What changed in this filing

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Item 1. Business

2024-02-27 compared with 2023-02-24 · 174 added, 134 removed, 298 unchanged (51% of the section changed)

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We are primarily engaged in the business of planning, directing, and coordinating the business activities of our wholly owned subsidiary and single reportable segment, Heritage Bank.

Heritage 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 as of December 31, 2022.

On January 10, 2023, the Company opened its 51st branch in Boise, Idaho which is the first branch in Idaho.

The deposits of the Bank are insured by the FDIC.

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A strong credit culture is a high priority for us.

We have a well-developed credit approval structure that has enabled us to maintain a standard of asset quality that we believe has moderate risk while at the same time allowing us to achieve our lending objectives.

We have a well-developed credit approval structure that has enabled us to maintain a standard of asset quality that we believe has moderate and manageable risk while at the same time allowing us to achieve our lending objectives.

We will continue to focus on loan types and markets that we know well and where we have a historical record of success.

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Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" of this Form 10-K.

As of December 31, 2022, the regulatory capital ratios of the Bank were well in excess of the levels required for “well-capitalized” status, and our consolidated common equity tier 1 capital ratio, leverage ratio, Tier 1 capital ratio, and total capital ratio were 12.8%, 9.7%, 13.2% and 14.0%, respectively.

As of December 31, 2023, the regulatory capital ratios of the Bank were in excess of the levels required for “well-capitalized” status, and our consolidated common equity tier 1 capital ratio, leverage ratio, Tier 1 capital ratio, and total capital ratio were 12.9%, 10.0%, 13.3% and 14.1%, respectively.

Focused deposit growth.

Our strategic focus is to continuously grow deposits with emphasis on total relationship banking with our business and retail customers.

We continue to seek to increase our market share in the communities we serve by providing exceptional customer service, focusing on relationship development with local businesses and strategic branch

We continue to seek to increase our market share in the communities we serve by providing exceptional customer service, focusing on relationship development with local businesses and strategic branch expansion.

Our primary focus is to maintain a high level of non-maturity deposits to internally fund our loan growth with a low reliance on maturity (certificate) deposits.

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Our technology-based products, including online personal financial management, business cash management and business remote deposit products enable us to compete effectively with banks of all sizes.

Our retail and commercial management teams are well-seasoned and have strong ties to the communities we serve with a strong focus on relationship building and customer service.

Our retail and commercial management teams

are well-seasoned and have strong ties to the communities we serve with a strong focus on relationship building and customer service.

Emphasize business relationships with a focus on commercial lending .

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We have a strong corporate culture, which is supported by our commitment to internal development and promotion from within as well as the retention of management and officers in key roles.

There have been no material changes to our business strategy during the years ended December 31, 2022 and 2021, except for our participation in the SBA's PPP program which expired on May 31,2021.

There have been no material changes to our business strategy during the years ended December 31, 2023 and 2022.

The Bank was established in 1927 as a federally-chartered mutual savings bank.

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Our lending activities are conducted through the Bank.

While our focus is on commercial business lending, we also originate consumer loans, real estate construction and land development loans, and residential real estate loans both held for sale and investment.

While our focus is on commercial business lending, we also originate real estate construction and land development loans, residential real estate and consumer loans.

Our loans are originated under policies that are reviewed and approved annually by our Board of Directors.

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We conduct post-approval reviews on selected loans and routinely perform internal loan reviews of our loan portfolio to confirm credit quality, proper documentation and compliance with laws and regulations.

Loan repayments are considered one of the primary sources of funding for the Bank.

Loan repayments are considered one of the primary sources of funding for the Company.

Commercial Business Lending

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We also generally obtain personal guarantees from the owners of the collateral after a thorough review of personal financial statements.

In addition, we review a majority of the individual loans within our commercial real estate loan portfolio annually for various performance related criteria and stress-test loans for potential changes in interest rates, occupancy and collateral values.

See also, Item 1A.

Risk Factors—Risks Related to Our Lending Activities.

Supervision and Regulation

We are subject to extensive regulation, and supervision under federal law and the law of Washington State, which are both primarily intended to protect depositors and the FDIC, and not shareholders.

We are subject to extensive regulation, and supervision under federal law and the laws of Washington State, which are both primarily intended to protect depositors and the FDIC, and not shareholders.

Additionally, the Consumer Financial Protection Bureau is responsible for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements.

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Prior Federal Reserve approval is required for any bank holding company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after such acquisition, the acquiring bank holding company would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.

In addition to the approval of the Federal Reserve, prior

approval may for such acquisitions also be necessary from other agencies including the DFI and agencies that regulate the target.

In addition to the approval of the Federal Reserve, prior approval may for such acquisitions also be necessary from other agencies including the FDIC, DFI and agencies that regulate the target.

In July 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy.

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Total capital is the sum of Tier 1 and Tier 2 capital.

In addition to the minimum common equity Tier 1, Tier 1, leverage ratio and total capital ratios, the Company and the Bank must maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying

discretionary bonuses.

The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), enacted in May 2018, required the federal banking agencies, including the FDIC, to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” or “CBLR” of between 8 to 10%.

Institutions with capital meeting or exceeding the ratio and otherwise complying with the specified requirements (including off-balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements.

The CBLR was established at 9% Tier 1 capital to total average assets, effective January 1, 2020.

A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report.

An institution that temporarily ceases to meet any qualifying criteria is provided with a two-quarter grace period to again achieve compliance.

Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements.

The Bank has not elected to use the CBLR framework as of December 31, 2023.

To be considered "well capitalized," a bank holding company must have, on a consolidated basis, a Tier 1 risk-based capital ratio of 6.0% or greater and a total risk-based capital ratio of 10.0% or greater and must not be subject to an individual order, directive or agreement under which the Federal Reserve requires it to maintain a specific capital level.

To be considered “well capitalized,” a depository institution must have a common equity Tier 1 capital ratio of at least 6.5%, a leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.

To be considered “well capitalized,” a depository institution must have a common equity Tier 1 capital ratio of at least 6.5%, a leverage

ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.

The Company’s and the Bank's required and actual capital levels as of December 31, 2023 are listed in Note (20) Regulatory Capital Requirements of the Notes to Consolidated Financial Statements included in Item 8.

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or total commercial real estate loans (as defined in the guidance) greater than 300% of the Bank’s total capital and an increase in the bank’s commercial real estate portfolio of 50% or more during the prior 36 months.

The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be considered in supervisory guidance on evaluation of capital adequacy.

As of December 31, 2023, the Bank’s aggregate recorded loan balances for construction, land development and land loans were 53% of regulatory capital.

In addition, at December 31, 2023, the Bank’s loans on commercial real estate, as defined by the FDIC, were 271% of regulatory capital.

Deposit Insurance and Other FDIC Programs

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In October 2022, the FDIC finalized a rule that will increase the initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023 (January 1, 2023 through March 31, 2023).

The FDIC, as required under the Federal Deposit Insurance Act, established a plan in September 2020 to restore the Deposit Insurance

Fund reserve ratio to meet or exceed the statutory minimum of 1.35 percent within eight years.

as required under the Federal Deposit Insurance Act, established a plan in September 2020 to restore the Deposit Insurance Fund reserve ratio to meet or exceed the statutory minimum of 1.35 percent within eight years.

This plan did not include an increase in the deposit insurance assessment rate.

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The revised assessment rate schedule will remain in effect unless and until the reserve ratio meets or exceeds 2 percent, absent further action by the FDIC.

In November 2023, the FDIC issued a Final Rule on Special Assessment Pursuant to Systemic Risk Determination to implement a special assessment to recover the loss to the Deposit Insurance Fund (DIF) associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank.

The assessment base for the special assessment is equal to an insured depository institution’s (IDI’s) estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion.

The Company did not have more than $5 billion in uninsured deposits as of December 31, 2022 and therefore is not subject to this special assessment.

Bank Secrecy Act / Anti-Money Laundering Laws

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Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours.

Further, on July 26, 2023, the SEC adopted final rules that require public companies to promptly disclose material cybersecurity incidents in a Current Report on Form 8-K (“Form 8-K”) and detailed information regarding their cybersecurity risk management and governance on an annual basis in an Annual Report on Form 10-K (Form 10-K”).

Companies will be required to report on Form 8-K any cybersecurity incident they determine to be material within four business days of making that determination.

Cybersecur ity for annual disclosures.

Other Regulatory Developments

The following summarizes some of the significant federal legislation affecting banking in recent years.

Economic Growth Act.

In May 2018 the Economic Growth Act was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act.

While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.

The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures, risk weights for certain high-risk commercial real estate loans and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a Community Bank Leverage Ratio, which became effective January 1, 2020.

The new ratio is an optional framework that is designed to reduce regulatory burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework starting in the first quarter of 2020.

Qualifying community banking organizations that elect to use the Community Bank Leverage Ratio framework and that maintain a leverage ratio of greater than nine percent are considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rule.

Additionally, such insured depository institutions are considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act.

The leverage ratio required for purposes of the new framework is calculated as Tier 1 capital divided by average total consolidated assets, consistent with how banking organizations calculate their leverage ratio under the current rules.

As of December 31, 2022, the Company and the Bank had not elected to be subject to the Community Bank Leverage Ratio.

The FASB issued a new accounting standard the Bank adopted on January 1, 2020.

This standard, referred to as CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets.

CECL covers a broader range of assets than the prior method of recognizing credit losses and generally results in earlier recognition of credit losses.

Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL.

Concurrent with enactment of the CARES Act, federal banking agencies issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL.

The interim final rule provided banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory

capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.

The changes in the final rule apply only to those banking organizations that elected the CECL transition relief provided under the rule.

The Company and the Bank elected this option.

See discussion of CECL Adoption in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements of the Notes to Consolidated Financial Statements included in Item 8.

Financial Statements And Supplementary Data

Community Reinvestment Act .

On October 24, 2023, the federal banking agencies, including the FDIC issued a final rule designed to strengthen and modernize regulations implementing the Community Reinvestment Act (CRA).

The changes are designed to encourage banks to expand access to credit, investment and banking services in low and moderate income communities, adapt to changes in the banking industry including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type.

The Bank cannot predict the impact the changes the new CRA rule will have on its operations at this time.

Website Access to Company Reports

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Any significant changes or waivers of the Code of Ethics will be publicly disclosed to shareholders.

We compete for loans and deposits with other commercial banks, credit unions, mortgage bankers, and other providers of financial services, including finance companies, online-only banks, mutual funds, insurance companies, and more recently with financial technology companies that rely on technology to provide financial services.

with financial technology companies that rely on technology to provide financial services.

Many of our competitors have substantially greater resources than we do.

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We compete for loans principally through the range and quality of the services we provide, interest rates and loan fees, and robust delivery channels for our products and services.

We actively solicit deposit-related clients and compete for deposits by offering depositors a variety of savings accounts, checking accounts, cash management and other services.

We actively solicit deposit-related clients and compete for deposits by offering depositors high touch service on a variety of savings accounts, checking accounts, cash management and other services.

Human Capital

As of December 31, 2022, the Bank employed 793 full-time and 36 part-time employees across Washington, Oregon, and Idaho.

No employees are represented by a collective bargaining agreement.

During 2022, we hired 238 regular full-time and part-time employees.

Voluntary workforce turnover (rolling 12-month attrition) was 19.4%, compared to 20.8% in 2021.

Our average tenure was 7.1 years.

Our workforce was 71.3% female and 28.7% male, and women held 69.8% of the bank’s management roles (including department supervisors and managers, as well as executive leadership).

The average tenure of management was 9.9 years.

The ethnicity of our workforce was 75.6% White, 8.6% Asian, 6.3% Hispanic, 4.5% Two or More Races, 2.3% Black, and 2.8% other.

Our Culture and Our People

The Company's success depends on the success of its people.

As a result, the Company is focused on enhancing employee empowerment through human capital and talent management.

Our strong culture was built upon adherence to a well-defined company mission and values, which aligns employees across all levels of the Company to a common goal and enables them to reach their full potential.

The Company views its employees as our most important assets, which makes training and professional development a worthy investment.

We offer an array of learning opportunities through virtual and in-house courses via “Heritage Bank University”, as well as sponsoring courses through external providers, such as Ken Blanchard Company, Washington Bankers Association, Oregon Bankers Association and the Pacific Coast Banking School.

We sponsor situational leadership training for leaders that focuses on communication and employee engagement.

The Company strives to maintain an environment of open communication with access to senior management, which includes quarterly all-employee virtual meetings, as well as New Employee Orientation hosted by the Chief Executive Officer.

To further enhance our “listening culture” and foster open communications, we utilize a pulse survey platform to provide employees with a chance to share feedback directly with leadership throughout the year, including internal communications and COVID-19 Pandemic-related surveys.

Survey results are shared with executive leadership and drive action planning.

We also host Celebrate Great, an active internal peer recognition platform, where managers and employees post appreciation and recognition for co-workers and teams.

The Company celebrates “Employee Appreciation Days” in the spring and fall which includes prizes, games, employee recognition and in-person events hosted by executive management.

During 2021, the Puget Sound Business Journal recognized Heritage Bank as one of the Top 100 Best Workplaces in the Puget Sound.

In 2022, the Company dedicated an afternoon to volunteering at organizations and nonprofits throughout our communities and closed all customer facing locations early.

Over 500 employees participated and volunteered over 1,500 hours of service.

In addition to vacation and sick leave, all employees receive at least eight hours of paid time each year specifically to use for volunteer activities of their choice in the communities where they live and work.

The Company maintained its commitment to supporting its community and customers during the COVID-19 Pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers.

As of December 31,

2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments.

The Company continues to monitor the situation and will continue to implement measures commensurate with guidance issued by the Centers for Disease Control and state/local health authorities.

Diversity, Equity, and Inclusion

We recognize and appreciate the importance of creating an environment in which all employees feel valued, included, and empowered to do their best work.

We recognize that each employee's unique experiences, perspectives, and viewpoints add value to our ability to be the leading commercial community bank in the Pacific Northwest.

The Company has a DEI plan, a Diversity Council and a DEI Officer who has been certified by the National Diversity Council.

The Company's Diversity Council is made up of a diverse group of employees that acts on behalf of the Company to promote the diversity and inclusion process and works closely with senior leaders to ensure DEI initiatives align with the Company's overall strategic goals and initiatives.

Both our Chief Executive Officer and Senior Vice President Chief Human Resources Officer serve as Executive Sponsors to the Company's Diversity Council.

The Company's Diversity Council is a critical driver in fostering organizational change, establishing a dedicated focus on diversity, equity, and inclusion priorities.

The primary role of the Company's Diversity Council is to connect DEI activities to a broader, business-driven and results-oriented strategy.

Executive management and the Company's Board of Directors have received instructor-led, custom DEI training.

In addition, all employees receive ongoing diversity training.

The Company's success depends on the success of its people, and we are dedicated to fostering employee empowerment through robust human capital and talent management.

Our strong culture, built upon a clear mission and values, unites employees at all levels of the Company towards a common goal, enabling them to reach their full potential.

Diversity, Equity, Inclusion (“DEI”)

We recognize and appreciate the importance of creating an environment where all employees feel valued, included, and empowered to do their best work.

Recognizing the unique perspectives each employee brings, we value their contributions to making us the leading commercial community bank in the Pacific Northwest.

To advance DEI, we have a comprehensive plan, a DEI Officer certified by the National Diversity Council (“NDC”), and a dedicated Diversity Council.

The Diversity Council, comprising diverse employees collaborating closely with senior leaders, ensures DEI initiatives align with our strategic goals.

Both our Chief Executive Officer and Executive Vice President Chief Human Resources Officer serve as executive sponsors to the Diversity Council.

The Diversity Council plays a crucial role in driving organizational change and prioritizing diversity, equity, and inclusion.

Our executive management team and Board of Directors have undergone instructor-led, customized DEI training.

All employees receive ongoing diversity training.

In 2023, the NDC recognized our community outreach and corporate social responsibility efforts, rating us among the best companies for diversity.

The objectives of the Company's DEI plan include:

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Develop structures and strategies to equip leaders with the ability to manage diversity, be accountable, measure results, refine approaches on the basis of such data and foster a culture of inclusion.

The following chart depicts the percentage of self-identified females and minorities in our workforce at December 31, 2022, by job classification as defined by the Equal Employment Opportunity Commission (“EEOC”):

Job Classification Female % Minority % (1)

Distribution by EEOC Job Classification

Administrative Support Workers 83.9 % 33.0 % 47.2 %

Executive/Senior Level Officials and Managers 34.6 3.8 3.1

First/Mid-Level Officials and Managers 74.7 22.0 22.4

Professionals 58.3 14.2 15.3

Sales Workers 42.7 13.5 11.6

Service Workers — — 0.4

(1) Includes employees self-identified as Hispanic or Latino, Black or African American, Asian, Native Hawaiian or Other Pacific Islander, American Indian or Alaska Native, or Two or More Races.

Compensation and Benefits

We provide competitive compensation and benefit programs to aid us in attracting and retaining top talent in the very competitive Puget Sound and Portland, Oregon job markets where many of our offices are located.

These programs include annual bonuses, equity, 401(k) Plan with an employer matching contribution, health insurance, transit passes, paid parking, and paid time off.

In 2023, we strengthened the integration of DEI goals into our hiring practices.

Our recruiting team achieved certification as “Diversity and Inclusion Recruiters” after completing the Advanced Internet Recruitment Strategies (“AIRS”) program.

We also introduced "Interview and Selection" training during 2023 to address and mitigate unconscious bias in hiring decisions.

This initiative resulted in an enhanced diversity representation across the organization, with 37% of new hires in 2023 coming from Underrepresented Minority Groups (“URG”), compared to 31% in 2022.

Additionally, the Company enlisted an external consultant in 2023 to provide inclusive leadership training to its managers.

This training, offering insights into diversity, inclusion, and identity, has been incorporated into the mandatory curriculum for new managers.

All employees receive quarterly "Inclusion Insights" training, and "Lunch & Learn" sessions are open to all, encouraging ongoing discussions on these crucial topics.

As of December 31, 2023, the Company employed 764 full-time and 35 part-time employees across Washington, Oregon, and Idaho.

The Company also had six employees who were working remotely in other states.

No employees are represented by a collective bargaining agreement.

During 2023, we hired 145 regular full-time and part-time employees.

Voluntary workforce turnover (rolling 12-month attrition) was 16.6%, compared to 19.4% in 2022.

Our average overall tenure was 7.1 years.

The average tenure of management was 9.9 years.

The following tables illustrate workforce demographics by job group (Note:

“Director” refers to director-level management positions within the organization, not the Board of Directors) as of December 31, 2023:

Organizational Level

Individual Contributor

70.13 % 29.87 %

Total Workforce

69.94 % 30.06 %

Organizational Level

Underrepresented Groups (%)

Individual Contributor 28.69 % 28.7 % 71.31 %

Manager 23.26 23.3 76.74

Director 7.14 7.1 92.86

Executive — — 100.00

Total Workforce 26.46 % 26.5 73.54 %

Communication and Listening

The Company strives to maintain an environment of open communication, facilitating access to senior management through initiatives like quarterly virtual “All Banker Calls,” monthly updates for Company leaders, and orientation sessions led by the Chief Executive Officer and the President/COO for new hires.

To further enhance our “listening culture,” we utilize a survey platform to allow employees to share feedback directly with leadership, including an annual employee engagement survey and periodic pulse surveys.

Survey results, shared with employees, executive leadership and the Board, guide actions at both the corporate and departmental levels.

In recognition of our commitment to employee engagement, the Company earned a spot among the top 100 Best Places to Work in Washington and Oregon by the Puget Sound and Portland Business Journals based on the 2023 employee engagement survey.

Our commitment to open communication extends to providing employees with avenues for confidential and anonymous reporting.

We offer a whistleblower hotline/website, enabling employees to report financial and workplace concerns to key leadership, including the Board Chair, Audit Committee Chair, Chief Executive Officer, Chief Operations Officer, Chief Risk Officer and Chief Human Resources Officer.

Additionally, our Company intranet hosts an "Idea Bank," allowing employees to submit new ideas or recommendations directly to executive management.

Talent Development and Succession

Developing employees for future growth and professional development is a vital corporate activity crucial to our long-term success.

The Company views its employees as our most important assets, which makes training and professional development a worthy investment.

We offer an array of learning opportunities through virtual and in-house courses via “Heritage Bank University.” Additionally, we sponsor courses from external providers such as Blanchard, Risk Management Association, Archbright, Jennifer Brown Consulting, Washington Bankers Association, Oregon Bankers Association, and the Pacific Coast Banking School.

We offer situational leadership training for leaders that focuses on communication and employee engagement and endorse coaching using the tools from this program.

All employees are required to complete an extensive series of quarterly digital training courses focused on bank regulatory compliance, ethics, workplace safety, security, fraud awareness and prevention and other interpersonal or leadership topics.

An interactive leadership roadmap is available to assist future leaders in their career development.

Heritage Bank University has been recognized as a “Champion of Learning” by The Association for Talent Development for its commitment to employee learning.

In 2023, the Company launched an online succession planning tool to further identify next-generation leaders and establish development plans for these individuals.

Over time, we expect this process to increase generational representation across all levels, including leadership positions.

As of December 31, 2023, the Company’s generational representation consisted of 20% Baby Boomers, 39% Gen X-ers, 33% Millennials, and 8% Gen Z-ers.

Management and the Board review leadership succession annually.

Recognition and appreciation

We host “Celebrate Great,” an active internal peer recognition platform enabling managers and employees to express appreciation and recognize their co-workers and teams.

Throughout 2023, more than 6,000 e-cards were posted on Celebrate Great, with 44 individuals or teams receiving “Bravo” awards and seven employees receiving “Standing Ovation” awards for their exceptional work.

The Company celebrates employees achieving milestone anniversaries or upon retirement with a personalized yearbook and special gift.

Compensation, Benefits and Pay Equity

Offering competitive compensation and benefit programs is critical to attracting and retaining top talent in our highly competitive market areas.

Employees are generally eligible for a base pay review at least once a year or upon promotion or transfer.

Our hiring practices prioritize pay transparency, with job postings disclosing the pay range minimum and maximum, as well as the benefits package, and we refrain from requesting salary history from job applicants.

We collaborate with a third-party consultant annually to evaluate hiring, promotion, and other pay practices to ensure continued equity and fairness.

Incentive plan goals and results are aligned with strategic Company objectives and are approved by the Board Compensation Committee.

Further alignment is achieved by having similar corporate performance metrics cascade through most executive, management, and employee annual incentive plans.

Employees working a minimum of 20 hours per week are eligible for most benefit plans, including a 401(k) Plan with an employer matching contribution, medical, dental and vision insurance, life and long-term disability insurance, public transit passes, paid parking, and paid time off.

Further, full-time employees enjoy up to 11 paid holidays each year and receive an

annual floating holiday to be used at their discretion.

Employees also accrue up to 12 days of paid sick time per year for personal use or to care for a family member.

Both full-time and part-time employees accrue vacation time ranging from two and five weeks, dependent on factors such as position and tenure.

Employee Wellness and Wellbeing

Our corporate culture places a strong emphasis on the wellbeing of our employees, recognizing its pivotal role in cultivating a vibrant and productive workforce.

To support holistic wellbeing, we offer a range of resources.

Through our Employee Assistance Program, employees receive counseling and referral services to address challenges both at work and at home.

This includes mental health counseling, financial planning, basic legal advice, and dependent/elder care referrals, all at no cost to them or their household members.

Additional wellness benefits are available through the Company's medical insurance plans.

Moreover, enrolled members can take advantage of mental health apps, weight loss and fitness programs, smoking cessation programs, and various online resources, all provided at no extra cost.

To alleviate workplace stress and burnout, the Company hosts a "no meetings week" at the start of each quarter.

This dedicated time allows managers and employees to engage in purposeful planning, catch up on tasks, and reduce stress.

By incorporating these breaks, employees can participate in strategic planning, creative thinking, and collaborative efforts without the constraints of scheduled meetings, ultimately contributing to a more innovative and healthier work environment.

Community Involvement

As a community bank, we are committed to supporting the communities where we operate, and we actively encourage and support our employees to do the same.

In 2022, the Company implemented an annual volunteer event, during which the Bank closes for half a day, providing employees with a paid opportunity to volunteer in teams at various community organizations within our operating footprint.

Our 2023 volunteer day event involved over 600 employees volunteering approximately 1,770 hours to more than 50 organizations in Washington, Oregon, and Idaho.

To further facilitate community involvement, employees receive a minimum of eight additional hours of paid time off each year specifically to use for volunteer activities of their choice.

Heritage Bank also participated in a 2023 EcoChallenge, where 28 teams of employees engaged in friendly competition by undertaking environmentally sustainable actions and practices.

Challenges involved activities such as reducing waste, conserving energy, and adopting eco-friendly lifestyle habits.

The collective efforts of the EcoChallenge resulted in 9,673 actions, contributing to a heightened awareness of environmental responsibility, fostering a sense of community engagement, and reinforcing a shared commitment to sustainability.

Executive Officers

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Deuel 65 President and Chief Executive Officer of Heritage Financial Corporation and Chief Executive Officer of Heritage Bank 2010

Bryan McDonald 51 Executive Vice President of Heritage Financial Corporation and President and Chief Operating Officer of Heritage Bank 2014

McDonald 52 Executive Vice President of Heritage Financial Corporation and President and Chief Operating Officer of Heritage Bank 2014

Hinson 62 Executive Vice President and Chief Financial Officer of Heritage Financial Corporation and Heritage Bank 2005

Tony Chalfant 61 Executive Vice President and Chief Credit Officer of Heritage Financial Corporation and Heritage Bank 2018

Cindy Hirman (formerly Huntley) 59 Executive Vice President and Chief Banking Officer of Heritage Bank 1988

62 Executive Vice President and Chief Credit Officer of Heritage Financial Corporation and Heritage Bank 2018

52 Executive Vice President and Chief Lending Officer of Heritage Bank 2010

The business experience of each executive officer is set forth below.

Deuel is the President and Chief Executive Officer of Heritage Financial Corporation and Chief Executive Officer of Heritage Bank.

Deuel was promoted to President and Chief Executive Officer of Heritage Bank and President of Heritage Financial Corporation effective July 2018 and then promoted to President and Chief Executive Officer of Heritage Financial Corporation effective July 2019.

Deuel was promoted to President and Chief Operating Officer of Heritage Bank and Executive Vice President of Heritage Financial Corporation in September 2012.

Deuel is the President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank.

Deuel was promoted to President and Chief Executive Officer of the Bank and President of the Company effective July 2018 and then promoted to President and Chief Executive Officer of the Company effective July 2019.

Deuel was promoted to President and Chief Operating Officer of the Bank and Executive Vice President of the Company in September 2012.

In November 2010, Mr.

Deuel was named Executive Vice President and Chief Operating Officer of Heritage Bank and Executive Vice President of the Company.

Deuel joined Heritage Bank in February 2010 as Executive Vice President.

Prior to joining Heritage, Mr.

Deuel was named Executive Vice President and Chief Operating Officer of the Bank and Executive Vice President of the Company.

Deuel joined the Bank in February 2010 as Executive Vice President.

Prior to joining the Company and the Bank, Mr.

Deuel held the position of Executive Vice President Commercial Operations with JPMorgan Chase, formerly Washington Mutual.

4 unchanged sentences

He earned his Bachelor’s degree at Gettysburg College.

Bryan McDonald is the President and Chief Operating Officer of Heritage Bank.

McDonald was promoted to Executive Vice President and Chief Operating Officer of Heritage Bank effective July 1, 2018 and then promoted to President and Chief Operating Officer of Heritage Bank effective July 1, 2021.

McDonald joined Heritage Bank as an Executive Vice President and Chief Lending Officer as a result of the merger between Heritage Financial and Washington Banking Company effective May 1, 2014.

Previously, with Whidbey Island Bank he held the position of President and Chief Executive Officer of Whidbey Island Bank from January 2012 to May 2014.

McDonald is an Executive Vice President of the Company and the President and Chief Operating Officer of the Bank.

McDonald joined the Bank as an Executive Vice President and Chief Lending Officer in connection with the Company’s acquisition of Washington Banking Company and its wholly owned banking subsidiary, Whidbey Island Bank, effective May 1, 2014.

McDonald was promoted to Executive Vice President of the Company and Executive Vice President and Chief Operating Officer of the Bank effective July 1, 2018 and then promoted to President and Chief Operating Officer of the Bank effective July 1, 2021.

Previously, Mr.

McDonald held the position of President and Chief Executive Officer of Whidbey Island Bank from January 2012 to May 2014.

He joined Whidbey Island Bank in 2006 as Commercial Banking Manager and was promoted to Chief Operating Officer in 2010.

1 unchanged sentence

Before joining the team at Whidbey Island Bank, he was Snohomish and King County Business Group Manager where he was responsible for developing all aspects of Peoples Bank's commercial banking operation in King and Snohomish counties.

Hinson was promoted to Executive Vice President and Chief Financial Officer in September 2012.

From 2007 to 2012, he was Senior Vice President and Chief Financial Officer.

Hinson joined the Company in 2005 as Vice President and Controller.

McDonald is on the Washington Bankers Association Board and the American Bankers Association Government Relations Council.

McDonald holds a Bachelor's degree in Management and a Master's degree in Business Administration from Washington State University.

He is also a graduate of the Pacific Coast Banking School.

Hinson serves as Executive Vice President and Chief Financial Officer of the Company and the Bank, positions he has held since September 2012.

From 2007 to 2012, he was Senior Vice President and Chief Financial Officer of the Company and the Bank.

Hinson joined the Company and the Bank in 2005 as Vice President and Controller.

Prior to that, he served in the banking audit practice of local and national accounting firms of Knight, Vale and Gregory and RSM McGladrey from 1994 to 2005.

Hinson holds a Bachelor's degree in Accounting from Central Washington University and a Bachelor's degree in Psychology from Western Washington University.

Tony Chalfant became Executive Vice President and Chief Credit Officer of Heritage Financial Corporation and Heritage Bank in July 2020.

Chalfant became Executive Vice President and Chief Credit Officer of the Company and the Bank in July 2020.

Previously, Mr.

Chalfant held the title of Senior Vice President and Deputy Chief Credit Officer of Heritage Bank since July 2019.

Prior to that, he served as a Regional Credit Officer since January 2018 when Heritage Bank acquired Puget Sound Bank.

Chalfant held the title of Senior Vice President and Deputy Chief Credit Officer of the Bank since July 2019.

Prior to that, he served as a Regional Credit Officer since January 2018 when the Bank acquired Puget Sound Bank.

Chalfant served as the Chief Credit Officer for Puget Sound Bank for 13 years.

5 unchanged sentences

Chalfant obtained his Bachelor's degree in Finance and Economics from Washington State University and is a graduate of the Pacific Coast Banking School.

Cindy Hirman (formerly Cindy Huntley) was appointed Executive Vice President and Chief Banking Officer in September of 2019.

On September 26, 2022, Heritage entered into a transitional retirement agreement with Ms.

Hirman, effective January 1, 2023.

The agreement with Ms.

Hirman provides for an employment period through April 3, 2023, which is Ms.

Hirman’s planned retirement date.

Hirman will serve as Executive Vice President, a part-time position in which she will assist with the transition of her Chief Banking Officer duties.

Cindy has been with Heritage Bank since 1988 and previously served as a Director of Retail Banking since 2006 and a Senior Vice President since 2004.

During her tenure with Heritage, Ms.

Huntley has held numerous positions including marketing, retail and executive support positions.

She holds a Bachelor's degree in Management from the University of Northern Colorado and graduated from the Pacific Coast Banking School.

Ray is the Executive Vice President and Chief Lending Officer of the Bank.

Ray joined the Bank in 2010 and was most recently promoted to his current position of Executive Vice President and Chief Lending Officer in January 2023.

Previously, Mr.

Ray held the title of Senior Vice President and Market President of the Bank from January 2018 to December 2022.

Since joining the Bank, he has held leadership positions as the commercial banking team leader, regional manager and market president.

In addition, he has led the consumer, mortgage, SBA and small business lending divisions.

Ray has more than 25 years of experience in sales, credit, operations, commercial banking and residential real estate.

He holds a Bachelor's degree in Business Administration-Finance from Northwestern College and is also a graduate of Pacific Coast Banking School.

He currently serves on the Board of Directors for Chinook Enterprises.

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What changed 10-K

Item 1. Business