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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-02-24 · 242 added, 209 removed, 378 unchanged (54% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the year ended December 31, 2022.

The information contained in this section should be read together with the December 31, 2022 audited Consolidated Financial Statements and the accompanying Notes included in Item 8.

Financial Statements And Supplementary Data of this Form 10-K.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “ Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2021 .

The following is a discussion and analysis of our financial condition and results of operations and should be read in conjunction with our financial statements and notes thereto included in Item 8 of this report.

In addition to historical information, this discussion contains forward‑looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations.

Factors that could cause such differences are discussed in the sections entitled “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors.” The Company assumes no obligation to update any of these forward‑looking statements.

Management’s discussion focuses on 2023 results compared to 2022.

For a discussion of 2022 results compared to 2021, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 24, 2023.

Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank.

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

We also make real estate construction and land development loans and consumer loans.

We additionally originate for sale or for investment purposes residential real estate loans on single family properties located primarily in our markets.

We also originate real estate construction and land development loans, residential real estate loans and consumer loans, primarily in our markets.

Our core profitability depends primarily on our net interest income.

Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, comprised primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits.

Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, including mostly recently significant changes as a result of inflation, and by governmental policies and actions of regulatory agencies.

Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, including recently significant changes as a result of inflation, and by governmental policies and actions of regulatory agencies.

Net interest income is additionally affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.

1 unchanged sentence

The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.

Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on our methodology.

Management believes that the ACL on loans reflects the appropriate amount to provide for current expected credit losses in our loan portfolio based on the CECL methodology.

Net income is also affected by noninterest income and noninterest expense.

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Professional services consist primarily of third-party service providers such as auditors, consultants and lawyers.

Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from the COVID-19 Pandemic and inflation and the governmental actions taken to address these issues.

Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from inflation and the governmental actions taken to address these issues.

Net income is also impacted by growth of operations through organic growth or acquisitions.

Results of Operations

Net income was $81.9 million, or $2.31 per diluted common share, for the year ended December 31, 2022 compared t o $98.0 million, or $2.73 per diluted common share, for the year ended December 31, 2021 .

Net income decreased $16.2 million, or 16.5% compared to December 31, 2021 primarily due to decreases in reversal of provision for credit losses of $27.9 million and a $5.0 million decrease in noninterest income.

These decreases were partially offset by an increase of $13.6 million in net interest income to $219.4 million during the year ended December 31, 2022 compared to $205.8 million during the year ended December 31, 2021, primarily as a result of rising market interest rates and changes in the mix of total interest earning assets including an increase in higher yielding taxable securities.

The Company’s efficiency ratio was 60.63% for the year ended December 31, 2022 compared to 62.09% for the same period in 2021 .

Net income was $61.8 million, or $1.75 per diluted common share, for the year ended December 31, 2023 down from $81.9 million, or $2.31 per diluted common share, for the year ended December 31, 2022.

Net income decreased $20.1 million, or 24.6%, compared to December 31, 2022 due to losses on sales of investment securities of $12.2 million largely as a result of investment portfolio repositioning, an increase in noninterest expense of $15.7 million including an $8.0 million increase in compensation and employee benefits, and an increase in the provision for credit losses of $5.7 million resulting from a provision for credit losses of $4.3 million for the year ended December 31, 2023 compared to a reversal of the provision for credit losses of

$1.4 million during 2022.

These decreases were partially offset by an increase in net interest income of $5.8 million and a decrease in income tax expense of $6.4 million.

Net Interest Income and Margin Overview

One of the Company's key sources of earnings is net interest income.

There are several factors that affect net interest income, including, but not limited to, the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities;

the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity;

market interest rate fluctuations;

and asset quality.

Market rates impact the results of the Company's net interest income, including the significant increases in the federal funds target rate by the Federal Reserve in response to inflation during 2022 and 2023.

The following table provides the federal funds target rate history and changes since December 31, 2021 :

Change Date Rate (%) Rate Change (%)

December 31, 2021 0.00% - 0.25% N/A

March 17, 2022 0.25% - 0.50% 0.25 %

May 5, 2022 0.75% - 1.00% 0.50 %

June 16, 2022 1.50% - 1.75% 0.75 %

July 28, 2022 2.25% - 2.50% 0.75 %

September 22, 2022 3.00% - 3.25% 0.75 %

November 3, 2022 3.75% - 4.00% 0.75 %

December 15, 2022 4.25% - 4.50% 0.50 %

February 2, 2023 4.50% - 4.75% 0.25 %

March 23, 2023 4.75% - 5.00% 0.25 %

May 4, 2023 5.00% - 5.25% 0.25 %

July 27, 2023 5.25% - 5.50% 0.25 %

Average Balances, Yields and Rates Paid

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Junior subordinated debentures 21,615 2,074 9.60 21,322 1,156 5.42 21,025 742 3.53

Year Ended December 31,

2023 2022 2021

(Dollars in thousands)

Securities sold under agreement to repurchase 32,976 153 0.46 46,209 138 0.30 45,655 140 0.31

FHLB advances and other borrowings 137 6 4.38 — — — 1,466 8 0.55

Borrowings 369,665 17,733 4.80 137 6 4.38 — — —

Total interest bearing liabilities 4,230,986 59,310 1.40 % 4,063,976 8,072 0.20 % 3,899,955 7,042 0.18 %

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

Net Interest Income and Margin Overview

One of the Company's key sources of earnings is net interest income.

There are several factors that affect net interest income, including, but not limited to, the volume, pricing, mix and maturity of interest earning assets and interest bearing

the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity;

market interest rate fluctuations;

and asset quality.

Market rates impact the results of the Company's net interest income, including the significant increases in the federal funds target rate by the Federal Reserve in response to inflation during 2022.

The following table provides the federal funds target rate history and changes from each period since December 31, 2021 :

Change Date Rate (%) Rate Change (%)

December 31, 2021 0.00% - 0.25% N/A

March 17, 2022 0.25% - 0.50% 0.25 %

May 5, 2022 0.75% - 1.00% 0.50 %

June 16, 2022 1.50% - 1.75% 0.75 %

July 28, 2022 2.25% - 2.50% 0.75 %

September 22, 2022 3.00% - 3.25% 0.75 %

November 3, 2022 3.75% - 4.00% 0.75 %

December 15, 2022 4.25% - 4.50% 0.50 %

The following table provides the changes in net interest income for the periods indicated due to changes in average asset and liability balances (volume), changes in average rates (rate) and changes attributable to the combined effect of volume and interest rates allocated proportionately to the absolute value of changes due to volume and changes due to interest rates:

The following tables provide the changes in net interest income for the periods indicated due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:

2023 Compared to 2022

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Securities sold under agreement to repurchase (46) 61 15 10.9

FHLB advances and other borrowings 6 — 6 100.0

Borrowings 17,727 — 17,727 100.0

Total interest expense 18,366 32,872 51,238 634.8

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Taxable securities 19,174 3,961 23,135 132.3

2022 Compared to 2021

Increase (Decrease) Due to changes in

Volume Yield/Rate $ %

Nontaxable securities (611) 200 (411) (10.5)

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Savings accounts 28 (14) 14 3.8

2021 Compared to 2020

Increase (Decrease) Due to changes in

Volume Yield/Rate $ %

(Dollars in thousands)

Interest bearing demand and money market accounts 252 750 1,002 25.2

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Securities sold under agreement to repurchase 2 (4) (2) (1.4)

FHLB advances and other borrowings (4) (4) (8) (100.0)

Borrowings 6 — 6 100.0

Total interest expense 29 1,001 1,030 14.6

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Total interest income increased $57.0 million, or 25.1%, to $284.5 million for the year ended December 31, 2023 compared to $227.5 million for the year ended December 31, 2022.

The increase in total interest income was primarily due to an increase in average balances of taxable securities and secondarily due to increased yields on interest earning assets, offset partially by a $15.6 million decrease in interest earned on loans receivable, net resulting from a decrease in deferred SBA PPP loan fees recognized.

SBA PPP interest and fee income decreased $26.9 million, or 83.8%, to $5.2 million for the year ended December 31, 2022 compared to $32.1 million for the year ended December 31, 2021 due to a decline in the volume of forgiven SBA PPP loans.

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

Year Ended December 31,

Loan yield (GAAP) 4.52 % 4.54 %

Exclude impact from SBA PPP loans (0.09) % (0.20) %

Exclude impact from incremental accretion on acquired loans (0.04) % (0.07) %

Loan yield excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) 4.39 % 4.27 %

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

The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was three basis points during the year ended December 31, 2022 compared to seven basis points during the same period in 2021.

Total interest expense increased $1.0 million, or 14.6%, to $8.1 million for the year ended December 31, 2022 compared to $7.0 million for the year ended December 31, 2021 due primarily to an increase in average rates paid on deposit accounts as a result of upward market pressure and an increase in average rates paid on junior subordinated debentures as a result of rising market interest rates.

The increase was primarily due to a 106 basis point increase in the yield on interest earning assets to 4.53% for the year ended December 31, 2023, compared to 3.47% for the year ended December 31, 2022 following increases in market interest rates.

Total interest expense increased $51.2 million, or 634.8%, to $59.3 million for the year ended December 31, 2023 compared to $8.1 million for the year ended December 31, 2022 due primarily to increased costs of interest bearing deposits resulting from competitive rate pressures as well as customers transferring balances from non-maturity deposits to higher rate certificates of deposits and an increase in borrowings.

Total cost of interest bearing liabilities increased 120 basis points to 1.40% for the year ended December 31, 2023, compared to 0.20% for the year ended December 31, 2022.

The net interest margin increased 23 basis points to 3.58% for the year ended December 31, 2023 compared to 3.35% for the year ended December 31, 2022.

The increase in net interest margin was due primarily to increases in average yields on total interest earning assets as a result of increases in market interest rates and the change in the mix of total interest earning assets to higher yielding assets, including an increase in higher yielding taxable securities.

This was partially offset by an increase in the average cost of interest bearing liabilities as a result of upward market pressure related to deposit rates.

The increase in net interest margin was due primarily to increases in average yields on total interest earning assets as a result of increases in market interest rates.

This was partially offset by increases in the average cost of interest bearing liabilities as a result of upward market pressure related to deposit rates and an increase in borrowings.

Provision for Credit Losses Overview

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

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

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

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

Year Ended December 31, Change

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(Dollars in thousands)

Reversal of provision for credit losses on loans $ (563) $ (27,298) $ 26,735 (97.9) %

Provision for (reversal of) credit losses on loans $ 4,736 $ (563) $ 5,299 (941.2) %

(Reversal of) provision for credit losses on unfunded commitments (456) (863) 407 (47.2)

Reversal of provision for credit losses $ (1,426) $ (29,372) $ 27,946 (95.1) %

The reversal of provision for credit losse s recognized during the year ended December 31, 2022 was due primarily to a $3.4 million reduction in the ACL on loans individually evaluated for losses offset partially by an increase related to the growth in balances of collectively evaluated loans.

The reversal of provision for credit losses recognized during the year ended December 31, 2021 was due substantially to continued improvements in the economic forecast at December 31, 2021 as compared to the forecast at December 31, 2020.

Provision for (reversal of) credit losses $ 4,280 $ (1,426) $ 5,706 (400.1) %

The provision for credit losses on loans recognized during the year ended December 31, 2023 was due primarily to growth in balances of collectively evaluated loans.

The ACL on loans to Loans receivable increased to 1.11% as December 31, 2023, compared to 1.06% at December 31, 2022 due to changes in the loan mix as loan growth occurred in segments requiring a higher calculated reserve as a percentage of loans including real estate construction and land development loans.

The reversal of provision for credit losses on unfunded commitments recognized during the year ended December 31, 2023 was due primarily to an increase in utilization rates on lines of credit and a decrease in the unfunded exposure on construction loans.

Noninterest Income Overview

5 unchanged sentences

Card revenue 8,340 8,885 (545) (6.1)

Gain (loss) on sale of investment securities, net (256) 29 (285) (982.8)

Loss on sale of investment securities, net

(12,231) (256) (11,975) 4,677.7

Gain on sale of loans, net 343 633 (290) (45.8)

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Total noninterest income $ 18,663 $ 29,591 $ (10,928) (36.9) %

Nonintere st income decreased due primarily to lower gain on sale of other assets, net and lower gain on sale of loans, net.

The decrease in the gain on sale of other assets, net, was due to a higher gain on sale of branches held for sale recognized during the year ended December 31, 2021 as a result of branch consolidations.

The decrease in gain on sale of loans, net was due to a decline in origination and sales volumes as a result of the higher interest rate environment.

These decreases were partially offset by an increase in bank owned life insurance income due to the recognition of a death benefit of $1.0 million during year ended December 31, 2022 as well as increases in service charges and other fees and card revenue reflecting increased customer transactions as businesses reopened in our market areas.

Nonintere st income decreased $10.9 million, or 36.9%, during the year ended December 31, 2023 compared to the same period in 2022.

This decline was primarily driven by a pre-tax loss of $12.2 million incurred on the sale of investment securities available for sale during the year ended December 31, 2023.

The loss on the sale of investment securities was a consequence of strategically repositioning the investment portfolio, involving the sale of $219.7 million in investment securities, with the aim of enhancing future earnings.

Card revenue declined due to lower deposit transaction volumes.

Bank owned life insurance income decreased due to the recognition of a death benefit of $1.0 million during the year ended December 31, 2022 which was not repeated during 2023, and gain on sale of other assets, net declined due to gain on sale of branches held for sale recognized during the year ended December 31, 2022 as a result of branch consolidations.

These decreases were partially offset by an increase in other income primarily due to a one-time sale of Visa Inc.

Class B common stock of $1.6 million and a $610,000 gain on sale of the Ellensburg branch during the year ended December 31, 2023.

Service charges also increased due primarily to an increase in service charge income on commercial deposit accounts.

Noninterest Expense Overview

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Total noninterest expense $ 166,623 $ 150,966 $ 15,657 10.4 %

Noninterest expense increased due primarily to an increase in compensation and employee benefits as a result of an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in the second quarter of 2022 and an increase in salaries and wages due to upward market pressure.

This increase was offset partially by a decrease in professional services, which were elevated during the year ended December 31, 2021 due to costs associated with our participation in the SBA PPP, as well as a decrease in marketing expenses due to less activity.

Noninterest expense increased $15.7 million, or 10.4%, during the year ended December 31, 2023 compared to the same period in 2022 due primarily to an $8.0 million increase in compensation and employee benefits resulting from a 4.2% increase in the average number of full-time equivalent employees, which included the addition of commercial and relationship banking teams in Boise, Idaho in the first quarter of 2023 and Eugene, Oregon in the second quarter of 2022.

as well as an increase in salaries and wages due to upward market pressure.

Occupancy and equipment expense increased due to our expansion into Eugene, Oregon and Boise, Idaho.

Data processing costs increased due to increased cost of service contracts, expansion of digital services offerings and a $320,000 accrual for the early termination of a technology-related contract.

Professional services increased due primarily to a $1.5 million expense related to renewal of the core vendor contract during the fourth quarter of 2023.

Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023.

Other expense increased due to an increase in customer deposit loss expense and employee related expenses, which included additional expenses related to calling efforts for the newly added teams, as well as a general increase in operating costs.

Income Tax Expense Overview

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

December 31, Change

Year Ended December 31,

2023 Compared to 2022

2023 2022 2021 $ %

3 unchanged sentences

Effective income tax rate 15.3 % 17.7 % 18.6 % (2.4) % (13.6) %

Income tax expense and the effective income tax rate both decreased due primarily to lower pre-tax income, which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and LIHTC.

Financial Condition Overview

5 unchanged sentences

Investment securities held to maturity, at amortized cost, net 739,442 766,396 (26,954) (3.5)

Loans held for sale — 1,476 (1,476) (100.0)

Loans receivable, net 4,287,628 4,007,872 279,756 7.0

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Total deposits 5,599,872 5,924,840 $ (324,968) (5.5)

Borrowings 500,000 — 500,000 100.0

Junior subordinated debentures 21,765 21,473 292 1.4

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Retained earnings 375,989 345,346 30,643 8.9

Accumulated other comprehensive (loss) income, net (99,850) 9,396 (109,246) (1,162.7)

Accumulated other comprehensive loss, net (72,476) (99,850) 27,374 (27.4)

Total stockholders' equity 853,261 797,893 55,368 6.9

Total liabilities and stockholders' equity $ 7,174,957 $ 6,980,100 $ 194,857 2.8 %

Total assets decreased due primarily to a decrease in cash and cash equivalents reflecting deployment of excess liquidity into purchases of higher yielding investment securities and loans.

Total liabilities and stockholders' equity decreased due primarily to a decrease in deposits as well as a decrease in AOCI following an increase in market interest rates during the year ended December 31, 2022, which negatively impacted the fair value of our investment securities available for sale portfolio at December 31, 2022.

Total assets increased due primarily to an increase in loans receivable and cash and cash equivalents offset partially by a decrease in investment securities.

Total liabilities and stockholders' equity increased due primarily to an increase in borrowings offset partially by a decrease in deposits.

The changes are discussed in more detail in the sections below.

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Our investment policy is established by the Company's Board of Directors and monitored by the Risk Committee of the Board of Directors.

It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements the Bank's lending activities.

The policy permits investment in various types of liquid assets permissible under applicable regulations.

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Residential CMO and MBS (1)

512,049 27.3 424,386 20.2 87,663 20.7

Commercial CMO and MBS (1)

504,258 27.0 664,421 31.8 (160,163) (24.1)

Corporate obligations 7,613 0.4 3,834 0.2 3,779 98.6

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Residential CMO and MBS (1)

267,204 14.3 290,318 13.8 (23,114) (8.0)

Commercial CMO and MBS (1)

321,163 17.1 325,142 15.5 (3,979) (1.2)

Total 739,442 39.5 766,396 36.5 (26,954) (3.5)

Total investment securities $ 1,873,795 100.0 % $ 2,097,839 100.0 % $ (224,044) (10.7) %

Total investment securities increased due primarily to purchases to deploy excess liquidity into higher yielding, longer duration assets.

Purchases of investment securities available for sale were offset partially by a $139.1 million decrease in the fair value of these investment securities as a result of an increase in market interest rates resulting in an unrealized loss at December 31, 2022 of $128.6 million compared to an unrealized gain at December 31, 2021 of $10.5 million.

government agency and government-sponsored enterprise CMO and MBS obligations.

Total investment securities decreased due to sales of investment securities available for sale and maturities and repayments, offset partially by purchases of investment securities available for sale.

Total losses on sale of $12.2 million were recognized during the year ended December 31, 2023

During the year ended December 31, 2023, the Company incurred a pre-tax loss of $12.2 million on the sale of investment securities available for sale due to the strategic repositioning of its investment portfolio.

The Company sold $219.7 million in investment securities with an estimated weighted average book yield of 2.42% and purchased $178.4 million of investment securities with an estimated weighted average book yield of 5.77%.

The following table provides the weighted average yield at December 31, 2023 calculated based upon the fair values of our investment securities available for sale and held to maturity, and excluding any income tax benefits of tax-exempt bonds:

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Residential CMO and MBS (1)

9 2.97 1,200 2.96 61,017 3.44 449,823 3.46 512,049 3.45

Commercial CMO and MBS (1)

31,829 2.19 324,439 3.07 133,046 2.73 14,944 5.49 504,258 3.00

Corporate obligations — — — — 7,613 7.60 — — 7,613 7.60

10 unchanged sentences

Residential CMO and MBS (1)

— — — — 41,753 3.30 211,350 4.02 253,103 3.90

Commercial CMO and MBS (1)

— — 123,169 3.16 145,206 1.76 17,598 3.47 285,973 2.44

Total $ — — % $ 123,169 3.16 % $ 265,529 2.08 % $ 273,752 3.62 % $ 662,450 2.90 %

government agency and government-sponsored enterprise CMO and MBS obligations.

Loan Portfolio Overview

Changes by loan type

The Bank originates a wide variety of loans with a focus on commercial business loans.

In addition to originating loans, the Bank may also acquire loans through pool purchases, participation purchases and syndicated loan purchases.

The Company originates a wide variety of loans with a focus on commercial business loans.

In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases.

The following table provides information about our loan portfolio by type of loan at the dates indicated:

4 unchanged sentences

Commercial and industrial $ 718,291 16.6 % $ 693,568 17.1 % $ 24,723 3.6 %

SBA PPP 1,468 — 145,840 3.8 (144,372) (99.0)

Owner-occupied CRE 958,620 22.1 937,040 23.1 21,580 2.3

9 unchanged sentences

Total $ 4,335,627 100.0 % $ 4,050,858 100.0 % $ 284,769 7.0 %

Loans receivable increased due primarily to higher loan demand as well as increased utilization of commercial and industrial lines of credit and a decline in loan prepayments.

The increase in residential real estate loans included $139.0 million of purchased residential real estate loans.

This increase was offset partially by repayments of SBA PPP loans and a decrease in consumer loans due primarily to repayments of $54.4 million in indirect loans as the Bank ceased indirect auto loan originations in 2020.

Loans receivable increased due primarily to increased loan demand and a decline in loan prepayments as compared to the prior year, as well as an increase in advances on lines of credit.

This increase was offset partially by a decrease in consumer loans due primarily to repayments totaling $30.5 million in indirect consumer loans as the Company ceased indirect consumer loan originations in 2020.

Owner-occupied CRE and non-owner occupied CRE loans increased $132.5 million to $2.66 billion at December 31, 2023, compared to $2.52 billion at December 31, 2022 .

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

December 31, 2023 December 31, 2022 Change

Amortized Cost % of CRE Loans Amortized Cost % of CRE Loans $ %

(Dollars in thousands)

Owner occupied and non-owner occupied CRE loans by collateral type:

Office $ 555,822 20.9 % $ 579,762 22.9 % $ (23,940) (4.1) %

Industrial 418,651 15.8 366,947 14.6 51,704 14.1

Retail store / shopping center 285,926 10.8 291,799 11.6 (5,873) (2.0)

Multi-family 305,499 11.5 256,661 10.2 48,838 19.0

Mini-storage 171,778 6.5 148,580 5.9 23,198 15.6

December 31, 2023 December 31, 2022 Change

Amortized Cost % of CRE Loans Amortized Cost % of CRE Loans $ %

(Dollars in thousands)

Mixed use property 154,674 5.8 154,793 6.1 (119) (0.1)

Warehouse 149,176 5.6 147,443 5.8 1,733 1.2

Motel / hotel 142,172 5.4 129,352 5.1 12,820 9.9

Single purpose 123,344 4.6 112,924 4.5 10,420 9.2

Recreational / school 67,791 2.6 70,565 2.8 (2,774) (3.9)

Other 281,361 10.5 264,846 10.5 16,515 6.2

Total $ 2,656,194 100.0 % $ 2,523,672 100.0 % $ 132,522 5.3 %

Office loans represented the l argest segment of owner-occupied and non-owner occupied CRE loans totaling $555.8 million, or 20.9% of the total owner-occupied CRE and non-owner occupied CRE, at December 31, 2023.

Of this total, $277.4 million, or 49.9%, were owner-occupied CRE loans.

Owner-occupied CRE loans have a lower risk profile as there is less tenant rollover risk and generally have guarantees from the company occupying the space as well as the owners of the company.

The average individual loan balance of owner-occupied CRE and non-owner occupied CRE was $1.2 million at December 31, 2023.

Commercial and multifamily construction loans increased $121.8 million or 56.9% due to new loan originations and advances on outstanding loans.

New commitments for commercial and multifamily construction loans were $246.6 million during the year ended December 31, 2023.

Composition of loans receivable by contractual maturity and interest type

1 unchanged sentence

In one year or less After one year through five years After five years through 15 years After 15 years Total

(In thousands)

(Dollars in thousands)

Commercial business:

Commercial and industrial $ 282,665 $ 244,539 $ 186,764 $ 4,323 $ 718,291

SBA PPP — 1,468 — — 1,468

Owner-occupied CRE 161,406 361,050 396,254 39,910 958,620

In one year or less After one year through five years After five years through 15 years After 15 years Total

(In thousands)

Non-owner occupied CRE 367,147 737,167 575,713 17,547 1,697,574

11 unchanged sentences

Have floating or adjustable interest rates (1)

(In thousands)

(Dollars in thousands)

Commercial business:

Commercial and industrial $ 344,692 $ 90,934 $ 435,626

SBA PPP 1,468 — 1,468

Owner-occupied CRE 497,698 299,516 797,214

3 unchanged sentences

324,088 44,537 368,625

Have predetermined interest rates (1)

Have floating or adjustable interest rates (1)

(Dollars in thousands)

Real estate construction and land development:

4 unchanged sentences

Total $ 2,228,833 $ 966,291 $ 3,195,124

(1) Includes $2.5 million of real estate construction and land development loans with predetermined interest rates and $284.9 million of commercial business loans with floating or adjustable interest rates in which the Bank entered into non-hedge interest rate swap contracts with the borrower and a third-party.

Under these derivative contract arrangements, the Bank effectively earns a variable rate of interest based on the one-month LIBOR plus a margin, except for interest rate swap contracts on construction loans that earn fixed rates until the end of the construction period and the variable rate swap becomes effective.

As of December 31, 2022, there were $389.0 million of loans in our portfolio tied to LIBOR.

To mitigate the uncertainty surrounding the LIBOR transition, the Bank has been utilizing specific contract language in new loan agreements beginning in 2021 that provides for changes in the index used to calculate the loan's interest rate.

Additionally, effective January 25, 2021, the Bank agreed to adhere to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc recommended by the Alternative Reference Rates Committee.

Nonaccrual loans, accruing loans past due 90 days or more performing TDR loans and nonperforming assets

The following table provides information about our nonaccrual loans, accruing loans past due 90 days or more, performing TDR loans and nonperforming assets for the dates indicated:

2022 December 31, 2021 $ %

(1) Includes $281.8 million of commercial business loans with floating or adjustable interest rates in which the Company entered into non-hedge interest rate swap contracts with the borrower and a third-party.

Under these derivative contract arrangements, the Company effectively earns a variable rate of interest based on the one-month SOFR plus a margin, except for interest rate swap contracts on construction loans that earn fixed rates until the end of the construction period and the variable rate swap becomes effective.

Loans classified as nonaccrual and performing modified loans and nonperforming assets

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

December 31, 2023 December 31, 2022 $ %

(Dollars in thousands)

1 unchanged sentence

Commercial business $ 4,468 $ 5,869 $ (1,401) (23.9) %

2022 December 31, 2021 $ %

Residential real estate

— 47 (47) (100.0)

Real estate construction and land development — 37 (37) (100.0)

Consumer — 29 (29) (100.0)

Total nonaccrual loans 4,468 5,906 (1,438) (24.3)

Other real estate owned — — — n/a

Total nonperforming assets $ 5,906 $ 23,754 $ (17,848) (75.1) %

Accruing loans past due 90 days or more $ 1,293 $ 1,615 (322) (19.9) %

Total nonperforming loans

5,761 7,521 $ (1,760) (23.4) %

Other real estate owned — — — —

Total nonperforming assets $ 5,761 $ 7,521 $ (1,760) (23.4) %

Credit quality ratios:

Nonaccrual loans to loans receivable 0.10 % 0.15 %

Nonaccrual loans to total assets 0.08 0.32 (0.24) (75.0)

Performing TDR loans:

Nonperforming loans to loans receivable 0.13 0.19

Nonperforming assets to total assets 0.08 0.11

Modified loans:

Commercial business $ 19,969

1 unchanged sentence

Real estate construction and land development 9,643

Consumer 737 1,160 (423) (36.5)

Total performing TDR loans $ 50,441 $ 59,110 $ (8,669) (14.7) %

(1) At December 31, 2022 and December 31, 2021, $1.5 million, and $1.4 million of nonaccrual loans, respectively, and $2.0 million and $1.6 million of performing TDR loans, respectively, were guaranteed by government agencies.

Total performing modified loans $ 29,653

(1) At December 31, 2023 and December 31, 2022, $3.2 million, and $1.5 million, respectively, of nonaccrual loans were guaranteed by government agencies.

(2) The Company adopted ASU 2022-02 on a prospective basis January 1, 2023.

The following table provides the changes in nonaccrual loans during the periods indicated:

1 unchanged sentence

2023 2022 $ %

(In thousands)

(Dollars in thousands)

Balance, beginning of period $ 5,906 $ 23,754 $ (17,848) (75.1) %

Additions to nonaccrual loan classification 1,325 1,495 (170) (11.4)

Net principal payments and transfers to accruing status (14,612) (14,786) 174 (1.2)

Additions 3,057 1,325 1,732 130.7

Year Ended December 31, Change

2023 2022 $ %

(Dollars in thousands)

Net principal payments, sales and transfers to accruing status (1,508) (14,612) 13,104 (89.7)

Payoffs (2,987) (4,390) 1,403 (32.0)

1 unchanged sentence

Balance, end of period $ 4,468 $ 5,906 $ (1,438) (24.3) %

Nonaccrual loans decreased $17.8 million, or 75.1%, to $5.9 million due primarily to ongoing collection efforts, including the partial payoff of two large commercial and industrial loan relationships totaling $1.9 million and the transfer of six commercial business loan relationships totaling $10.2 million back to accrual status.

The Bank also sold a pool of 14 nonaccrual loans totaling $1.0 million during the year ended December 31, 2022.

Nonaccrual loans decreased $1.4 million, or 24.3%, due primarily to ongoing collection efforts including the payoff of a commercial business loan for $1.6 million which also included a recovery of $1.1 million.

Additions to nonaccrual loans consisted primarily of a $2.1 million commercial and industrial loan which is 100% government guaranteed.

Allowance for Credit Losses on Loans Overview

1 unchanged sentence

At or For the Years Ended December 31,

2022 2021 Change % Change

2023 2022 2021

(Dollars in thousands)

1 unchanged sentence

Commercial business (719) (316) (1,276)

At or For the Years Ended December 31,

2022 2021 Change % Change

(Dollars in thousands)

Residential real estate

(30) — (30) 100.0

Real estate construction and land development — — (1)

7 unchanged sentences

Net recoveries (charge-offs) 277 1,188 (526)

(Reversal of) provision for credit losses on loans (563) (27,298) 26,735 (97.9)

Provision for (reversal of) credit losses on loans 4,736 (563) (27,298)

ACL on loans at the end of period $ 47,999 $ 42,986 $ 42,361

Credit quality ratios:

ACL on loans to loans receivable 1.06 % 1.11 % (0.05) % (4.5) %

ACL on loans to loans receivable, excluding SBA PPP loans (1)

ACL on loans to:

Loans receivable 1.11 % 1.06 % 1.11 %

Nonaccrual loans 1074.28 727.84 178.33

Nonaccrual loans to loans receivable

0.10 0.15 0.62

ACL on loans to nonaccrual loans 727.84 178.33 549.51 308.1

ACL on loans to nonperforming assets 727.84 % 178.33 % 549.51 % 308.1 %

Balances at the end of the period:

Loans receivable

$ 4,335,627 $ 4,050,858 $ 3,815,662

Nonaccrual loans

4,468 5,906 23,754

Average balances outstanding during the period:

2 unchanged sentences

Real estate construction and land development 362,919 242,528 301,532

At or For the Years Ended December 31,

2023 2022 2021

(Dollars in thousands)

Consumer 179,454 212,306 271,834

1 unchanged sentence

Net (recoveries) charge-offs during the period to average balances outstanding during the period:

2023 2022 2021

Commercial business (0.02) % (0.02) % 0.01 %

3 unchanged sentences

Total (0.01) % (0.03) % 0.01 %

(1) The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.

See "Reconciliations of Non-GAAP Measures" section below.

(1) Average balances exclude the ACL on loans and loans held for sale, but include loans classified as nonaccrual.

The ACL on loans increased due primarily to net recoveries offset partially by a reversal of provision for credit losses.

The reversal of provision for credit losses of $563,000 was due primarily to a reduction of loans individually evaluated for losses and as a result, their related ACL of $3.4 million, offset by an increase in ACL on loans collectively evaluated due to loan growth.

There were also improvements in the economic forecast used in the CECL model at December 31, 2022 as compared to the economic forecast at December 31, 2021.

T he economic forecast at December 31, 2022 considered the potential impact of inflation and potential recession;

however, the December 31, 2021 considered a more significant impact as a result of COVID-19 and related variants.

The provision for credit losses on loans of $4.7 million recognized during the year ended December 31, 2023 was due primarily to growth in balances of collectively evaluated loans.

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

12 unchanged sentences

December 31, 2023 December 31, 2022 Change

Percent of Total Balance Percent of Total $ %

% of Total Balance (1)

% of Total $ %

(Dollars in thousands)

6 unchanged sentences

Total deposits $ 5,599,872 100.0 % $ 5,924,840 100.0 % $ (324,968) (5.5) %

(1) Deposit balances includes deposits held for sale at December 31, 2022.

Total deposits decreased due primarily to competitive pricing pressures and customers moving excess funds to alternative higher yielding investments, utilization of funds received through the SBA PPP and investment in property and equipment by commercial deposit customers.

A portion of these balances were transferred to assets under management by the Bank's Wealth Management department.

The Bank entered into a purchase and sale agreement with a third party to sell and transfer assets, deposits and other liabilities of its branch in Ellensburg during the three months ended September 30, 2022.

As a result of entering into this purchase and sale agreement, $17.4 million in deposits are classified as held for sale.

The lower of amortized cost or fair value adjustment upon transferring these deposits to held for sale was not material.

The sale is expected to be completed during the second quarter of 2023;

however, the completion of this sale depends on many factors including regulatory approval.

Total deposits include uninsured deposits of $2.37 billion and $2.68 billion at December 31, 2022 and 2021, respectively, calculated in accordance with FDIC guidelines.

The Bank does not hold any foreign deposits.

The following table provides the uninsured portion of certificates of deposit at December 31, 2022, by account, with a maturity of:

(In thousands)

(1) Deposit balances at December 31, 2022 include deposits held for sale of $17.4 million, respectively.

Total deposits decreased $325.0 million, or 5.5%, to $5.60 billion at December 31, 2023, compared to $5.92 billion at December 31, 2022 due primarily to competitive rate pressures and interest rate sensitive clients moving a portion of their non-operating deposits to higher yielding accounts.

Certificate of deposits increased due to increasing rates which attracted customers to this deposit type as well as the addition of $115.0 million in brokered deposits.

The Company entered into a purchase and sale agreement with a third party to sell and transfer certain assets, deposits and other liabilities of its branch in Ellensburg, WA in September 2022.

During the three months ended September 30, 2023,

$13.8 million in deposits were sold as part of the closing of the Ellensburg branch sale, which included $13.6 million of non-maturity deposits.

At December 31, 2022, $17.4 million in deposits were classified as held for sale.

Total deposits include uninsured deposits of approximately $2.10 billion and $2.37 billion at December 31, 2023 and 2022, respectively, calculated in accordance with FDIC guidelines.

Uninsured deposits included $256.5 million fully collateralized deposits as of December 31, 2023, The Bank does not hold any foreign deposits.

The following table provides the estimated uninsured portion of certificates of deposit that are in excess of the FDIC insurance limit, by remaining time until maturity at December 31, 2023, by account, with a maturity of:

(Dollars in thousands)

Three months or less $ 121,833

8 unchanged sentences

2023 2022 $ %

(In thousands)

(Dollars in thousands)

Balance, beginning of period $ 797,893 $ 854,432 $ (56,539) (6.6) %

1 unchanged sentence

Dividends declared (31,112) (29,767) (1,345) 4.5

Other comprehensive loss, net of tax (109,246) (15,622) (93,624) 599.3

Other comprehensive income (loss), net of tax

27,374 (109,246) 136,620 (125.1)

Common stock repurchased (6,974) (3,196) (3,778) 118.2

1 unchanged sentence

Balance, end of period $ 853,261 $ 797,893 $ 55,368 6.9 %

Stockholder's equity decreased due primarily to a decrease in AOCI as a result of an increase in other comprehensive loss, net of tax, following increases in market interest rates during the year ended December 31, 2022, which negatively impacted the fair value of our investment securities available for sale.

Stockholder's equity increased due primarily to net income and an increase in AOCI as a result of a decrease in other comprehensive income (loss), net of tax, which positively impacted the fair value of our investment securities available for sale.

AOCI has no effect on our regulatory capital ratios as the Company opted to exclude it from our common equity tier 1 capital.

Cash dividends and stock repurchases also contributed to the decrease in stockholders' equity, partly offset by net income earned during the year ended December 31, 2022.

Cash dividends and stock repurchases partially offset the increase in stockholders' equity during the year ended December 31, 2023.

The Company repurchased 330,424 and 100,090 shares of its common stock under the Company's stock repurchase plan during the years ended December 31, 2023 and December 31, 2022, respectively.

The Company also repurchased 32,792 and 26,944 shares which represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units during the years ended December 31, 2023 and December 31, 2022, respectively

Liquidity and Capital Resources

The following table provides the material cash requirements and capital resources from known contractual and other obligations and sources as of December 31, 2022:

One Year or Less Over One Year Other (1)

(Dollars in thousands)

Cash requirements:

Unfunded commitments - loans and letters of credits $ 1,280,349 $ — $ — $ 1,280,349

Maturing certificates of deposit 270,575 36,998 — 307,573

Unfunded commitment of LIHTCs 30,429 75,769 — 106,198

Operating leases 4,744 21,750 — 26,494

Junior subordinated debentures — 25,000 — 25,000

Non-maturity deposits — — 5,617,267 5,617,267

Securities sold under agreement to repurchase — — 46,597 46,597

Total cash requirements $ 1,586,097 $ 159,517 $ 5,663,864 $ 7,409,478

Capital resources:

Unrestricted cash and cash equivalents $ 103,590 $ — $ — $ 103,590

FHLB and FRB borrowing availability (2)

1,273,061 — — 1,273,061

Unencumbered investment securities available for sale 34,862 1,289,085 — 1,323,947

Loans receivable scheduled repayments, by contractual maturity date 335,420 3,715,438 — 4,050,858

Fed funds line borrowing availability 215,000 — — 215,000

Investment securities held to maturity, by contractual maturity date — 673,434 — 673,434

Total capital resources $ 1,961,933 $ 5,677,957 $ — $ 7,639,890

(1) Represents the undefined maturity of non-maturity deposits, including noninterest bearing demand deposits, interest bearing demand deposits, money market accounts and savings accounts, and securities sold under agreement to repurchase, which can generally both be withdrawn on demand.

(2) Includes FHLB borrowing availability of $1.23 billion at December 31, 2022 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.14 billion.

We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations.

Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources.

These objectives can be met from either our assets or liabilities.

Asset liquidity sources consist of the repayments and maturities of loans, sales of loans, maturities of investment securities and sales of investment securities available for sale.

These activities are generally included as investing activities in the Consolidated Statements of Cash Flows.

Net cash used by investing activities was $93.4 million during the year ended December 31, 2023.

Net increases in loan balances from both loan originations and purchases used $280.7 million of cash, while investment securities sales and maturities, net of purchases provided $246.2 million in cash.

Liquidity may also be affected by liabilities as a result of changes in deposits and borrowings.

These activities are included in financing activities in the Consolidated Statements of Cash Flows.

During the year ended December 31, 2023, financing activities provided $105.3 million of funds resulting primarily from an increase in short-term borrowings of $500.0 million offset partially by declines of $310.3 million in deposits and $46.6 million in securities sold under agreements to repurchase, and $30.8 million in dividend payments.

The decline in deposits consisted of a decrease in non-maturity deposits of $710.4 million, offset partially by an increase in certificates of deposit of $385.4 million due primarily to competitive rate pressures and interest rate sensitive clients moving a portion of their non-operating deposits to higher yielding accounts including certificates of deposit.

The decrease in total deposits during 2023 was industry wide.

No assurance can be given as to future trends;

historically, we have been able to retain and increase our deposits.

We had FRB advances of $500.0 million at December 31, 2023, which were obtained through the Bank Term Funding Program ("BTFP") and mature during 2024 and are discussed in Note 11 of the Consolidated Financial Statements.

At December 31, 2023, we had outstanding loan commitments of $1.27 billion, primarily relating to undisbursed loans in process and unused credit lines as discussed in Note 19 of the Consolidated Financial Statements.

Loan commitments represent potential growth in the loan portfolio and lending activities.

The current level of commitments is proportionally consistent with our historical experience and does not represent a departure from traditional operations.

For the year ended December 31, 2023, we have $21.5 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts.

In addition, for the year ended December 31, 2023, we have $28.2 million of commitments under operating lease agreements.

We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and we also actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations.

Our funding strategy has been to acquire non-maturity deposits from our retail accounts, acquire noninterest bearing demand deposits from our commercial customers and use our borrowing availability to fund growth in assets.

We may also acquire brokered deposits when the cost of funds is advantageous to other funding sources.

We may also acquire brokered deposits when the cost of funds is advantageous compared to other funding sources.

Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels).

1 unchanged sentence

While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position.

The Company pays dividends to our shareholders and the primary source of the Company's liquidity is cash obtained from dividends from the Bank.

We maintain credit facilities with the FHLB, which provide for advances that in the aggregate would equal the lesser of 45% of the Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock).

At December 31, 2023, under these credit facilities based on pledged loan collateral, the Bank had $1.42 billion of available credit capacity.

We had no funds borrowed from the FHLB at December 31, 2023 or 2022.

In addition, the Bank has access to the FRB Discount Window and BTFP.

Under these programs, based on pledged investment collateral, the Bank had available lines of credit of approximately $819.5 million as of December 31, 2023, subject to amount of pledged collateral.

We had $500.0 million in borrowings from the FRB's BTFP at December 31, 2023, as discussed previously, and none at December 31, 2022.

At December 31, 2023, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $145.0 million.

No balances were outstanding under these agreements as of December 31, 2023 or 2022.

Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility.

These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage.

Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.

The Company pays dividends to our shareholders and the primary source of the Company's liquidity is cash obtained from dividends from the Bank to the Company.

We expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice.

Our current quarterly common stock dividend rate is $0.22 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders.

Our current quarterly common stock dividend rate is $0.23 per share, as approved by our Board of Directors.

We believe this dividend rate per share enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders.

Assuming continued payment during 2024 at this rate of $0.23 per share, our average total dividend paid each quarter would be approximately $8.0 million based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares).

From time to time, our Board of Directors has authorized stock repurchase plans.

In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders.

Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

The Company's current stock repurchase program authorizes us to repurchase up to 1,799,054 shares of Company common stock, of which 307,790 shares remained available for future repurchases as of December 31, 2023.

The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the SEC, price, general business and market conditions, and alternative investment opportunities.

See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” contained in Item 5, Part II of this Form 10-K for additional information relating to stock repurchases.

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and intermediate-term cash requirements.

Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

financial condition or results of operations of the registrant.

The Company considers its critical accounting estimates to be as follows:

5 unchanged sentences

While management utilizes its best judgment and information available to recognize credit losses on loans, future additions to the allowance may be necessary based on declines in local and national economic conditions.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s ACL on loans.

Such agencies may require the Bank to make adjustments to the allowance based on their judgments about information available to them at the time of their examinations.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL on loans.

Such agencies may require the Company to make adjustments to the allowance based on their judgments about information available to them at the time of their examinations.

Unanticipated changes in any of these inputs could have a significant impact on our financial condition and results of operations.

3 unchanged sentences

ACL on Unfunded Commitments

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

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

Unanticipated changes in loss rates estimated in the ACL on loans, as utilized in the methodology for the ACL on unfunded commitments, or the expected utilization of unfunded commitments could have a significant impact on our financial condition and results of operations.

1 unchanged sentence

Financial Statements And Supplementary Data.

The Company performed its annual goodwill impairment test during the fourth quarter of 2022 and determined, based on a qualitative assessment utilizing the Company's market capitalization, that it is more likely than not that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired for the year ended December 31, 2022.

Due to a sustained decline in stock price during the three months ended June 30, 2023, the Company determined a triggering event occurred and consequently performed a quantitative assessment of goodwill as of May 31, 2023.

We estimated the fair value of the reporting unit by weighting results from the market approach and the income approach.

Significant assumptions inherent in the valuation methodologies for goodwill were employed and included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry.

Based on this quantitative test, we determined that the fair value of the reporting unit more likely than not exceeded the carrying value.

The Company performed its annual goodwill impairment test during the fourth quarter of 2023 and determined that no material adverse changes had occurred since the quantitative assessment was performed as of May 31, 2023, and that it is more likely than not that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired for the year ended December 31, 2023.

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 adverse impact on the Company’s operating results.

1 unchanged sentence

Financial Statements And Supplementary Data.

Reconciliations of Non-GAAP Measures

This Form 10-K contains certain financial measures not presented in accordance with GAAP in addition to financial measures presented in accordance with GAAP.

The Company has presented these non-GAAP financial measures in this Form 10-K because it believes they provide useful and comparative information to assess trends in the Company’s performance and asset quality and to facilitate comparison of its performance with the performance of its peers.

These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited.

They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Reconciliations of the GAAP and non-GAAP financial measures are presented below.

The Company believes presenting loan yield excluding the effect of discount accretion on acquired loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet.

Incremental accretion on acquired loans represents the amount of interest income recorded on acquired loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium.

Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of ASU 2016-13.

The purchased discount is accreted into income over the remaining life of the loan.

The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the acquired loans decreases.

Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that have substantially decreased within a short time frame.

Loan yield, excluding SBA PPP Loans and Incremental Accretion on Acquired Loans, annualized:

Interest and fees on loans (GAAP) $ 174,275 $ 189,832

Exclude interest and fees on SBA PPP loans (5,215) (32,109)

Exclude incremental accretion on acquired loans (1,436) (2,638)

Adjusted interest and fees on loans (non-GAAP) $ 167,624 $ 155,085

Average loans receivable, net (GAAP) $ 3,852,604 $ 4,181,464

Exclude average SBA PPP loans (37,533) (549,422)

Adjusted average loans receivable, net (non-GAAP) $ 3,815,071 $ 3,632,042

Loan yield, annualized (GAAP) 4.52 % 4.54 %

Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans, annualized (non-GAAP) 4.39 % 4.27 %

The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans was significant to the loan portfolio during the year ended December 31, 2021, and since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for SBA PPP loans.

2022 December 31,

(Dollars in thousands)

ACL on Loans to Loans Receivable, excluding SBA PPP Loans:

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

Loans receivable (GAAP) $ 4,050,858 $ 3,815,662

Exclude SBA PPP loans (1,468) (145,840)

Loans receivable, excluding SBA PPP (non-GAAP) $ 4,049,390 $ 3,669,822

ACL on loans to loans receivable (GAAP) 1.06 % 1.11 %

ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 1.06 % 1.15 %

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 7. Management’s Discussion and Analysis