What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-24 compared with 2022-02-25 · 255 added, 324 removed, 1754 unchanged (25% of the section changed)

4 unchanged sentences

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying Consolidated Statements of Financial Condition of Heritage Financial Corporation and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related Consolidated Statements of Income, Comprehensive Income, Stockholders’ Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

We have audited the accompanying Consolidated Statements of Financial Condition of Heritage Financial Corporation and Subsidiaries (the "Company") as of December 31, 2022 and 2021, the related Consolidated Statements of Income, Comprehensive (Loss) Income, Stockholders’ Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,2022, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for allowance for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No 326, Financial Instruments – Credit Losses (ASC 326).

The Company adopted the new current expected credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Basis for Opinions

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The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

(1) relates to accounts or disclosures

that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans – Qualitative Allowance

As described in Note 1, “Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements” and Note 4, “Allowance for Credit Losses (“ACL”) on Loans” to the consolidated financial statements, the Company’s consolidated allowance for credit losses on loans was $42.4 million at December 31, 2021 and reversal of provision for credit losses on loans was $27.3 million for the year then ended.

As described in Note 1, “Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements” and Note 4, “Allowance for Credit Losses (“ACL”) on Loans” to the consolidated financial statements, the Company’s consolidated allowance for credit losses on loans was $43.0 million at December 31, 2022 and reversal of provision for credit losses on loans was $563,000 for the year then ended.

The ACL on loans evaluation is inherently subjective, as it utilizes estimates that require a high degree of judgment relating to risk characteristics of loan segments, macroeconomic variables used in forecasting, and other qualitative risk factors.

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Investment securities held to maturity, at amortized cost, net (fair value of $ 673,434 and $ 376,331 , respectively)

766,396 383,393

Total investment securities 2,097,839 1,277,728

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Loans receivable, net 4,007,872 3,773,301

Other real estate owned — —

Premises and equipment, net 76,930 79,370

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Deposits $ 5,907,420 $ 6,394,290

Deposits held for sale 17,420 —

Total deposits 5,924,840 6,394,290

Junior subordinated debentures 21,473 21,180

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Total liabilities 6,182,207 6,577,980

Commitments and contingencies (Note 20)

Stockholders’ equity:

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Retained earnings 345,346 293,238

Accumulated other comprehensive income, net 9,396 25,018

Accumulated other comprehensive (loss) income, net ( 99,850 ) 9,396

Total stockholders’ equity 797,893 854,432

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Service charges and other fees 10,390 9,207 8,995

Gain on sale of investment securities, net 29 1,518 330

Card revenue 8,885 8,325 7,233

Gain (loss) on sale of investment securities, net ( 256 ) 29 1,518

Gain on sale of loans, net 633 3,644 5,044

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

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( 108,977 ) ( 15,472 ) 15,828

Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $( 6 ), $( 330 ) and $( 69 ), respectively

( 23 ) ( 1,188 ) ( 261 )

Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $( 130 ), $( 35 ) and $ 0 , respectively

( 469 ) ( 127 ) —

Reclassification adjustment for net loss (gain) from sale of investment securities available for sale included in income, net of tax of $ 56 , $( 6 ) and $( 330 ), respectively

200 ( 23 ) ( 1,188 )

Other comprehensive (loss) income ( 109,246 ) ( 15,622 ) 14,640

Comprehensive income $ 82,413 $ 61,210 $ 85,390

Comprehensive (loss) income $ ( 27,371 ) $ 82,413 $ 61,210

See accompanying Notes to Consolidated Financial Statements.

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Balance at December 31, 2020 35,912,243 $ 571,021 $ 224,400 $ 25,018 $ 820,439

Cumulative effect from change in accounting policy (1)

— — ( 5,615 ) — ( 5,615 )

Restricted stock units vested 125,377 — — — —

Exercise of stock options 8,248 122 — — 122

Stock-based compensation expense — 3,666 — — 3,666

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Net income — — 98,035 — 98,035

Other comprehensive income, net of tax — — — 14,640 14,640

Other comprehensive loss, net of tax — — — ( 15,622 ) ( 15,622 )

Cash dividends declared on common stock ($ 0.81 per share)

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Balance at December 31, 2021 35,105,779 $ 551,798 $ 293,238 $ 9,396 $ 854,432

(1) Effective January 1, 2020, the Bank adopted ASU 2016-13, Financial Instruments - Credit Losses .

Year Ended December 31, 2020

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— — ( 5,615 ) — ( 5,615 )

Restricted stock units vested, net of forfeitures of restricted stock awards 61,964 — — — —

Restricted stock units vested 109,853 — — — —

Exercise of stock options 8,248 122 — — 122

2 unchanged sentences

Net income — — 46,570 — 46,570

Other comprehensive loss, net of tax — — — 17,833 17,833

Other comprehensive income, net of tax — — — 14,640 14,640

Cash dividends declared on common stock ($ 0.80 per share)

— — ( 29,029 ) — ( 29,029 )

Balance at December 31, 2019 36,618,729 $ 586,459 $ 212,474 $ 10,378 $ 809,311

(1) Effective January 1, 2019, the Bank adopted ASU 2016-02, Leases .

December 31, 2020 35,912,243 $ 571,021 $ 224,400 $ 25,018 $ 820,439

(1) Effective January 1, 2020, the Bank adopted ASU 2016-13, Financial Instruments - Credit Losses .

See accompanying Notes to Consolidated Financial Statements.

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Bank owned life insurance income ( 3,747 ) ( 2,520 ) ( 4,319 )

(Gain) loss on sale of other real estate owned — ( 179 ) 227

Valuation adjustment on interest rate swaps ( 66 ) ( 355 ) 422

Gain on sale of other real estate owned — — ( 179 )

Gain on sale of mortgage loans held for sale, net ( 633 ) ( 3,644 ) ( 5,044 )

Gain on sale of investment securities available for sale, net ( 29 ) ( 1,518 ) ( 330 )

Gain on sale of other assets, net ( 4,405 ) ( 955 ) ( 246 )

Impairment of assets held for sale 145 630 102

Impairment of ROU asset 160 655 117

Gain (loss) on sale of investment securities, net 256 ( 29 ) ( 1,518 )

Gain on sale of assets held for sale ( 403 ) ( 4,440 ) ( 1,043 )

Other 9,605 19,717 ( 9,781 )

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Cash flows from investing activities:

Loan repayments (originations), net 699,107 ( 692,720 ) ( 126,142 )

Loan originations and purchases, net of payments ( 225,149 ) 699,107 ( 692,720 )

Maturities and repayments of investment securities available for sale 181,487 254,668 264,223

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Purchase of premises and equipment ( 4,016 ) ( 3,018 ) ( 6,997 )

Proceeds from sales of other loans — — 3,562

Proceeds from sales of other real estate owned — — 1,290

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Proceeds from bank owned life insurance death benefit 2,114 — 1,324

Cash received from return of New Market Tax Credit equity method investment 9,642 — —

Capital contributions to low-income housing tax credit partnerships ( 41,911 ) ( 7,117 ) ( 27,485 )

Net cash provided (used) by investing activities 163,763 ( 538,549 ) ( 125,302 )

Cash received from return of NMTC equity method investment — 9,642 —

Capital contributions to tax credit partnerships ( 18,190 ) ( 41,911 ) ( 7,117 )

Net cash (used) provided by investing activities ( 1,207,779 ) 163,763 ( 538,549 )

Year Ended December 31,

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Cash flows from financing activities:

Net increase in deposits 783,347 1,015,314 150,274

Net (decrease) increase in deposits ( 469,450 ) 783,347 1,015,314

Federal Home Loan Bank advances 50,050 — 64,000

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Common stock cash dividends paid ( 29,491 ) ( 28,937 ) ( 28,859 )

Net increase (decrease) in securities sold under agreement to repurchase 15,156 15,514 ( 11,318 )

Net (decrease) increase in securities sold under agreement to repurchase ( 4,242 ) 15,156 15,514

Proceeds from exercise of stock options — — 122

Repurchase of common stock ( 3,196 ) ( 22,889 ) ( 19,119 )

Net cash provided by financing activities 746,677 982,972 99,470

Net increase in cash and cash equivalents 979,970 514,754 66,658

Net cash (used) provided by financing activities ( 506,379 ) 746,677 982,972

Net (decrease) increase in cash and cash equivalents ( 1,619,702 ) 979,970 514,754

Cash and cash equivalents at beginning of period 1,723,292 743,322 228,568

5 unchanged sentences

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

Investment in low-income housing tax credit partnership and related funding commitment 29,551 10,237 46,677

Loans received from return of New Market Tax Credit equity method investment 15,596 — —

Investment in tax credit partnerships and related funding commitment 85,888 29,551 10,237

Loans received from return of NMTC equity method investment — 15,596 —

ROU assets obtained in exchange for new operating lease liabilities 2,869 13,966 1,265

Transfers of properties classified as held for sale to prepaid expenses and other assets from premises and equipment, net 3,556 3,243 1,533

Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net 910 3,556 3,243

Cumulative effect from change in accounting policy (1)

— 7,175 29,754

Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued, but not paid — — 2,672

Transfers of loans receivable to other real estate owned — — 270

(1) Effective January 1, 2020 and 2019, the Bank adopted ASU 2016-13, Financial Instruments - Credit Losses, and ASU 2016-02, Leases, respectively.

Transfer of deposits to deposits held for sale 17,420 — —

(1) Effective January 1, 2020, the Bank adopted ASU 2016-13, Financial Instruments - Credit Losses, respectively.

See accompanying Notes to Consolidated Financial Statements.

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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 49 branch offices located throughout Washington State and the greater Portland, Oregon area.

The Bank is headquartered in Olympia, Washington and conducts business from its 50 branch offices located throughout Washington State, the greater Portland, Oregon area and Eugene, Oregon.

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.

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When the Company acquires another entity, all investment securities are recorded at fair value and classified as available for sale at the acquisition date.

Realized gains and losses on sales of investment securities are recorded on the trade date in gain on sale of investment securities, net on the Consolidated Statements of Income and determined using the specific identification method.

Realized gains and losses on sales of investment securities are recorded on the trade date in "Gain (loss) on sale of investment securities, net" on the Consolidated Statements of Income and determined using the specific identification method.

Premiums and discounts on investment securities available for sale and held to maturity are amortized or accreted into income using the interest method.

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Management evaluates the need for an ACL on investment securities available for sale on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

For investment securities available for sale in

an unrealized loss position, the Company first assesses whether it intends to sell or it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit loss against income.

For investment securities available for sale in an unrealized loss position, the Company first assesses whether it intends to sell or it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement

to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit loss against income.

For investment securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

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Changes in the ACL on investment securities available for sale are recorded as provision for credit losses expense.

Losses are charged against the ACL when management believes the uncollectability of an investment security available for sale is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Losses are charged against the ACL when management believes the uncollectibility of an investment security available for sale is confirmed or when either of the criteria regarding intent or requirement to sell is met.

ACL on Investment Securities Held to Maturity

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Changes in the ACL on investment securities held to maturity are recorded as provision for credit losses expense.

Losses are charged against the ACL when management believes the uncollectability of an investment security held to maturity is confirmed.

Losses are charged against the ACL when management believes the uncollectibility of an investment security held to maturity is confirmed.

Loans Held for Sale

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Acquired loans are recorded at their fair value at acquisition date net of an ACL on loans expected to be incurred over the life of the loan.

The initial ACL on purchased loans is determined using the same methodology as originated loans.

The initial ACL on acquired loans is determined using the same methodology as originated loans.

For non-PCD loans, the initial ACL on loans is recorded through earnings as a provision for credit losses.

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Any unrecognized discount or premium for a purchased loan that is subsequently repaid in full is recognized immediately into income.

Subsequent changes to the ACL on loans for purchased loans are recorded through earnings as a provision for credit losses.

Subsequent changes to the ACL on loans for acquired loans are recorded through earnings as a provision for credit losses.

Delinquent Loans :

Loans are considered past due or delinquent when principal or interest payments are past due 30 days or more.

Delinquent loans may generally remain on accrual status between 30 days and 89 days past due.

Delinquent loans generally remain on accrual status between 30 days and 89 days past due.

The Bank did not designate loans with payment deferrals granted due to the COVID-19 Pandemic as past due during their modification period in accordance with the CARES Act and related regulatory guidance.

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Loans for which the accrual of interest has been discontinued are designated as nonaccrual loans.

The accrual of interest is generally discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection.

The accrual of interest is generally discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of

Loans are placed on nonaccrual at an earlier date if collection of the contractual principal or interest is doubtful.

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six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Borrowers are considered current if they were less than 30 days past due on the contractual payments as of December 31, 2019 under the CARES Act, which the Bank determined was the implementation date of its modification program under related regulatory guidance.

Borrowers were considered current if they were less than 30 days past due on the contractual payments as of December 31, 2019 under the CARES Act, which the Bank determined was the implementation date of its modification program under related regulatory guidance.

The CA Act extended relief offered under the CARES Act through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

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Loans are debited against the ACL on loans when management believes the uncollectibility of a loan balance is confirmed and subsequent recoveries, if any, are credited to the ACL on loans.

The Bank records the changes in the ACL on loans through earnings as a provision for credit losses on the Consolidated Statements of Income.

The Bank records the changes in the ACL on loans through earnings as a "(Reversal of) provision for credit losses" on the Consolidated Statements of Income.

Management has adopted a historic loss, open pool CECL methodology to calculate the ACL on loans.

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

Nonaccrual TDR loans are individually evaluated for credit loss except the original interest rate is used to discount the expected cash flows, not the rate specified in the restructuring.

Nonaccrual TDR loans are individually evaluated for credit loss except if the original interest rate is used to discount the expected cash flows, not the rate specified in the restructuring.

The allowance for collectively evaluated loans is comprised of the baseline loss allowance, the macroeconomic allowance and the qualitative allowance.

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The Bank has a bias for minimal qualitative risk factors unless internal or external factors indicate otherwise.

Qualitative adjustments may be related to and include, but not limited to, factors such as:

Qualitative adjustments may be related to and include, but not be limited to, factors such as:

(i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral or industry specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) other limitations associated with factors such as underwriting changes, acquisition of new portfolios, changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.

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The allowance methodology for unfunded commitments is similar to the ACL on loans, but additionally includes considerations of the current utilization of the commitment and an estimate of the future utilization as determined appropriate by historical commitment utilization and the Bank's estimates of future utilization given current economic forecasts.

The ACL for unfunded commitments is recorded in accrued expenses and other liabilities on the Consolidated Statements of Financial Condition and changes are recognized through earnings in the provision for credit losses on the Consolidated Statements of Income.

The ACL for unfunded commitments is recorded in "Accrued expenses and other liabilities" on the Consolidated Statements of Financial Condition and changes are recognized through earnings in the "(Reversal of) provision for credit losses" on the Consolidated Statements of Income.

Mortgage Banking Operations

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If the Company later determines all or a portion of the impairment no longer exists for a particular stratum, a reduction of the allowance may be recorded as an increase to income.

Changes in valuation allowances are reported within other noninterest income on the Consolidated Statements of Income.

Changes in valuation allowances are reported within "Other income" on the Consolidated Statements of Income.

In connection with the loan sales, the Bank typically makes representations and warranties about the underlying loans conforming to specified guidelines.

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The Bank believes the potential for material loss under these arrangements was remote at December 31, 2022, December 31, 2021 and December 31, 2020.

Servicing fee income is recorded for fees earned for servicing loans and reported as other noninterest income on the Consolidated Statements of Income.

Servicing fee income is recorded for fees earned for servicing loans and reported as "Other income" on the Consolidated Statements of Income.

The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned.

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A premium over the adjusted carrying value is received upon the sale of the guaranteed portion of a SBA or USDA loan.

The Bank's investment in an SBA or USDA loan is allocated among the sold and retained portions of the loan based on the relative fair value of each portion at the time of loan origination, adjusted for payments and other activities.

The Bank's investment in a SBA or USDA loan is allocated among the sold and retained portions of the loan based on the relative fair value of each portion at the time of loan origination, adjusted for payments and other activities.

Because the portion retained does not carry a SBA or USDA guarantee, part of the gain recognized on the sold portion of the loan is deferred and amortized as a yield enhancement on the retained portion in order to obtain a market equivalent yield.

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Goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (single reporting unit) on an annual basis or more frequently if an indication of impairment exists between the annual tests.

For the goodwill impairment assessment, the Company either assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not the fair value of the reporting unit is less than its carrying value and a quantitative test is needed or opts to bypass the qualitative analysis and performs a quantitative analysis only.

For the goodwill impairment assessment, the Company either assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not the fair value of the reporting unit is less than its carrying value and a quantitative test is needed or opts to bypass the qualitative analysis and performs a quantitative analysis only.

The quantitative analysis requires the Company to make assumptions and judgments regarding the fair value of the reporting unit.

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Certain restricted stock unit grants are subject to performance-based vesting as well as other approved vesting conditions and cliff-vest based on those conditions, and the fair value is estimated using a Monte Carlo simulation pricing model.

The assumptions used in the Black-Scholes-Merton option pricing model and the Monte Carlo simulation pricing model include the expected term based on the valuation date and the remaining contractual term of the award;

The assumptions used in the Monte Carlo simulation pricing model include the expected term based on the valuation date and the remaining contractual term of the award;

the risk-free interest rate based on the U.S.

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and the expected stock price volatility over the expected term based on the historical volatility over the equivalent historical term.

Low Income Housing Tax Credit Investments

The Company has two equity investments in LIHTC partnerships, which are indirect federal subsidies that finance low-income housing projects.

Tax Credit Investments

The Company has equity investments in LIHTC partnerships, which are indirect federal subsidies that finance low-income housing projects.

As a limited liability investor in these partnerships, the Company receives tax benefits in the form of tax deductions from partnership operating losses and federal income tax credits.

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The Company accounts for the LIHTCs under the proportional amortization method and amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance on the Consolidated Statements of Income as a component of "Income tax expense".

The Company reports the carrying value of the equity investments in the unconsolidated LIHTCs as prepaid expenses and other assets on the Company’s Statements of Financial Condition.

The Company reports the carrying value of the equity investments in the unconsolidated LIHTCs as Prepaid expenses and other assets and the unfunded contingent commitments related to the equity investments as Accrued expenses and other liabilities on the Company’s Statements of Financial Condition.

The maximum exposure to loss in the LIHTCs is the amount of equity invested and credit extended by the Company.

1 unchanged sentence

The Company has evaluated the variable interests held by the Company in each LIHTC investment and determined the Company does not have controlling financial interests in such investments and is not the primary beneficiary.

New Market Tax Credit Investments

Through May 2021, the Company held $ 25.0 million of qualified equity investments in three certified development entities eligible to receive NMTC.

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As such, participants are general unsecured creditors of the Company with respect to their participation under both plans.

The Company records a liability within accrued expenses and other liabilities on the Consolidated Statements of Financial Condition and records compensation and employee benefits expense on the Consolidated Statements of Income in a systematic and rational manner.

Since the amounts earned under the Deferred Compensation Plan are generally based on the Company’s annual performance, the Company

records deferred compensation expense each year for an amount calculated based on that year’s financial performance.

The Company records a liability within "Accrued expenses and other liabilities" on the Consolidated Statements of Financial Condition and records the expense as "Compensation and employee benefits" on the Consolidated Statements of Income in a systematic and rational manner.

Since the amounts earned under the Deferred Compensation Plan are generally based on the Company’s annual performance, the Company records deferred compensation expense each year for an amount calculated based on that year’s financial performance.

Earnings per Share

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Costs related to production of advertising are considered incurred when the advertising is first used.

Provision for Credit Losses

(Reversal of) Provision for Credit Losses

The provision for credit losses as presented in the Consolidated Statements of Income includes the provision for credit losses on loans, the provision for credit losses on unfunded commitments and the provision for credit losses on investment securities.

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The Company earns fees from contracts with customers for fiduciary and brokerage activities.

Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer’s

assets under management or based on investment or insurance solutions that are implemented for the customer.

Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer’s assets under management or based on investment or insurance solutions that are implemented for the customer.

• Merchant Processing Services and Debit and Credit Card Fees:

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(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU 2016-02 , Leases (Topic 842), as amended by ASU 2017-13, 2018-01, 2018-10, 2018-11 and ASU 2018-11 and ASU 2019-01, was originally issued in February 2016, to increase transparency and comparability of leases among organizations and to disclose key information about leasing arrangements.

The ASU sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.

The ASU requires lessees to apply a dual approach, classifying leases as either a finance or operating lease.

This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.

A lessee is also required to record a ROU asset and liability for all leases with a term greater than 12 months regardless of their classification.

All cash payments are classified within operating activities in the statement of cash flows.

In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.

The ASU was effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The Company adopted the ASU on January 1, 2019 and elected an exclusion accounting policy for lease assets and lease liabilities of leases with a term of twelve months or less.

The adoption of this ASU resulted in the recognition of operating lease ROU assets and liabilities of approximately $ 29.3 million and $ 30.2 million, respectively, in prepaid expenses and other assets and accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.

This change also resulted in a cumulative-effect adjustment to beginning retained earnings of $ 399,000 , net of tax, under the modified retrospective approach.

FASB ASU 2016-13 , Financial Instruments - Credit Losses (Topic 326):

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The Significant Accounting Policies section above reflects the policies after adoption.

The CECL Adoption had the following impacts:

Investment Securities

As of December 31, 2019, the Company only held investment securities available for sale, had no historical charge-off or recovery history and did not have any investment securities available for sale outstanding at the adoption date for which an other-than-temporary impairment was previously recorded.

At the adoption date of ASU 2016-13, the unrealized losses present in the portfolio of investment securities available for sale were primarily due to decreases in market interest rates on floating rate investment securities since the purchase of the securities and the fair value of these securities was expected to recover as the securities approach their maturity dates.

The basis of management’s conclusion was that at December 31, 2019, 83.5 % of the investment securities were issued by or guaranteed by the United States government or its agencies, 14.0 % were issued and guaranteed by State and local governments and the remainder of the portfolio was invested in at least investment-grade securities.

As a result of the analysis, no ACL on investment securities available for sale was recorded upon adoption.

Loan Receivable

ASU 2016-13 replaced the allowance for loan losses with the ACL on loans on the Consolidated Statements of Financial Condition and replaced the related provision for loan losses with the provision for credit losses as presented on the Consolidated Statements of Income, which now additionally includes the provision for credit losses on unfunded commitments discussed below.

The adoption was completed in a specific order beginning with the transition of PCI loans to PCD loans.

The Bank elected to account for the PCD loans individually, terminating the pools of loans that were previously accounted for under ASC 310-30.

First, an ACL on loans was determined for each PCI loan.

The ACL on PCI loans was added to the loan's carrying amount to establish a PCD loan at its amortized cost basis.

The difference between the outstanding principal balance and the amortized cost basis of the PCD loan is a noncredit premium or discount, which is amortized into interest income over the remaining life of the PCD loan.

The PCI to PCD transition did not have an impact on

beginning retained earnings;

however, it did have the effect of reducing the existing allowance for PCI loans by $ 1.6 million under the CECL methodology as compared to the previous ASC 310-10 methodology.

Following the PCI to PCD transition, the Bank recorded a pretax increase to the ACL on loans of $ 3.4 million to increase the reserve to the estimated credit losses at January 1, 2020 based on its CECL methodology as part of the cumulative-effect adjustment to beginning retained earnings.

The pretax increase to the ACL on loans of $ 3.4 million and the reduction in ACL on loans due to the PCI to PCD transition of $ 1.6 million resulted in an increase in the ACL on loans of $ 1.8 million at January 1, 2020.

Upon adoption, the adjusted beginning balance of the ACL on loans as a percentage of loans receivable was 1.01 % as compared to 0.96 % at December 31, 2019 under the prior incurred loss methodology.

The PCI to PCD transition also resulted in a net discount of $ 4.3 million for PCD loans, or an increase in the net discount for PCD loans of $ 1.6 million.

Following the transition, the total net discount for purchased loans increased to $ 10.0 million at January 1, 2020 compared to $ 8.4 million as of December 31, 2019.

Unfunded Commitments

ASU 2016-13 replaced the reserve for unfunded commitments with the ACL on unfunded commitments as included in Accrued liabilities and other expenses on the Consolidated Statements of Financial Condition and replaced the provision for unfunded commitments which was previously recorded in Other expense with the provision for credit losses as presented on the Consolidated Statements of Income, which now additionally includes the provision for credit losses on loans discussed above.

Upon adoption, the Bank recorded a pretax increase in the beginning ACL on unfunded commitments of $ 3.7 million.

Overall CECL Adoption Impact

The adoption of ASU 2016-13, including the above mentioned increase to the ACL on loans of $ 3.4 million and the increase to the ACL on unfunded commitments of $ 3.7 million, resulted in a pretax cumulative-effect adjustment of $ 7.1 million.

Upon adoption of this ASU, the Company recorded an increase to the ACL on loans of $ 3.4 million and an increase to the ACL on unfunded commitments of $ 3.7 million, which resulted in a pretax cumulative-effect adjustment of $ 7.1 million.

The impact of this adjustment to beginning retained earnings on January 1, 2020 was $ 5.6 million, net of tax.

FASB ASU 2020-04 , Reference Rate Reform (Topic 848) , as amended by ASU 2021-01, 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 December 31, 2022.

FASB ASU 2020-04 , Reference Rate Reform (Topic 848) , as amended by ASU 2021-01, and ASU 2022-06 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The amendments in this ASU are effective for all entities as of March 12, 2020.

In December 2022, FASB amended this ASU and deferred the sunset date of Topic 848 from December 31, 2022, to December 31, 2024.

The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

2 unchanged sentences

and recommended by the Alternative Reference Rates Committee.

The Company does not expect this ASU to have a material impact on its business operations and the Condensed Consolidated Financial Statements.

The Company does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial 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 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 the Company previously adopted the amendments in ASU 2016-13.

Early adoption is permitted in any interim period if an entity has adopted ASU 2016-13 and such election may be 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 for the disclosures related to loan restructurings for borrowers experiencing financial difficulty and the presentation of gross write-offs in the vintage disclosures.

The guidance related to the recognition and measurement of TDRs may be adopted on a prospective or modified retrospective transition method.

The Company has not yet adopted this ASU for the year ended December 31, 2022 does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

(2) Investment Securities

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

During the three months ended September 30, 2021, the Company reassessed and transferred, at fair value, $ 244.8 million of U.S.

During 2021, the Company transferred, at fair value, $ 244.8 million of U.S.

government and agency securities from the available for sale classification to the held to maturity classification.

The net unrealized after tax gain of $ 1.3 million remained in AOCI to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities.

The net unrealized after tax gain remained in AOCI and is amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities.

No gains or losses were recognized at the time of the transfer.

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

There were no investment securities classified as held to maturity at December 31, 2020.

(a) Investment Securities by Classification, Type and Maturity

7 unchanged sentences

Residential CMO and MBS 479,473 — ( 55,087 ) 424,386

December 31, 2021

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

(In thousands)

Commercial CMO and MBS 714,136 19 ( 49,734 ) 664,421

8 unchanged sentences

December 31, 2021

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair

(In thousands)

7 unchanged sentences

Total $ 883,832 $ 15,341 $ ( 4,838 ) $ 894,335

Investment securities held to maturity:

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

The amortized cost and fair value of investment securities at December 31, 2022, by contractual maturity, are set forth below.

10 unchanged sentences

1,216,034 1,110,724 615,460 556,083

Total $ 883,832 $ 894,335 $ 383,393 $ 376,331

Total investment securities $ 1,460,033 $ 1,331,443 $ 766,396 $ 673,434

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

2 unchanged sentences

(b) Unrealized Losses on Investment Securities Available for Sale

and length of time the individual securities have been in a continuous unrealized loss position at the dates indicated:

The following tables show 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:

December 31, 2022

8 unchanged sentences

Commercial CMO and MBS 473,580 ( 16,971 ) 181,692 ( 32,763 ) 655,272 ( 49,734 )

Corporate obligations 3,834 ( 166 ) — — 3,834 ( 166 )

Other asset-backed securities 16,489 ( 510 ) 721 ( 12 ) 17,210 ( 522 )

6 unchanged sentences

(In thousands)

government and agency securities $ 14,828 $ ( 176 ) $ — $ — $ 14,828 $ ( 176 )

Municipal securities $ 29,774 $ ( 619 ) $ 9,351 $ ( 235 ) 39,125 ( 854 )

5 unchanged sentences

The Company evaluated investment securities available for sale as of December 31, 2022 and December 31, 2021 and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics.

Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of both December 31, 2021 and December 31, 2020.

Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of both December 31,

2022 and December 31, 2021.

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 December 31, 2022 and December 31, 2021.

The Company also evaluated investment securities held to maturity for current expected credit losses.

There were no investment securities held to maturity classified as nonaccrual or past due as of December 31, 2021 and all were issued by the U.S.

The Company also evaluated investment securities held to maturity for current expected credit losses as of December 31, 2022 and December 31, 2021.

There were no investment securities held to maturity classified as nonaccrual or past due as of December 31, 2022 and December 31, 2021 and all were issued by the U.S.

government and its agencies and either explicitly or implicitly guaranteed by the U.S.

government, highly rated by major credit rating agencies and have a long history of no credit losses.

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 December 31, 2021.

Therefore, no ACL on investment securities held to maturity was recorded as of December 31, 2022 and December 31, 2021.

(d) Realized Gains and Losses

The following table presents the gross realized gains and losses on the sale of investment securities available for sale for the years ended December 31, 2021, December 31, 2020 and December 31, 2019:

The following table presents the gross realized gains and losses on the sale of investment securities available for sale during the following periods:

Year ended December 31,

3 unchanged sentences

Gross realized losses ( 260 ) — ( 19 )

Net realized gains $ 29 $ 1,518 $ 330

Net realized gains/(losses) $ ( 256 ) $ 29 $ 1,518

(e) Pledged Securities

The following table summarizes the amortized cost and fair value of investment securities that are pledged as collateral for the following obligations at December 31, 2021 and December 31, 2020:

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

December 31, 2022 December 31, 2021

8 unchanged sentences

(f) Accrued Interest Receivable

Accrued interest receivable excluded from the amortized cost on investment securities available for sale totaled $ 3.5 million and $ 3.6 million at December 31, 2021 and December 31, 2020, respectively.

Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $ 1.1 million at December 31, 2021.

No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities available for sale during the years ended December 31, 2021, 2020, and 2019.

Accrued interest receivable excluded from the amortized cost of investment securities available for sale totaled $ 4.8 million and $ 3.5 million at December 31, 2022 and December 31, 2021, respectively.

Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $ 2.4 million and $ 1.1 million at December 31, 2022 and December 31, 2021, 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 years ended December 31, 2022, 2021, and 2020.

(G) Non-Marketable Securities

As a member bank of Visa U.S.A., we held 6,549 shares of Visa Inc.

Class B common stock at December 31, 2022 and December 31, 2021.

These shares have a carrying value of zero and are 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.

Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value.

(3) Loans Receivable

1 unchanged sentence

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

5 unchanged sentences

Within these segments are classes of loans for which management monitors and assesses credit risk.

The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.

Management reviews and approves these policies and procedures on a regular basis.

The Bank has certain lending policies and guidelines in place that are designed to maximize loan income within an acceptable level of risk.

Management reviews and approves these policies and guidelines on a regular basis.

A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans.

1 unchanged sentence

The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel.

The amortized cost of loans receivable, net of ACL on loans at December 31, 2021 and December 31, 2020 consisted of the following portfolio segments and classes:

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

December 31, 2022 December 31, 2021

15 unchanged sentences

Loans receivable 4,050,858 3,815,662

December 31, 2021 December 31, 2020

(In thousands)

Allowance for credit losses on loans ( 42,986 ) ( 42,361 )

16 unchanged sentences

These loans have either a two-year or five-year maturity date and earn interest at 1 %.

The Bank also earns a fee based on the size of the loan, which is recognized over the life of the loan.

The Bank also earned a fee based on the size of the loan, which is recognized over the life of the loan.

The Bank no longer originates SBA PPP loans as the program expired on May 31, 2021.

Owner-occupied and non-owner occupied CRE.

The Bank originates CRE loans primarily within its primary market areas.

These loans are subject to underwriting standards and processes similar to commercial and industrial loans in that these loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate properties.

These loans are subject to underwriting standards and processes similar to commercial and industrial loans in that these

loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate properties.

CRE lending typically involves higher loan principal amounts and payments on loans and repayment is dependent on successful operation and management of the properties.

7 unchanged sentences

The Bank sells a portion of originated residential real estate loans in the secondary market.

In addition to originating residential real estate loans, the Bank began purchasing pools of residential real estate loans during the year ended 2022.

All purchased loans adhere to the Bank's underwriting standards.

Real Estate Construction and Land Development :

2 unchanged sentences

The Bank also provides financing to builders for the construction of pre-sold residential homes and, in selected cases, to builders for the construction of speculative single-family residential property.

Substantially all construction loans are short-term in nature and priced with variable rates of interest.

Construction loans are typically short-term in nature and priced with variable rates of interest.

Construction loans may also include construction to permanent financing where the loan term includes both the construction phase and term loan.

Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion.

3 unchanged sentences

Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained.

These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being dependent upon successful completion of the construction project, market interest rate changes, government

regulation of real property, general economic conditions and the availability of long-term financing.

The Bank originates consumer loans and lines of credit that are both secured and unsecured.

9 unchanged sentences

(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 to Clark County in Washington State and Multnomah County and Washington County in Oregon, as well as other contiguous markets and represents a geographic concentration.

Additionally, our loan portfolio is concentrated in commercial loans, including commercial business loans and commercial and multifamily real estate construction and land development loans.

Commercial loans are generally viewed as having more inherent risk of default than residential real estate loans or other consumer loans.

Most of the Bank’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State, and Multnomah, Washington and Lane County in Oregon, as well as other contiguous markets and represents a geographic concentration.

Additionally, the Bank's loan portfolio is concentrated in commercial business loans, including commercial and industrial, owner and nonowner-occupied CRE and commercial and multifamily real estate construction and land development loans.

Commercial business loans, excluding SBA PPP loans, are generally considered as having 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.

28 unchanged sentences

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.

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.

2 unchanged sentences

Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades.

The SM loan grade is transitory in that the Bank is waiting on additional information to determine the likelihood and extent of the potential loss.

The SM loan grade is 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 accrual loans at risk of being classified as nonaccrual loans and includes all of our loans classified as nonaccrual.

Loans with a SS grade have further credit deterioration and include both accrual loans and 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.

Regulatory agencies provided guidance regarding credit risk ratings, delinquency reporting and nonaccrual status for loans adversely impacted by the COVID-19 Pandemic.

The Bank has and will continue to exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely classify credits that have been affected by the COVID-19 Pandemic.

The Bank exercised judgment in determining the risk rating for impacted borrowers and did not automatically adversely classify credits that were affected by the COVID-19 Pandemic.

The Bank did not designate loans with payment deferrals granted due to the COVID-19 Pandemic as past due because of the deferral.

Due to the short-term nature of the forbearance and other relief programs the Bank was offering as a result of the COVID-19 Pandemic, borrowers granted relief under these programs were generally not reported as nonaccrual during the deferral period.

The following table presents the amortized cost of loans receivable by risk grade as of December 31, 2021 and December 31, 2020:

December 31, 2021 Revolving Loans Revolving Loans Converted to Term Loans (1)

Due to the short-term nature of the forbearance and other relief programs the Bank offered as a result of the COVID-19 Pandemic, borrowers granted relief under these programs were generally not reported as nonaccrual during the deferral period.

The following table presents the amortized cost of loans receivable by risk grade at the dates indicated:

December 31, 2022

Amortized Cost Basis by Origination Year Revolving Loans Revolving Loans Converted (1)

Loans Receivable

Amortized Cost Basis by Origination Year

2022 2021 2020 2019 2018 Prior

4 unchanged sentences

SM 212 109 443 4,637 362 4,447 5,433 — 15,643

December 31, 2022

Amortized Cost Basis by Origination Year Revolving Loans Revolving Loans Converted (1)

Loans Receivable

2022 2021 2020 2019 2018 Prior

SS 773 188 1,710 3,465 559 5,098 3,674 168 15,635

22 unchanged sentences

Pass 45,521 26,675 2,891 3,061 871 1,055 — — 80,074

December 31, 2021 Revolving Loans Revolving Loans Converted to Term Loans (1)

Loans Receivable

Amortized Cost Basis by Origination Year

2021 2020 2019 2018 2017 Prior

Commercial and multifamily

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

December 31, 2020 Revolving Loans Revolving Loans Converted to Term Loans (1)

December 31, 2021

Amortized Cost Basis by Origination Year Revolving Loans Revolving Loans Converted (1)

Loans Receivable

Amortized Cost Basis by Origination Year

2021 2020 2019 2018 2017 Prior

7 unchanged sentences

Pass 139,253 6,587 — — — — — — 145,840

Total 139,253 6,587 — — — — — — 145,840

Owner-occupied CRE

2 unchanged sentences

SS — 1,332 — 3,787 3,014 16,418 — — 24,551

Doubtful or Loss — — — — — — — — —

Total 183,006 91,941 191,459 85,022 72,990 306,660 — 72 931,150

11 unchanged sentences

Pass 85,089 27,090 23,295 5,672 6,141 16,891 — — 164,178

SM — — — — — — — — —

SS — — — — — 404 — — 404

2 unchanged sentences

Pass 44,892 23,728 12,266 2,921 389 1,351 — — 85,547

SS — — — 1,926 — — — — 1,926

Total 44,892 23,728 12,266 2,921 389 1,351 — — 85,547

9 unchanged sentences

Total 101,340 65,915 46,451 8,715 1,099 3,363 — — 226,883

December 31, 2021

Amortized Cost Basis by Origination Year Revolving Loans Revolving Loans Converted (1)

Loans Receivable

2021 2020 2019 2018 2017 Prior

Pass 1,286 15,737 46,041 29,819 15,068 13,026 108,492 120 229,589

SM — — — — — — — — —

SS — 181 657 476 542 1,043 36 17 2,952

7 unchanged sentences

(d) Nonaccrual Loans

The following table presents the amortized cost of nonaccrual loans for the dates indicated:

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

December 31, 2022

4 unchanged sentences

Owner-occupied CRE — 212 212

Non-owner occupied CRE 1,273 3,379 4,652

Total commercial business 4,503 1,366 5,869

Residential real estate

Real estate construction and land development:

Commercial and multifamily

Consumer — 29 29

Total $ 4,503 $ 1,403 $ 5,906

10 unchanged sentences

Commercial and multifamily

572 450 1,022

Consumer — 29 29

Total $ 10,763 $ 12,991 $ 23,754

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 of previously classified nonaccrual loans during the following periods:

December 31, 2021

December 31, 2020

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:

Year Ended December 31, 2022

Year Ended December 31, 2021

Interest Income Reversed Interest Income Recognized Interest Income Reversed Interest Income Recognized

8 unchanged sentences

Commercial and multifamily

( 14 ) 65 — —

Total real estate construction and land development ( 14 ) 65 — 71

1 unchanged sentence

Total $ ( 28 ) $ 1,242 $ ( 11 ) $ 3,136

For the years ended December 31, 2021 and 2020, 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.

For the years ended December 31, 2022 and 2021, 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

12 unchanged sentences

Total commercial business 822 6,293 7,115 3,210,125 3,217,240

December 31, 2021

30-89 Days 90 Days

or Greater Total Past

Due Current Loans Receivable

(In thousands)

Residential real estate

15 unchanged sentences

SBA PPP 223 293 516 145,324 145,840

December 31, 2021

30-89 Days 90 Days or

Greater Total Past

Due Current Loans Receivable

(In thousands)

Owner-occupied CRE 2,397 112 2,509 928,641 931,150

10 unchanged sentences

Total $ 10,190 $ 7,807 $ 17,997 $ 3,797,665 $ 3,815,662

There was one SBA PPP loan 90 days or more past due that was still accruing interest as of December 31, 2021 with an amortized cost of $ 293,000 .

There were no loans 90 days or more past due that were still accruing interest as of December 31, 2020 .

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

(f) Collateral-dependent Loans

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 December 31, 2021 and December 31, 2020 were as follows, with b alances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan :

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 December 31, 2022 and December 31, 2021 was as follows, with b alances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan :

December 31, 2022

CRE Farmland Residential Real Estate Other Total

CRE Farmland Residential Real Estate Total

(In thousands)

2 unchanged sentences

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:

Commercial and multifamily

571 — — — 571

Total $ 1,428 $ 1,977 $ 929 $ 4,334

7 unchanged sentences

Total commercial business 5,807 4,362 1,036 245 11,450

Residential real estate

Real estate construction and land development:

1 unchanged sentence

571 — — — 571

Consumer — — 30 — 30

Total $ 6,378 $ 4,362 $ 1,036 $ 245 $ 12,021

25 unchanged sentences

(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 loa ns of $ 3.1 million, $ 7.5 million and $ 1.0 million at December 31, 2021, December 31, 2020, and December 31, 2019, respectively, related to these TDR loans which were restructured during the year ended December 31, 2021, 2020 and 2019, respectively.

The Bank had an ACL on loa ns of $ 12,000 , $ 3.1 million, and $ 7.5 million at December 31, 2022, December 31, 2021, and December 31, 2020, respectively, related to these TDR loans which were restructured during the year ended December 31, 2022, 2021 and 2020, respectively.

The unfunded commitment to borrowers related to TDR loans was $ 5.8 million and $ 5.7 million at December 31, 2022 and December 31, 2021, respectively.

The following tables present loans that were modified in a TDR and subsequently defaulted within twelve months from the modification date during the periods indicated:

The following table presents loans that were modified in a TDR and subsequently defaulted within twelve months from the modification date during the periods indicated:

Year Ended December 31,

11 unchanged sentences

Non-owner occupied CRE — — — — 2 1,811

Total commercial business 1 189 6 1,379 8 5,316

Total 1 $ 189 6 $ 1,379 8 $ 5,316

1 unchanged sentence

Certain TDR loans may have been paid-down or charged-off during the years ended December 31, 2022, 2021 and 2020.

During the years ended December 31, 2021, 2020, and 2019, six , eight and 11 TDR loans defaulted because each was past its modified maturity date and the borrower had not subsequently repaid the credits.

During the years ended December 31, 2022, 2021, and 2020, one , six and eight TDR loans defaulted because each was past its modified maturity date and the borrower had not subsequently repaid the credits.

The Bank chose not to further extend the maturity date on these TDR loans.

The remaining six TDR loans for the year ended December 31, 2019 defaulted because the borrower was more than 90 days delinquent on their scheduled loan payments.

The Bank had an ACL on loans for these TDR loans which defaulted during the related years of $ 7,000 , $ 111,000 , and $ 229,000 at December 31, 2022, 2021, and 2020.

14 unchanged sentences

The Bank does not retain servicing on loans sold in the secondary market.

At December 31, 2021 and December 31, 2020, the balance of loans held for sale was $ 1.5 million and $ 4.9 million, respectively.

There were no loans held for sale at December 31, 2022 and $ 1.5 million at December 31, 2021.

The following table presents information concerning the origination and sale of the Bank's residential real estate loans and the gains from their sale during the periods indicated:

10 unchanged sentences

(j) Commercial Loan Sales, Servicing, and Commercial Servicing Asset

Details of loans serviced for others are as follows:

The following table presents the d etails of loans serviced for others for the periods indicated:

December 31, 2022 December 31, 2021

18 unchanged sentences

There were no changes to this assumption during the year ended December 31, 2022.

The reasonable and supportable period and subsequent reversion period used in the CECL model was five quarters and two quarters at December 31, 2021.

The reasonable and supportable period and subsequent reversion period used in the CECL model was five quarters and two quarters, respectively at December 31, 2022.

There were no changes to these assumptions during the year ended December 31, 2022.

1 unchanged sentence

As the length of the reasonable and supportable period increases, the degree of judgment involved in estimating the allowance increases.

During the year ended December 31, 2021, the ACL on loans decreased $ 27.8 million, or 39.6 %, due primarily to a reversal of provision for credit losses on loans of $ 27.3 million.

The reversal of provision for credit losses was primarily driven by improvements in the economic forecast used in the CECL model at December 31, 2021 as compared to the forecast used in the CECL model at December 31, 2020.

During the year ended December 31, 2022, the ACL on loans increased $ 625,000 , or 1.5 %, due primarily to net recoveries of $ 1.2 million offset partially by a reversal of provision for credit losses on loans of $ 563,000 .

The reversal of provision for credit losses was 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 balances of certain segments of collectively evaluated loans.

The ACL on loans at December 31, 2022 and December 31, 2021 did not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.

A summary of the changes in the ACL on loans during the years ended December 31, 2021, December 31, 2020 and December 31, 2019 is as follows:

The following table presents a summary of the changes in the ACL for the periods indicated:

Year Ended December 31,

27 unchanged sentences

Year Ended December 31, 2021

Beginning Balance Impact of CECL Adoption Beginning Balance,

as Adjusted Charge-offs Recoveries Provision (Reversal of Provision) for Credit Losses Ending Balance

Beginning Balance Charge-offs Recoveries (Reversal of) Provision for Credit Losses Ending Balance

(In thousands)

2 unchanged sentences

Owner-occupied CRE 9,486 ( 359 ) 25 ( 2,741 ) 6,411

Year Ended December 31, 2021

Beginning Balance Charge-offs Recoveries (Reversal of) Provision for Credit Losses Ending Balance

(In thousands)

Non-owner occupied CRE 10,112 — — ( 1,251 ) 8,861

7 unchanged sentences

Consumer 5,894 ( 669 ) 572 ( 3,170 ) 2,627

Unallocated 899 ( 899 ) — — — — —

Total $ 70,185 $ ( 1,946 ) $ 1,420 $ ( 27,298 ) $ 42,361

The following table details activity in the allowance for loan losses by segment and class for the period indicated:

Year Ended December 31, 2020

Beginning Balance Charge-offs Recoveries Provision for Loan Losses Ending Balance

Beginning Balance Impact of CECL Adoption Beginning Balance,

as Adjusted Charge-offs Recoveries (Reversal of) Provision for Credit Losses Ending Balance

(In thousands)

5 unchanged sentences

Residential real estate 1,458 1,471 2,929 — 3 ( 1,341 ) 1,591

1,203 ( 60 ) — 315 1,458

Year Ended December 31, 2019

Beginning Balance Charge-offs Recoveries Provision for Loan Losses Ending Balance

Real estate construction and land development:

7 unchanged sentences

(5) Other Real Estate Owned

Changes in other real estate owned during the periods indicated were as follows:

Year Ended December 31,

2021 2020 2019

For the years ended December 31, 2022 and December 31, 2021 the Bank had no other real estate owned.

The following table provided the c hanges in other real estate owned during the year ended December 31, 2020:

December 31, 2020

(In thousands)

3 unchanged sentences

Gain (loss) on sale, net 179

Valuation adjustment — — ( 51 )

Balance at the end of the year $ —

1 unchanged sentence

(6) Premises and Equipment

A summary of premises and equipment is as follows:

The following table presents a summary of premises and equipment at the dates indicated:

December 31, 2022 December 31, 2021

17 unchanged sentences

Similarly, no goodwill impairment charges were recorded for the years ended December 31, 2021 and 2020.

Even though there was no goodwill impairment at December 31, 2021, changes in

the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company’s operating results.

Even though there was no goodwill impairment at December 31, 2022, changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company’s operating results.

(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 goodwill during the years ended December 31, 2021, 2020, and 2019 and the estimated aggregate amortization expense related to other intangible assets for future years as of December 31, 2021 is as follows, in thousands:

There were no additions during the years ended December 31, 2022, 2021, and 2020 and the estimated aggregate amortization expense related to other intangible assets for future years as of December 31, 2022 is as follows, in thousands:

Thereafter 152

1 unchanged sentence

(8) Derivative Financial Instruments

The following table presents the notional amounts and estimated fair values of derivatives:

The following table presents the notional amounts and estimated fair values of derivatives at the dates indicated:

December 31, 2022 December 31, 2021

9 unchanged sentences

Generally, the gains and losses of the interest rate derivatives offset due to the back-to-back nature of the contracts.

However, the settlement values of the Bank's net derivative assets with customers were increased by $ 355,000 and reduced by $ 422,000 as of December 31, 2021 and December 31, 2020, respectively, due to the recognition of a credit valuation adjustment.

A credit valuation adjustment was not recorded on the Bank's net derivative assets as of December 31, 2019.

Deposits consisted of the following:

December 31, 2021 December 31, 2020

Amount Percent Amount Percent

However, the settlement values of the Bank's net derivative assets with customers were increased by $ 66,000 and $ 355,000 , and reduced by $ 422,000 as of December 31, 2022, December 31, 2021, and December 31, 2020, respectively, due to the change in the credit valuation adjustment.

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

December 31, 2022 December 31, 2021 Change

Amount % of Total Amount % of Total $ %

(Dollars in thousands)

6 unchanged sentences

Total deposits $ 5,924,840 100.0 % $ 6,394,290 100.0 % $ ( 469,450 ) ( 7.3 ) %

Deposit accounts overdrawn and reclassified to loans receivable were $ 216,000 and $ 187,000 as of December 31, 2021 and December 31, 2020.

Deposit accounts overdrawn and reclassified to loans receivable were $ 317,000 and $ 216,000 as of December 31, 2022 and December 31, 2021, respectively.

Accrued interest payable on deposits was $ 143,000 and $ 53,000 as of December 31, 2022 and December 31, 2021, respectively and is included in "Accrued expenses and other liabilities" in the Consolidated Statements of Financial Condition.

Interest expense, by category, was as follows:

The following table presents Interest expense, by category, for the periods indicated:

Year Ended December 31,

8 unchanged sentences

2023 $ 270,575

Total $ 307,573

15 unchanged sentences

For financial reporting purposes, the Company's investment in the Master Trust is accounted for under the equity method and is included in "Prepaid expenses and other assets" on the Consolidated Statements of Financial Condition.

The junior subordinated debentures issued and guaranteed by the Company and held by the Master Trust are reflected as liabilities on the Consolidated Statements of Financial Condition.

The junior subordinated debentures issued and guaranteed by the Company and held by the Master Trust are reflected as "Junior subordinated debentures" on the Consolidated Statements of Financial Condition.

(11) Securities Sold Under Agreement to Repurchase

16 unchanged sentences

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.

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 December 31, 2022, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $ 1.23 billion.

14 unchanged sentences

The majority of the leases contain renewal options and provisions for increases in rental rates based on an agreed upon index or predetermined escalation schedule.

As of December 31, 2021 and December 31, 2020, the Company’s operating lease ROU asset was $ 27.6 million and $ 18.0 million, respectively, and the related operating lease ROU liability was $ 28.8 million and $ 19.3 million, respectively.

As of December 31, 2022 and December 31, 2021, the Company’s operating lease ROU asset was $ 22.7 million and $ 27.6 million, respectively and is included in "Prepaid expenses and other assets" on the Consolidated Statements of Financial Condition.

The related operating lease ROU liability was $ 24.4 million and $ 28.8 million, respectively and is included in " Accrued expenses and other liabilities " on the Consolidated Statements of Financial Condition.

The Company does not have any leases designated as finance leases.

On December 30, 2021, the Company sold its Olympia, Washington headquarters campus for total proceeds of $ 5.4 million resulting in a net gain of $ 2.7 million.

Contemporaneously with the closing of the sale, the Company entered into two leases pursuant to which the Company leased back the first and second floors of the main building for an initial annual rent of $ 227,000 , subject to annual escalations of 3 % over the lease terms.

The leases are being accounted for as operating leases and have initial lease terms of ten and five years for the first and second floor, respectively, and both leases additionally provide the Company with two five-year options to extend.

The new operating leases were incorporated into the required disclosures below.

The table below summarizes the information about our leases during the periods or at period end presented:

15 unchanged sentences

ROU liability $ 24,369

During the year ended December 31, 2022, the Company entered into two lease agreements for $ 1.9 million and $ 3.3 million commencing on January 1, 2023 and May 1, 2023.

These lease agreements are not included in the lease payment obligations in the table above.

(14) Employee Benefit Plans

19 unchanged sentences

Employer contributions 793 634 207

Employer contributions 110 — —

Interest credited 99 78 128

2 unchanged sentences

(d) Salary Continuation Plan

In conjunction with the Company's merger with Premier Commercial Bancorp in 2018, the Company assumed an unfunded deferred compensation plan for select former Premier Commercial executive officers, some of which are current

Company officers.

The following table presents a summary of the changes in the salary continuation plan during the periods indicated:

8 unchanged sentences

(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:

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

Year Ended December 31,

3 unchanged sentences

Dividends and undistributed earnings allocated to participating securities (1)

— ( 7 ) ( 57 )

Net income allocated to common shareholders $ 81,875 $ 98,035 $ 46,563

20 unchanged sentences

October 21, 2020 $ 0.20 November 4, 2020 November 18, 2020

October 23, 2019 $ 0.10 November 7, 2019 November 21, 2019 *

January 27, 2021 $ 0.20 February 10, 2021 February 24, 2021

6 unchanged sentences

October 19, 2022 $ 0.21 November 2, 2022 November 16, 2022

* Denotes a special dividend.

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.

23 unchanged sentences

(d) Issuance of Common Stock

Common stock was issued during the years ended December 31, 2020 and 2019 related to the exercise of stock options as further described in Note (17) Stock-Based Compensation.

Common stock was issued during the year ended December 31, 2020 related to the exercise of stock options as further described in Note (17) Stock-Based Compensation.

(16) Fair Value Measurements

4 unchanged sentences

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.

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.

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.

24 unchanged sentences

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 Consolidated Statements of Financial Condition with any valuation adjustment recorded within other noninterest expense on the Consolidated Statements of Income.

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 Consolidated Statements of Financial Condition with any valuation adjustment recorded within "Other expense" on the Consolidated Statements of Income.

The fair value of branches held for sale is determined based on a real estate appraisal or broker price opinion.

9 unchanged sentences

government and agency securities $ 63,859 $ 19,779 $ 44,080 $ —

December 31, 2021

Total Level 1 Level 2 Level 3

(In thousands)

Municipal securities 153,026 5,399 147,627 —

30 unchanged sentences

Commercial business:

Commercial and industrial $ 1,911 $ 1,049 $ — $ — $ 1,049

Owner-occupied CRE $ 613 $ 182 $ — $ — $ 182

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

Real estate construction and land development:

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 $ 613 $ 182 $ — $ — $ 182

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

(2) In December 2021, one branch was written down to its net realizable value concurrent with the signing of an agreement for sale at a future date.

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

Fair Value at December 31, 2021

4 unchanged sentences

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:

Commercial and multifamily

991 534 — — 534

Total 3,515 1,772 — — 1,772

Prepaid expenses and other assets:

3 unchanged sentences

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

(2) In October 2020, one branch was reclassified as held for sale in accordance with ASC 360-10.

As part of the transfer, the branch was written down to its net realizable value at that time.

(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:

11 unchanged sentences

Branch held for sale — $ ( 145 ) $ ( 630 )

Net loss from nonrecurring fair value adjustments $ ( 1,233 ) $ ( 638 ) $ ( 78 )

Net gain (loss) from nonrecurring fair value adjustments $ 16 $ ( 1,233 ) $ ( 638 )

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:

3 unchanged sentences

(Dollars in thousands)

Collateral-dependent loans $ 1,772 Market approach Adjustment for differences between the comparable sales 35.0 % - ( 11.0 %);

Branch held for sale $ 698 Market approach Sale agreement Not applicable

Collateral-dependent loans $ 182 Market approach Adjustment for differences between the comparable sales N/A (1)

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

December 31, 2021

3 unchanged sentences

Collateral-dependent loans $ 1,772 Market approach Adjustment for differences between the comparable sales 35.0 % - ( 11.0 %);

Branch held for sale $ 1,330 Market approach Adjustment for differences between the comparable sales 140.7 % - ( 40.3 %);

Branch held for sale $ 698 Market approach Sale agreement N/A

(b) Fair Value of Financial Instruments

14 unchanged sentences

Investment securities held to maturity 766,396 673,434 — 673,434 —

Loans held for sale 1,476 1,527 — 1,527 —

Loans receivable, net 4,007,872 3,841,821 — — 3,841,821

December 31, 2022

Value Fair Value Fair Value Measurements Using:

Level 1 Level 2 Level 3

Accrued interest receivable 18,547 18,547 349 6,892 11,306

15 unchanged sentences

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 —

8 unchanged sentences

Junior subordinated debentures 21,180 18,750 — — 18,750

December 31, 2020

Value Fair Value Fair Value Measurements Using:

Level 1 Level 2 Level 3

(In thousands)

Accrued interest payable 73 73 33 19 21

4 unchanged sentences

(a) Stock Option Awards

Stock options generally vested ratably over three years and expired five years after they become exercisable or vested ratably over four years and expired ten years from date of grant.

All outstanding stock options were exercised during the year ended December 31, 2020.

The intrinsic value from options exercised during the years ended December 31, 2020 and 2019 was $ 61,000 and $ 60,000 , respectively.

The cash proceeds from options exercised during the years ended December 31, 2020 and 2019 were $ 122,000 and $ 58,000 , respectively.

The following table summarizes the stock option activity during the periods indicated:

The intrinsic value from options exercised during the year ended December 31, 2020 was $ 61,000 .

The cash proceeds from options exercised during the year ended December 31, 2020 was $ 122,000 .

The following table summarizes the stock option activity during the year ended December 31, 2020:

Shares Weighted-Average Exercise Price

2 unchanged sentences

Exercised ( 8,248 ) 14.77

Outstanding at December 31, 2019

Exercised ( 8,248 ) 14.77

Forfeited or expired ( 409 ) 14.77

3 unchanged sentences

The remaining restricted stock awards vested during the year ended December 31, 2020.

For the years ended December 31, 2020 and 2019, the Company recognized compensation expense related to restricted stock awards of $ 76,000 and $ 440,000 , respectively, and a related tax benefit of $ 17,000 and $ 93,000 , respectively.

The vesting date fair value of restricted stock awards that vested during the years ended December 31, 2020 and 2019 was $ 442,000 and $ 1.3 million, respectively.

The following table summarizes the restricted stock award activity for the periods indicated

For the year ended December 31, 2020, the Company recognized compensation expense related to restricted stock awards of $ 76,000 , and a related tax benefit of $ 17,000 .

The vesting date fair value of restricted stock awards that vested during the year ended December 31, 2020 was $ 442,000 .

The following table summarizes the restricted stock award activity for the year ended December 31, 2020:

Shares Weighted-Average Grant Date Fair Value

2 unchanged sentences

Vested ( 20,707 ) 17.59

Forfeited ( 2,178 ) 18.32

Nonvested at December 31, 2020

Vested ( 20,707 ) 17.59

Nonvested at December 31, 2020

2 unchanged sentences

The conditions of the grants allow for an actual payout ranging between no payout and 150 % of target.

The payout level is calculated based on the percentile level of the market condition, which is the ratio of the Company's total shareholder return and the ratio of the Company's return on average assets over the performance period in relation to the performance of these metrics of a predetermined peer group.

The fair value of each performance-based

restricted stock unit, inclusive of the market condition, was determined using a Monte Carlo simulation and will be recognized over the vesting period.

The payout level is calculated based on the percentile level of the market condition, which includes the ratio of the Company's total shareholder return and the ratio of the Company's return on average assets and return on tangible common equity over the performance period in relation to the performance of these metrics of a predetermined peer group.

The fair value of each performance-based restricted stock unit, inclusive of the market condition, was determined using a Monte Carlo simulation and will be recognized over the vesting period.

The Monte-Carlo simulation model uses the same input assumptions as the Black-Scholes model;

21 unchanged sentences

As of December 31, 2022, the total unrecognized compensation expense related to non-vested restricted stock units was $ 6.1 million and the related weighted-average period over which the compensation expense is expected to be recognized is approximately 2.2 years.

The vesting date fair value of the restricted stock units that vested during the year ended December 31, 2021, 2020 and 2019 was $ 3.6 million, $ 2.4 million and $ 2.0 million, respectively.

The vesting date fair value of the restricted stock units that vested during the years ended December 31, 2022, 2021 and 2020 was $ 3.3 million, $ 3.6 million and $ 2.4 million, respectively.

The following table summarizes the unit activity for the periods indicated:

18 unchanged sentences

(18) Cash Restriction

The Bank had restricted cash included in interest earning deposits of $ 9.8 million and $ 25.9 million as of December 31, 2021 and December 31, 2020, respectively, relating to collateral required on interest rate swaps from third-parties as discussed in Note (8) Derivative Financial Instruments.

The Bank had no cash restrictions at December 31, 2022 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 (8) Derivative Financial Instruments.

The Bank does not have a collateral requirement with customers.

11 unchanged sentences

During the year ended December 31, 2020, the Company recorded a tax benefit from net operating loss carryback related to prior acquisitions of $ 967,000 .

The effective tax rate was 18.6 % for the year ended December 31, 2021 compared to an effective tax rate of 12.4 % and 16.6 % for the years ended December 31, 2020 and 2019, respectively.

The increase in the effective tax rate during the year ended December 31, 2021 was due primarily to the change in income before income taxes earned between the periods, including an increase in annual pre-tax income for the year ended December 31, 2021 which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits.

The effective tax rate was 17.7 % for the December 31, 2022 compared to an effective tax rate of 18.6 % and 12.4 % for the years ended December 31, 2021 and 2020, respectively.

The decrease in the effective tax rate during the year ended December 31, 2022 was due primarily to the change in income before income taxes earned between the periods, including a decrease in annual pre-tax income for the year ended December 31, 2022 which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits.

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

5 unchanged sentences

Tax-exempt instruments ( 1,733 ) ( 1,929 ) ( 1,785 )

Year Ended December 31,

2022 2021 2020

(In thousands)

Federal tax credits and other benefits (1)

13 unchanged sentences

Stock compensation 726 689

Market discount on purchased loans 944 1,062

Market discount on acquired loans 714 944

Foregone interest on nonaccrual loans 705 967

1 unchanged sentence

ROU lease liability 5,337 6,257

Net unrealized losses on investment securities 28,061 —

Other deferred tax assets 120 1,156

Total deferred tax assets 49,163 23,435

December 31, 2021 December 31, 2020

(In thousands)

Deferred tax liabilities:

3 unchanged sentences

Goodwill and other intangible assets ( 1,211 ) ( 1,659 )

New market tax credit — ( 2,048 )

Junior subordinated debentures ( 937 ) ( 991 )

8 unchanged sentences

As of December 31, 2022, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management expects to realize the benefits of these deductible differences.

At December 31, 2021 and December 31, 2020, the Company had a net operating loss carryforward of $ 888,000 and $ 986,000 , respectively, and do not expire.

At December 31, 2022 and December 31, 2021, the Company had a net operating loss carryforward of $ 789,000 and $ 888,000 , respectively, that do not expire.

The Company is limited to the amount of the net operating loss carryforward that it can deduct each year under Section 382 of the Internal Revenue Code.

2 unchanged sentences

The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next 12 months.

The amount of interest and penalties accrued as of December 31, 2021 and December 31, 2020 and recognized during the years ended December 31, 2021, 2020 and 2019 were immaterial.

The amount of interest and

penalties accrued as of December 31, 2022 and December 31, 2021 and recognized during the years ended December 31, 2022, 2021 and 2020 were immaterial.

The Company has qualified under provisions of the Internal Revenue Code to compute income taxes after deductions of additions to the bad debt reserves when it was registered as a Savings Bank.

2 unchanged sentences

Management does not expect this temporary difference to reverse in the foreseeable future.

The Company and its Bank subsidiary file a United States consolidated federal income tax return and an Oregon State income tax return, and the tax years subject to examination by the Internal Revenue Service are the years ended December 31, 2021, 2020, 2019 and 2018.

The Company and its Bank subsidiary file a United States consolidated federal income tax return and Oregon State and local income tax returns, and the tax years subject to examination by the Internal Revenue Service are the years ended December 31, 2022, 2021, 2020 and 2019.

(20) Commitments and Contingencies

11 unchanged sentences

Owner-occupied CRE 3,083 2,252

December 31, 2021 December 31, 2020

(In thousands)

Non-owner occupied CRE 13,396 7,487

16 unchanged sentences

Balance, end of period $ 1,744 $ 2,607 $ 4,681

(b) Variable Interests - Low Income Housing Tax Credit Investments

(b) Variable Interests - LIHTC Investments

The carrying values of investments in unconsolidated LIHTCs were $ 191.3 million and $ 116.3 million as of December 31, 2022 and December 31, 2021, respectively.

1 unchanged sentence

Total unfunded contingent commitments related to the Company’s LIHTC investments totaled $ 109.2 million and $ 41.5 million at December 31, 2022 and December 31, 2021, respectively.

The Company expects to fund LIHTC commitments of $ 10.6 million during the year ended December 31, 2022 and $ 23.6 million during the year ended December 31, 2023, with the remaining commitments of $ 7.3 million funded by December 31, 2035.

The Company expects to fund LIHTC commitments of $ 30.4 million during the year ending December 31, 2023 and $ 25.4 million during the year ending December 31, 2024, with the remaining commitments of $ 50.3 million funded by December 31, 2040.

There were no impairment losses on the Company’s LIHTC investments during the years ended December 31, 2022, 2021 or 2020.

The Company dissolved the NMTC investment during the year ended December 31, 2021 after gross tax credits related to the Company's certified development entities totaling $ 9.8 million were utilized during the seven year period ending December 31, 2020.

The equity method balance of the NMTC investment was $ 25.2 million at December 31, 2020.

9 unchanged sentences

There are no conditions or events since that notification that management believes have changed the Bank's categories.

Requirements Well-

Requirements Actual

(Dollars in thousands)

As of December 31, 2021:

The Company consolidated

Common equity Tier 1 capital to risk-weighted assets $ 200,525 4.5 % N/A N/A $ 600,390 13.5 %

Tier 1 leverage capital to average assets 285,791 4.0 N/A N/A 621,570 8.7

Tier 1 capital to risk-weighted assets 267,367 6.0 N/A N/A 621,570 13.9

Total capital to risk-weighted assets 356,489 8.0 N/A N/A 660,209 14.8

Heritage Bank

Common equity Tier 1 capital to risk-weighted assets 200,408 4.5 $ 289,478 6.5 % 615,820 13.8

Tier 1 leverage capital to average assets 285,657 4.0 357,071 5.0 615,820 8.6

Tier 1 capital to risk-weighted assets 267,210 6.0 356,280 8.0 615,820 13.8

Total capital to risk-weighted assets 356,280 8.0 445,350 10.0 654,459 14.7

As of December 31, 2020:

The Company consolidated

Common equity Tier 1 capital to risk-weighted assets $ 203,314 4.5 % N/A N/A $ 555,644 12.3 %

Tier 1 leverage capital to average assets 256,216 4.0 N/A N/A 576,531 9.0

Tier 1 capital to risk-weighted assets 271,086 6.0 N/A N/A 576,531 12.8

Total capital to risk-weighted assets 361,448 8.0 N/A N/A 633,061 14.0

Heritage Bank

Common equity Tier 1 capital to risk-weighted assets 203,112 4.5 $ 293,383 6.5 % 563,630 12.5

Tier 1 leverage capital to average assets 256,051 4.0 320,064 5.0 563,630 8.8

Tier 1 capital to risk-weighted assets 270,815 6.0 361,087 8.0 563,630 12.5

Total capital to risk-weighted assets 361,087 8.0 451,359 10.0 620,124 13.7

As of December 31, 2021 and December 31, 2020, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allowed us the option to delay for two years 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 starting January 1, 2022 until December 31, 2024.

Under applicable capital requirements both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5%, a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%.

Both the Company and the Bank are also required to maintain a capital conservation buffer consisting of common equity Tier 1 capital above 2.5% of minimum risk based capital ratios to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers.

At December 31, 2021, the capital conservation buffer was 6.8 % and 6.7 % for the Company and the Bank, respectively.

The following table presents the actual capital ratios of the Company and the Bank at the periods indicated:

Company Heritage Bank

December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021

Common equity Tier 1 capital ratio 12.8 % 13.5 % 12.9 % 13.8 %

Leverage ratio 9.7 8.7 9.4 8.6

Tier 1 capital ratio 13.2 13.9 12.9 13.8

Total capital ratio 14.0 14.8 13.7 14.7

Capital conservation buffer 6.0 6.8 5.7 6.7

As of both December 31, 2022 and December 31, 2021, 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.

(22) Heritage Financial Corporation (Parent Company Only)

60 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data