Plan

S-8

4.6

05/08/23

31.1

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

31.2

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

32.1

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

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)

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~~ITEM 6. EXHIBITS~~

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

104

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

Incorporated by Reference
Exhibit No. Description of Exhibit Form Exhibit Filing Date/Period End Date
10.39
Transitional Retirement Agreement made and entered into on September 26, 2022, effective as of January 1, 2023 by and between Heritage Financial Corporation and Cindy M. Hirman
8-K 10.1 09/26/2022
10.40*
Deferred Compensation Plan and Participation Agreement - Addendum by and between Heritage and Jeffrey J. Deuel
10-Q 11/8/2022
10.41*
Deferred Compensation Plan and Participation Agreement - Addendum by and between Heritage and Donald J. Hinson
10-Q 11/8/2022
10.42*
Deferred Compensation Plan and Participation Agreement - Addendum by and between Heritage and Bryan McDonald
10-Q 11/8/2022
10.43*
Deferred Compensation Plan and Participation Agreement - Addendum by and between Heritage and Tony Chalfant
10-Q 11/8/2022
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
32.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS
XBRL Instance Document (1)
101.SCH
XBRL Taxonomy Extension Schema Document (1)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)

~~(*)~~* Indicates management contract or compensatory plan or arrangement.

(1) Filed herewith.

SIGNATURES

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


						HERITAGE FINANCIAL CORPORATION
Date:
November 8, ~~2022~~2023						/S/ JEFFREY J. DEUEL
						Jeffrey J. Deuel
						President and Chief Executive Officer
Date:
November 8, ~~2022~~2023						/S/ DONALD J. HINSON
						Donald J. Hinson
						Executive Vice President and Chief Financial Officer

4852


	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(in thousands)
Commercial business:
Commercial and industrial	$	(14)	$	260	$	(11)	$	2,228
Owner-occupied CRE	—		53		—		117
Non-owner occupied CRE	—		774		—		313
Total commercial business	(14)		1,087		(11)		2,658
Residential real estate	—		19		—		—
Real estate construction and land development:
Residential	—		—		—		73


Consumer	—		68		—		32
Total	$	(14)	$	1,174	$	(11)	$	2,763


			Fair Value at December 31, 2021
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	1,911	$	1,049	$	—	$	—	$	1,049
Owner-occupied CRE	613		189		—		—		189

Total commercial business	2,524		1,238		—		—		1,238

Real estate construction and land development:


	Three Months Ended
	September 30, 2022		September 30, 2021

Loan yield (GAAP)	4.51	%	4.64	%
Exclude impact from SBA PPP loans	(0.02)		(0.38)
Exclude impact from incremental accretion on acquired loans	(0.05)		(0.07)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1)	4.44	%	4.19	%