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Item 8. Financial Statements and Supplementary Data

2024-02-27 compared with 2023-02-24 · 445 added, 592 removed, 1417 unchanged (42% of the section changed)

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Opinions on the Financial Statements and Internal Control over Financial Reporting

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

We have audited the accompanying Consolidated Statements of Financial Condition of Heritage Financial Corporation and Subsidiaries (the "Company") as of December 31, 2023 and 2022, the related Consolidated Statements of Income, Comprehensive Income (Loss), Stockholders’ Equity, and Cash Flows, for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements").

We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

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

(1) relates to accounts or disclosures

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

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

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

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

Allowance for Credit Losses on Loans – Qualitative Allowance

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

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

Changes in these judgments and estimates could have a material effect on the Company’s financial results.

As described in Note 1, “Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements” and Note 4, “Allowance for Credit Losses (“ACL”) on Loans” to the consolidated financial statements, the Company’s consolidated allowance for credit losses on loans was $48.0 million at December 31, 2023 and provision for credit losses on loans was $4.7 million for the year then ended.

The evaluation of ACL on loans is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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

The Company primarily uses a historic loss, open pool credit loss methodology to calculate the ACL on loans, which the Company has applied to identified loan segments with similar risk characteristics.

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The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan under the remaining life method to determine the baseline loss estimate for each loan.

The macroeconomic methodology incorporates a macroeconomic sensitive model which calculates multipliers for each loan segment to account for the current and forecasted conditions that adjust the baseline historical loss rates over a reasonable and supportable forecast period.

The Company uses macroeconomic scenarios from an independent third party.

These scenarios are based on past events, current conditions, the likelihood of future events occurring and include consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame.

Management also considers other qualitative risk factors to further adjust the estimated ACL on loans through a qualitative allowance.

These adjustments are subjectively selected by management and are based on established metrics to estimate risk.

These adjustments are subjectively selected by management and are based primarily on established macroeconomic factors to estimate risk.

The subjective nature of the qualitative risk factor adjustments requires significant judgment by management both in the selection of qualitative factors to apply, if any, and the magnitude of the adjustment once selected.

The audit procedures over the qualitative allowance utilized in management’s methodology involved especially challenging and subjective auditor judgment, including the use of more experienced audit personnel.

The audit procedures over the qualitative allowance utilized in management’s methodology involved especially challenging and subjective auditor judgment.

Therefore, we identified auditing the ACL qualitative allowance as a critical audit matter.

Our audit procedures to address this critical audit matter primarily included the following:

• Tested the operating effectiveness of controls over application of the macroeconomic sensitive model and related factors including:

• Tested the operating effectiveness of controls over application of the qualitative factors, including:

◦ The Company’s ACL committee’s review and approval of the qualitative risk factor adjustments used to derive the qualitative allowance for the ACL on loans, and the relevance and reliability of the data used therein.

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◦ Evaluated the reasonableness of management’s judgments used in the determination of the qualitative risk factor adjustments by loan segment and the resulting allocation to the qualitative allowance for the ACL on loans.

◦ Evaluated the reliability and relevancy of data used as a basis for the qualitative risk factor adjustments.

◦ Evaluated the reliability and relevance of data used as a basis for the qualitative risk factor adjustments.

◦ Tested the completeness and accuracy of the data utilized in management’s ACL methodology to derive the qualitative allowance for the ACL on loans.

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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except shares)

(Dollars in thousands, except share data)

December 31, 2023 December 31, 2022

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Total investment securities 1,873,795 2,097,839

Loans held for sale — 1,476

Loans receivable 4,335,627 4,050,858

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LIABILITIES AND STOCKHOLDERS' EQUITY

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

$ 5,599,872 $ 5,907,420

Deposits held for sale — 17,420

Total deposits 5,599,872 5,924,840

Borrowings 500,000 —

Junior subordinated debentures 21,765 21,473

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Retained earnings 375,989 345,346

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

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

Total stockholders’ equity 853,261 797,893

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CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts and shares outstanding)

(Dollars in thousands, except shares and per share data)

Year Ended December 31,

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Junior subordinated debentures 2,074 1,156 742

Other borrowings 144 140 168

Securities sold under agreement to repurchase 153 138 140

Borrowings 17,733 6 —

Total interest expense 59,310 8,072 7,042

Net interest income 225,155 219,385 205,789

(Reversal of) provision for credit losses ( 1,426 ) ( 29,372 ) 36,106

Net interest income after (reversal of) provision for credit losses 220,811 235,161 164,891

Provision for (reversal of) credit losses 4,280 ( 1,426 ) ( 29,372 )

Net interest income after provision for (reversal of) credit losses 220,875 220,811 235,161

NONINTEREST INCOME:

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Card revenue 8,340 8,885 8,325

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

(Loss) gain on sale of investment securities, net ( 12,231 ) ( 256 ) 29

Gain on sale of loans, net 343 633 3,644

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Federal deposit insurance premium 3,312 2,015 2,106

Other real estate owned, net — — ( 145 )

Amortization of intangible assets 2,434 2,750 3,111

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

Year Ended December 31,

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( 248 ) ( 469 ) ( 127 )

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

Reclassification adjustment for net loss (gain) from sale of investment securities available for sale included in income, net of tax benefit (expense) of $ 2,684 , $ 56 and $( 6 ), respectively

9,547 200 ( 23 )

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

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

Other comprehensive income (loss) 27,374 ( 109,246 ) ( 15,622 )

Comprehensive income (loss) $ 89,129 $ ( 27,371 ) $ 82,413

See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except shares and per share amounts)

(Dollars in thousands, except shares and per share data)

Year Ended December 31, 2023

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Net income 61,755 61,755

Other comprehensive loss, net of tax — — — ( 109,246 ) ( 109,246 )

Other comprehensive income, net of tax 27,374 27,374

Cash dividends declared on common stock ($ 0.88 per share)

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

Cumulative effect from change in accounting policy (1)

— — ( 5,615 ) — ( 5,615 )

Restricted stock units vested 125,377 —

Exercise of stock options 8,248 122 — — 122

Stock-based compensation expense 3,666 3,666

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Net income 98,035 98,035

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

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

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

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

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

See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Dollars in thousands)

Year Ended December 31,

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Depreciation, amortization and accretion 3,170 341 ( 21,739 )

(Reversal of) provision for credit losses ( 1,426 ) ( 29,372 ) 36,106

Provision for (reversal of) credit losses 4,280 ( 1,426 ) ( 29,372 )

Stock-based compensation expense 4,325 3,795 3,666

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

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

Gain on sale of mortgage loans held for sale, net ( 343 ) ( 633 ) ( 3,644 )

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

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

Loss (gain) on sale of investment securities, net 12,231 256 ( 29 )

Gain on sale of premises and equipment

— ( 403 ) ( 4,440 )

Gain on sale of branch including related deposits, net ( 610 ) — —

Other 24,872 9,605 19,717

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Purchase of premises and equipment ( 10,376 ) ( 4,016 ) ( 3,018 )

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

Proceeds from sales of assets held for sale — 2,102 10,556

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Capital contributions to tax credit partnerships ( 38,248 ) ( 18,190 ) ( 41,911 )

Net cash paid related to branch divestiture

Net cash (used) provided by investing activities ( 93,446 ) ( 1,207,779 ) 163,763

Year Ended December 31,

2022 2021 2020

Cash flows from financing activities:

Net (decrease) increase in deposits ( 310,303 ) ( 469,450 ) 783,347

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

Repayment of Federal Home Loan Bank advances ( 50,050 ) — ( 64,000 )

Proceeds from borrowings 1,889,700 50,050 —

Repayment of borrowings ( 1,389,700 ) ( 50,050 ) —

Common stock cash dividends paid ( 30,820 ) ( 29,491 ) ( 28,937 )

Net (decrease) increase in securities sold under agreement to repurchase ( 46,597 ) ( 4,242 ) 15,156

Proceeds from exercise of stock options — — 122

Repurchase of common stock ( 6,974 ) ( 3,196 ) ( 22,889 )

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

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

Net cash provided (used) by financing activities 105,306 ( 506,379 ) 746,677

Net increase (decrease) in cash and cash equivalents 121,383 ( 1,619,702 ) 979,970

Year Ended December 31,

2023 2022 2021

Cash and cash equivalents at beginning of period 103,590 1,723,292 743,322

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

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

Investment in LIHTC partnerships and related funding commitment 37,007 85,888 29,551

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

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Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net 5,974 910 3,556

Cumulative effect from change in accounting policy (1)

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

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

Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued, but not received

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

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

See accompanying Notes to Consolidated Financial Statements.

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The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank.

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

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

The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public.

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Investment Securities

Investment securities for which the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost.

Investment securities for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost.

Investment securities held primarily for the purpose of selling in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in income.

Investment securities not classified as held to maturity or trading are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income.

The Bank determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date.

The Company determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date.

Any subsequent reassessment of classification and transfer of investment securities available for sale to held to maturity are completed at the amortized cost basis plus or minus the amount of any remaining unrealized holding gain or loss reported in AOCI of the individual investment securities available for sale.

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

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

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

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

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If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL on investment securities available for sale is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any unrealized decline in fair value that has not been recorded through an ACL on investment securities available for sale is recognized in other comprehensive income.

Any unrealized decline in fair value that has not been recorded through an ACL on investment securities available for sale is recognized in other comprehensive income (loss).

Accrued interest receivable on investment securities available for sale is excluded from the estimate of expected credit losses.

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Loans Receivable

Loans receivable includes loans originated, indirect loans purchased by the Bank and loans acquired in business combinations that management has the intent and ability to hold for the foreseeable future or until maturity or payoff and is reported at amortized cost.

Loans receivable includes loans originated, indirect loans purchased by the Company and loans acquired in business combinations that management has the intent and ability to hold for the foreseeable future or until maturity or payoff and is reported at amortized cost.

Amortized cost is the outstanding principal balance, net of purchased premiums and discounts and net deferred loan origination fees and costs.

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

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

Nonaccrual and Charged-off Loans :

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

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

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

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

All interest accrued, but not collected, on loans deemed nonaccrual during the period is reversed against interest income in that period.

Interest payments received on nonaccrual loans are generally accounted for on the cost-recovery method whereby the interest payment is applied to the principal balances.

Interest payments received on nonaccrual loans are generally accounted for on the cost-recovery method whereby the

interest payment is applied to the principal balances.

Loans may be returned to accrual status when improvements in credit quality eliminate the doubt as to the full collectability of both interest and principal and a period of sustained performance has occurred.

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

Loans are generally charged off to their net realizable value if collection of the contractual principal or interest as scheduled in the loan agreement is doubtful.

Consumer loans are typically charged off no later than 90 days past due.

Troubled Debt Restructures :

A TDR is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider.

These concessions may include changes to the interest rate, extension of the maturity date, delay in the timing of the regular payment or any other actions intended to minimize potential losses.

The Bank does not generally forgive principal as part of a TDR, but in those situations where principal is forgiven, the entire amount of such principal forgiveness is immediately charged off to the extent not done so prior to the modification.

The Bank also considers insignificant delays in payments when determining if a loan should be classified as a TDR.

A loan that has been placed on nonaccrual status that is subsequently restructured will usually remain on nonaccrual status until the borrower is able to demonstrate repayment performance in compliance with the restructured terms for a sustained period, typically for six months.

A restructured loan may return to accrual status sooner based on other significant events or mitigating circumstances.

A loan that has not been placed on nonaccrual status may be restructured and such loan may remain on accrual status after such restructuring.

In these circumstances, the borrower has made payments before the restructuring and is expected to continue to perform after the restructuring.

Generally, this type of restructuring involves a reduction in the loan interest rate and/or a change to interest-only payments for a period of time.

A TDR is considered defaulted if, during the 12-month period after the restructure, the loan has not performed in accordance to the restructured terms.

Defaults generally include loans whose payments are 90 days or more past due and loans whose revised maturity date passed and no further modifications will be granted for that borrower.

Once a loan is classified as a TDR loan, it generally continues to be reported as such until it is paid off or charged off.

During 2020, the CARES Act and regulatory agencies provided guidance around the modification of loans as a result of the COVID-19 Pandemic and outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined by the CARES Act and related regulatory guidance prior to any relief are not TDRs.

This includes short-term (e.g.

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

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

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

The Bank elected to apply the temporary relief under the applicable guidance to certain eligible short-term modifications and did not classify the modifications as TDRs for accounting or disclosure purposes.

However, COVID Modifications whose payment deferral exceeded 180 days following the loans' initial modification were classified as TDRs based on the Bank's internal policy.

Deferred Loan Origination Fees and Costs

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

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

The Company records the changes in the ACL on loans through earnings as a "Provision for (reversal of) credit losses" on the Consolidated Statements of Income.

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

Under this methodology, loans are either collectively evaluated if they share similar risk characteristics, including performing TDR loans, or individually evaluated if they do not share similar risk characteristics, including nonaccrual loans.

Under this methodology, loans are either collectively evaluated if they share similar risk characteristics, including performing modified loans, or individually evaluated if they do not share similar risk characteristics, including nonaccrual loans.

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

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

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

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

The baseline loss allowance begins with the baseline loss rates calculated using the Bank's average quarterly historical loss information for an economic cycle.

The Bank evaluates the historical period on a quarterly basis with the assumption that economic cycles have historically lasted between 10 and 15 years.

The baseline loss allowance begins with the baseline loss rates calculated using the Company's average quarterly historical loss information for an economic cycle.

The Company evaluates the historical period on a quarterly basis with the assumption that economic cycles have historically lasted between 10 and 15 years.

The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan under the remaining life method to determine the baseline loss estimate for each loan.

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Contractual cash flows are based on the amortized cost and are adjusted for balances guaranteed by governmental entities, such as SBA or USDA, resulting in the unguaranteed amortized cost.

The contractual term excludes expected extensions, renewals and modifications unless either of the following applies:

1) management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or 2) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Prepayments are established for each segment based on rolling historical averages for the segment, which management believes is an accurate representation of future prepayment activity.

The contractual term excludes expected extensions, renewals and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Prepayments are established for each segment based on historical averages for the segment, which management believes is an accurate representation of future prepayment activity.

Management reviews the adequacy of the prepayment assumption on a quarterly basis.

The macroeconomic allowance includes consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame.

Economic forecast models for the current period are uploaded to the model, which targets 16 forecasted macroeconomic factors, such as unemployment rate, gross domestic product, housing price index, commercial real estate price index, disposable income growth, mortgage rates and certain rate indices.

The Company uses macroeconomic scenarios from an independent third party.

Economic forecast models for the current period are uploaded to the model, which targets certain forecasted macroeconomic factors, such as unemployment rate, gross domestic product, housing price index, commercial real estate price index, and certain rate and market indices.

Macroeconomic factor multipliers are determined through regression analysis and applied to loss rates for each segment of loans with similar risk characteristics.

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After the reasonable and supportable period, forecasted loss rates revert to historical baseline loss levels over the predetermined reversion period on a straight-lined basis.

The Bank’s ACL model also includes adjustments for qualitative factors, where appropriate.

Since historical information (such as historical net losses and economic cycles) may not always, by themselves, provide a sufficient basis for determining future expected credit losses, the Bank periodically considers the need for qualitative adjustments to the ACL.

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

At September 30, 2023, the Company upgraded its model used to calculate the ACL for collectively evaluated loans.

This upgraded version involves modifications to the macroeconomic variables for each loan segment.

Changes were based on regression testing, assessing the macroeconomic variable relationships to expected results and adjusting the lookback period from 1991 to 2000 for improved data relevance.

The most significant changes to macroeconomic variables were in the commercial and industrial and commercial real estate segments.

The commercial and industrial segment had previously used unemployment as a macroeconomic variable which was removed and replaced with a market index, rate index and real estate price index.

The commercial real estate segment had previously used gross domestic product as a macroeconomic variable

which was removed and replaced with a housing price index.

Additionally, a new segment for home equity lines of credit was introduced in this version.

The overall impact on the ACL for collectively evaluated loans, before applying qualitative adjustments, was not considered to be material.

The Company’s ACL model also includes adjustments for qualitative factors, where appropriate.

Since historical information (such as historical net losses and economic cycles) may not always, by themselves, provide a sufficient basis for determining future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL.

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

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

The Bank has established metrics to estimate the qualitative risk factors by segment based on the identified risk.

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

As of December 31, 2023, qualitative adjustments primarily related to certain segments of the loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have fully captured the associated impact to the ACL.

Qualitative adjustments also related to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments.

Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.

In general, management's estimate of the ACL on loans uses relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

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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.

The Company believes the ACL on loans is appropriate given all of the above considerations.

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 adjust the allowance based on their judgments about information available to them at the time of their examinations.

The Company believes the ACL on loans is appropriate given all the above considerations.

ACL on Unfunded Commitments

The Bank estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Bank is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Bank.

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

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

The Company estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company.

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

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

ACL on Accrued Interest Receivable

Accrued interest receivable on investment securities and loans receivable are excluded from their estimates of credit losses.

Additionally, no allowance has been established for accrued interest receivable on investment securities and loans receivable as interest accrued, but not received, is reversed timely in accordance with the policies stated above.

Provision for (reversal of) Credit Losses

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

Mortgage Banking Operations

The Bank originates and sells certain residential real estate loans on a servicing-released basis.

The Bank recognizes a gain or loss on sale to the extent that the sale proceeds of the loan sold differs from the net book value at the time of sale.

The Company originates and sells certain residential real estate loans on a servicing-released basis.

The Company recognizes a gain or loss on sale to the extent that the sale proceeds of the loan sold differs from the net book value at the time of sale.

Income from residential real estate loans brokered to other lenders is recognized into income on date of loan closing.

2 unchanged sentences

The Company enters into forward commitments for the future delivery of residential real estate loans when interest rate locks are entered into in order to hedge the interest rate risk resulting from its commitments to fund the loans.

These sale commitments are typically made on a best-efforts basis whereby the Bank is only obligated to sell the loan if the loan is approved and closed by the Bank.

These sale commitments are typically made on a best-efforts basis whereby the Company is only obligated to sell the loan if the loan is approved and closed by the Company.

Commitments to fund residential real estate loans to be sold into the secondary market and forward commitments for the future delivery of these loans are accounted for as free-standing derivatives, however, the fair values of these freestanding derivatives were not significant at December 31, 2023 or December 31, 2022.

In January 2024, we ceased the origination of residential real estate loans for the purpose of sales on the secondary market.

Commercial Loan Sales, Servicing, and Commercial Servicing Asset

7 unchanged sentences

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

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

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

If the underlying loans do not conform to the specifications, the Bank may have an obligation to repurchase the loans or indemnify the purchaser against any loss.

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

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

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

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

If the underlying loans do not conform to the specifications, the Company may have an obligation to repurchase the loans or indemnify the purchaser against any loss.

The Company believes the potential for material loss under these arrangements was remote at December 31, 2023 and December 31, 2022.

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

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

1 unchanged sentence

Late fees and ancillary fees related to loan servicing were not material for the years ended December 31, 2023, 2022, and 2021.

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

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

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

The balance of the deferred gain was immaterial at December 31, 2022, December 31, 2021 and December 31, 2020.

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

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

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

The balance of the deferred gain was immaterial at December 31, 2023 and December 31, 2022.

Other Real Estate Owned

11 unchanged sentences

Bank Owned Life Insurance

The Company's BOLI policies insure the lives of certain current or former Bank officers and name the Bank as beneficiary.

Noninterest income is generated tax-free (subject to certain limitations) from the increase in the policies' underlying

investments made by the insurance company.

The Company's BOLI policies insure the lives of certain current or former Company officers and name the Company as beneficiary.

Noninterest income is generated tax-free (subject to certain limitations) from the increase in the policies' underlying investments made by the insurance company.

The Company records BOLI at the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

ACL on Accrued Interest Receivable

Accrued interest receivable on investment securities and loans receivable are excluded from their estimates of credit losses.

Other Intangible Assets

8 unchanged sentences

If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge would be recorded for the difference.

The Company and the Bank file a United States consolidated federal income tax return and an Oregon State income tax return.

The Company and the Bank file a United States consolidated federal income tax return and an Oregon and Idaho State income tax return.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

3 unchanged sentences

A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized.

Deferred tax assets are reported in "Prepaid expenses and other assets" on the Consolidated Statements of Financial Condition.

We hold equity investments in certain structures which deliver tax benefits, including LIHTC funds and a Solar Tax Credit investment (“STC”).

For those LIHTC investments that qualify for application of the proportional amortization method, we apply such method.

Under the proportional amortization method, such investment is amortized in proportion to the allocation of tax benefits received in each period, and the investment amortization and the tax benefits are presented on a net basis within “Income tax expense” on our Consolidated Statements of Income.

A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.

18 unchanged sentences

Stock-Based Compensation

The Company maintains a number of stock-based incentive programs, which are discussed in more detail in Note (17)

Stock-Based Compensation.

The Company maintains a number of stock-based incentive programs, which are discussed in more detail in Note (16) Stock-Based Compensation.

Compensation cost is recognized for stock options, restricted stock awards and restricted stock units issued to employees and directors based on the fair value of these awards at the date of grant.

4 unchanged sentences

The fair value of stock options granted is estimated based on the date of grant using the Black-Scholes-Merton option pricing model.

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

Certain restricted stock unit grants are subject to performance-based

vesting as well as other approved vesting conditions and cliff-vest based on those conditions, and the fair value is estimated using a Monte Carlo simulation pricing model.

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

12 unchanged sentences

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

The Company has an equity investment in a solar tax credit investment.

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

The Company accounts for the solar tax credits under the deferral method where the tax credit is recognized over the useful life of the asset on the Consolidated Statements of Income as a component of "Income tax expense".

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

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

43 unchanged sentences

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

(Reversal of) Provision for Credit Losses

Operating Segments

While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis as operating results for all segments are similar.

Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.

Revenue from Contracts with Customers

8 unchanged sentences

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

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

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

• Merchant Processing Services and Debit and Credit Card Fees:

2 unchanged sentences

(d) Recently Issued or Adopted Accounting Pronouncements

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

Measurement of Credit Losses on Financial Instruments , as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, and ASU 2020-02, was originally issued in June 2016.

This ASU replaced the incurred loss methodology with an expected loss methodology, which is commonly referred to as the "CECL" methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable.

It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments.

In addition, CECL Adoption made changes to the accounting for credit losses on investment securities available for sale.

This ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected.

For public business entities, this ASU was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for fiscal years after December 15, 2018, and can be delayed under a provision of the CARES Act until the end of the official health emergency declaration.

The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost, investment securities available for sale and unfunded commitments.

At adoption, the Bank elected not to measure an ACL on accrued interest receivable on loans receivable or accrued interest receivable on investment securities available for sale as Bank policy is to reverse interest income for uncollectible accrued interest receivable balances in a timely manner.

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

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

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

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

2 unchanged sentences

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

The Bank’s interest rate swap-related transactions are the majority of the Company's LIBOR exposure.

Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc.

and recommended by the Alternative Reference Rates Committee.

The Company does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

The majority of the Company’s instruments indexed to LIBOR were transferred to another index during the year ended December 31, 2023.

The remaining instruments including loans and investments are either in the process of transition or will transition to a new index at the next repricing date.

FASB ASU 2022-02 , Financial Instruments - Credit Losses (Topic 326):

3 unchanged sentences

Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases.

These amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, since the Company previously adopted the amendments in ASU 2016-13.

These amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

Early adoption is permitted in any interim period if an entity has adopted ASU 2016-13 and such election may be made individually to adopt the guidance related to TDRs, including related disclosures, and the presentation of gross write-offs in the vintage disclosure.

1 unchanged sentence

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

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

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

The Company elected at the date of adoption to account for existing TDR loans as of December 31, 2022 under the Company's TDR accounting policy which is disclosed in the 2022 Annual Form 10-K.

All loan modifications post adoption are accounted for under the loan modification guidance in ASC 310-20.

The adoption of this ASU did not have a material impact on business operations or the Consolidated Statements of Financial Condition.

FASB ASU 2023-02 , Investments - Equity Method and Joint Ventures (Topic 323) :

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), was issued in February 2023.

The amendments in this ASU permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, if certain conditions are met.

Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the statement of operations as a component of income tax expense (benefit).

The amendments also require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understand the investments that generate income tax credits and other income tax benefits from a tax credit program.

The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted.

The amendments in the ASU can be applied either on a modified retrospective or a retrospective basis.

The Company does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

FASB ASU 2023-09 , Income Taxes (Topic 740) :

Improvements to Income Tax Disclosures, was issued in December 2023.

The amendments in this ASU requires a public business entity to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold.

In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received.

The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted.

An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all period presented.

The Company expects this ASU to only impact its disclosure requirements and does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

(2) Investment Securities

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

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

4 unchanged sentences

(a) Investment Securities by Classification, Type and Maturity

The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI:

The following tables present the amortized cost and fair value of investment securities and the corresponding amounts of gross unrealized and unrecognized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI, at the dates indicated:

December 31, 2023

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

(In thousands)

(Dollars in thousands)

Investment securities available for sale:

2 unchanged sentences

Residential CMO and MBS (1)

555,518 2,656 ( 46,125 ) 512,049

Commercial CMO and MBS (1)

538,910 88 ( 34,740 ) 504,258

Corporate obligations 7,745 2 ( 134 ) 7,613

1 unchanged sentence

Total $ 1,227,787 $ 2,786 $ ( 96,220 ) $ 1,134,353

government agency and government-sponsored enterprise CMO and MBS.

December 31, 2023

(Dollars in thousands)

Investment securities held to maturity:

1 unchanged sentence

Residential CMO and MBS (1)

267,204 — ( 14,101 ) 253,103

Commercial CMO and MBS (1)

321,163 — ( 35,190 ) 285,973

Total $ 739,442 $ — $ ( 76,992 ) $ 662,450

government agency and government-sponsored enterprise CMO and MBS.

December 31, 2022

(In thousands)

(Dollars in thousands)

Investment securities available for sale:

2 unchanged sentences

Residential CMO and MBS (1)

479,473 — ( 55,087 ) 424,386

Commercial CMO and MBS (1)

714,136 19 ( 49,734 ) 664,421

Corporate obligations 4,000 — ( 166 ) 3,834

1 unchanged sentence

Total $ 1,460,033 $ 205 $ ( 128,795 ) $ 1,331,443

government agency and government-sponsored enterprise CMO and MBS .

December 31, 2022

(Dollars in thousands)

Investment securities held to maturity:

1 unchanged sentence

Residential CMO and MBS (1)

290,318 — ( 17,440 ) 272,878

Commercial CMO and MBS (1)

325,142 — ( 41,937 ) 283,205

Total $ 766,396 $ — $ ( 92,962 ) $ 673,434

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

government agency and government-sponsored enterprise CMO and MBS.

The following table presents the amortized cost and fair value of investment securities by contractual maturity at the date indicated.

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2023

Securities Available for Sale Securities Held to Maturity

Amortized Cost Fair Value Amortized Cost Fair Value

(In thousands)

(Dollars in thousands)

Due in one year or less $ 3,792 $ 3,744 $ — $ —

3 unchanged sentences

Total investment securities due at a single maturity date 116,023 100,888 151,075 123,374

Mortgage-backed securities (1)

1,111,764 1,033,465 588,367 539,076

Total investment securities $ 1,227,787 $ 1,134,353 $ 739,442 $ 662,450

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

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

There were no holdings of investment securities of any one issuer, other than the U.S.

1 unchanged sentence

(b) Unrealized Losses on Investment Securities Available for Sale

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

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

December 31, 2023

3 unchanged sentences

Value Unrealized

(In thousands)

(Dollars in thousands)

government and agency securities $ — $ — $ 13,750 $ ( 2,297 ) $ 13,750 $ ( 2,297 )

1 unchanged sentence

Residential CMO and MBS (1)

— — 358,316 ( 46,125 ) 358,316 ( 46,125 )

Commercial CMO and MBS (1)

37,899 ( 228 ) 448,197 ( 34,512 ) 486,096 ( 34,740 )

Corporate obligations 911 ( 20 ) 3,887 ( 114 ) 4,798 ( 134 )

1 unchanged sentence

Total $ 46,696 $ ( 288 ) $ 902,899 $ ( 95,932 ) $ 949,595 $ ( 96,220 )

government agency and government-sponsored enterprise CMO and MBS.

December 31, 2022

3 unchanged sentences

Value Unrealized

(In thousands)

(Dollars in thousands)

government and agency securities $ 51,900 $ ( 2,031 ) $ 11,959 $ ( 3,022 ) $ 63,859 $ ( 5,053 )

1 unchanged sentence

Residential CMO and MBS (1)

217,949 ( 14,770 ) 206,437 ( 40,317 ) 424,386 ( 55,087 )

Commercial CMO and MBS (1)

473,580 ( 16,971 ) 181,692 ( 32,763 ) 655,272 ( 49,734 )

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

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

Total $ 846,332 $ ( 40,033 ) $ 441,754 $ ( 88,762 ) $ 1,288,086 $ ( 128,795 )

government agency and government-sponsored enterprise CMO and MBS.

The Company evaluated investment securities available for sale as of December 31, 2023 and December 31, 2022 and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics.

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

2022 and December 31, 2021.

Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of both December 31, 2023 and December 31, 2022.

In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity.

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(d) Realized Gains and Losses

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

The following table presents the gross realized gains and losses on the sale of investment securities available for sale determined using the specific identification method for the dates indicated:

Year ended December 31,

2023 2022 2021

(In thousands)

(Dollars in thousands)

Gross realized gains $ 36 $ 4 $ 29

2 unchanged sentences

(e) Pledged Securities

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

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

December 31, 2023 December 31, 2022

Value Amortized

(In thousands)

Washington and Oregon state public deposits $ 156,784 $ 137,931 $ 128,216 $ 130,217

Federal Reserve Bank credit facility

60,660 49,506 61,057 59,674

(Dollars in thousands)

State and local governments public deposits $ 238,060 $ 224,879 $ 156,784 $ 137,931

FRB 845,098 742,197 60,660 49,506

Securities sold under agreement to repurchase — — 63,685 55,836

6 unchanged sentences

(G) Non-Marketable Securities

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

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

These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A.

At December 31, 2022, as a member bank of Visa U.S.A., we held 6,549 shares of Visa Inc.

Class B common stock.

These shares had a carrying value of zero and were restricted from resale to non-member banks of Visa U.S.A.

until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account.

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

During the year ended December 31, 2023, the Company sold all shares of Visa Inc.

Class B common stock and recognized a $ 1.6 million gain which is included in "Other income" on the Consolidated Statements of Income.

(3) Loans Receivable

The Bank originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions.

Accrued interest receivable was excluded from disclosures presenting the Bank's amortized cost of loans receivable as it was deemed insignificant.

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

The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions.

Accrued interest receivable was excluded from disclosures presenting the Company's amortized cost of loans receivable as it was deemed insignificant.

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

(a) Loan Origination/Risk Management

The Bank categorizes the individual loans in the total loan portfolio into four segments:

The Company categorizes the individual loans in the total loan portfolio into four segments:

commercial business;

2 unchanged sentences

and consumer.

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

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

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

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

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

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

The Bank also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management.

The Company also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management.

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

1 unchanged sentence

December 31, 2023 December 31, 2022

(In thousands)

(Dollars in thousands)

Commercial business:

Commercial and industrial $ 718,291 $ 693,568

SBA PPP 1,468 145,840

Owner-occupied CRE 958,620 937,040

10 unchanged sentences

Loans receivable 4,335,627 4,050,858

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

ACL on loans ( 47,999 ) ( 42,986 )

Loans receivable, net $ 4,287,628 $ 4,007,872

4 unchanged sentences

Commercial Business :

There are four significant classes of loans in the commercial business portfolio segment discussed separately below:

Commercial and industrial.

5 unchanged sentences

Commercial and industrial loans carry more risk than other loans because the borrowers’ cash flow is less predictable and in the event of a default the amount of loss is potentially greater and more difficult to quantify because the value of the collateral securing these loans may fluctuate, may be uncollectible or may be obsolete or of limited use, among other things.

The Bank began originating SBA PPP loans following the enactment of the CARES Act in April 2020.

SBA PPP loans are fully guaranteed by the SBA, intended for businesses impacted by the COVID-19 Pandemic and designed to provide near term relief to help small businesses sustain operations.

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

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

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

Owner-occupied and non-owner occupied CRE.

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

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

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

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

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

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

3 unchanged sentences

Residential Real Estate :

The majority of the Bank’s residential real estate loans are secured by one-to-four family residences located in its primary market areas.

The majority of the Company’s residential real estate loans are secured by one-to-four family residences located in its primary market areas.

The Company’s underwriting standards require that residential real estate loans maintained in the portfolio generally are owner-occupied and do not exceed 80 % of the lower of appraised value at origination or cost of the underlying collateral.

Terms of maturity typically range from 15 to 30 years.

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

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

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

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

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

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

Real Estate Construction and Land Development :

The Bank originates construction loans for residential and for commercial and multifamily properties.

The residential construction loans generally include construction of custom single-family homes whereby the home owner is the borrower.

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

The Company originates construction loans for residential and for commercial and multifamily properties.

The residential construction loans generally include construction of custom single-family homes whereby the homeowner is the borrower.

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

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

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

Construction loans may also be originated as a construction-to-permanent financing loan whereby upon completion of the construction phase, the loan is automatically converted to a permanent term loan.

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

Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Bank’s estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results.

Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Company’s estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results.

As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness.

If the Bank’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan.

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

If the Company’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan.

These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being dependent upon successful completion of the construction project, market interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.

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

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

The underwriting process for these loans ensures a qualifying primary and secondary source of repayment.

3 unchanged sentences

To further reduce the risk, trend reports are reviewed by management on a regular basis.

The Bank also purchased indirect consumer loans.

These indirect consumer loans were secured by new and used automobile and recreational vehicles and were originated indirectly by established and well-known dealers located in our market areas.

In addition, the indirect loans purchased were made to only prime borrowers.

The Bank ceased indirect auto loan originations in March 2020.

The Company also purchased indirect consumer loans.

These indirect consumer loans were made by well-known dealers located in our market areas to prime borrowers and secured by new and used automobile and recreational vehicles.

The Company ceased indirect consumer loan originations in March 2020.

(b) Concentrations of Credit

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

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

Commercial business loans, excluding SBA PPP loans, are generally considered as having more inherent risk of default than residential real estate loans or other consumer loans.

Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.

Most of the Company’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County, Washington to Lane County, Oregon, as well as Yakima County in Washington and Ada County in Idaho.

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

Commercial business loans and commercial and multifamily real estate construction and land development loans are generally considered as having a more inherent risk of default than residential real estate loans or other consumer loans.

Also, the loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.

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

The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans.

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

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans.

Loans are graded on a scale of 1 to 10.

7 unchanged sentences

This grade includes "Watch" loans.

The grade is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipated in the near term.

The grade is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipated in the near term and are considered Pass grade for reporting purposes.

This grade includes "Special Mention" ("SM") loans and is intended to highlight loans deemed by management to have some elevated risks that deserve management's close attention.

3 unchanged sentences

This grade includes “Substandard” ("SS") loans in accordance with regulatory guidelines, which the Company has determined have a high credit risk.

These loans also have well-defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

These loans also have well-defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

The borrower may have shown serious negative trends in financial ratios and performance.

Such loans may be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business.

This grade includes “Doubtful” loans in accordance with regulatory guidelines and the Bank has determined these loans to have excessive credit risk.

This grade includes “Doubtful” loans in accordance with regulatory guidelines and the Company has determined these loans to have excessive credit risk.

Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty.

Additionally, these loans generally have been partially charged off for the amount considered uncollectible.

This grade includes “Loss” loans in accordance with regulatory guidelines and the Bank has determined these loans have the highest risk of loss.

This grade includes “Loss” loans in accordance with regulatory guidelines and the Company has determined these loans have the highest risk of loss.

Such loans are charged off or charged down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined.

1 unchanged sentence

Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews.

For consumer loans, the Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default.

For consumer loans, the Company follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default.

Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement.

3 unchanged sentences

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

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

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

The likelihood of loss for SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration.

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

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

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

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

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

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

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

December 31, 2022

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

For Doubtful and Loss graded loans, the Company is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value.

There were no loans graded Doubtful or Loss as of December 31, 2023 and 2022.

The following tables present the amortized cost of loans receivable by risk grade and origination year, and the gross charge-offs by loan class and origination year, at the dates indicated.

The Company adopted the vintage disclosure requirements of ASU 2022-02 prospectively as described in Note 1 beginning January 1, 2023.

December 31, 2023 Revolving Loans Revolving Loans Converted (1)

Loans Receivable

Amortized Cost Basis by Origination Year

2023 2022 2021 2020 2019 Prior

(In thousands)

(Dollars in thousands)

Commercial business:

2 unchanged sentences

SM — 2,495 104 292 4,556 1,458 9,124 — 18,029

December 31, 2022

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

Loans Receivable

2022 2021 2020 2019 2018 Prior

SS — 1,215 2,734 3,548 1,076 7,875 12,168 65 28,681

Total 120,973 154,564 77,069 70,204 45,939 86,257 163,032 253 718,291

Pass — 1,351 117 — — — — — 1,468

Owner-occupied CRE

13 unchanged sentences

Total 364,987 554,098 468,669 313,353 434,011 1,076,082 163,032 253 3,374,485

Commercial business gross charge-offs

Current period — — 254 323 27 115 — — 719

Residential real estate

4 unchanged sentences

Pass 41,663 24,760 1,050 1,289 804 719 1 — 70,286

SM — — 2,139 — — — — — 2,139

SS 1,000 319 4,866 — — — — — 6,185

Total 42,663 25,079 8,055 1,289 804 719 1 — 78,610

Commercial and multifamily

1 unchanged sentence

SM — — — 3,777 5,660 365 — — 9,802

SS — — — 37 — 394 — — 431

Total 42,499 187,827 91,460 4,114 6,409 3,510 — — 335,819

4 unchanged sentences

Total 85,162 212,906 99,515 5,403 7,213 4,229 1 — 414,429

December 31, 2023 Revolving Loans Revolving Loans Converted (1)

Loans Receivable

Amortized Cost Basis by Origination Year

2023 2022 2021 2020 2019 Prior

Pass 1,897 1,980 293 6,221 15,841 20,402 122,007 1,123 169,764

1 unchanged sentence

Total 1,897 1,980 293 6,355 16,048 21,295 122,340 1,163 171,371

Consumer gross charge-offs:

Current period 7 10 30 29 106 152 252 — 586

Loans receivable

3 unchanged sentences

Total $ 488,367 $ 910,185 $ 710,708 $ 349,219 $ 472,294 $ 1,118,065 $ 285,373 $ 1,416 $ 4,335,627

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

December 31, 2021

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

Gross charge-offs:

$ 7 $ 10 $ 284 $ 352 $ 133 $ 267 $ 252 $ — $ 1,305

(1) Represents the loans receivable balance at December 31, 2023 which was converted from a revolving loan to a non-revolving amortizing loan during the year ended December 31, 2023.

December 31, 2022 Revolving Loans Revolving Loans Converted (1)

Loans Receivable

Amortized Cost Basis by Origination Year

2022 2021 2020 2019 2018 Prior

(In thousands)

(Dollars in thousands)

Commercial business:

4 unchanged sentences

Total 169,803 94,950 84,707 69,262 34,878 83,726 155,902 340 693,568

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

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

Owner-occupied CRE

2 unchanged sentences

SS — — 671 — 3,722 13,075 — — 17,468

Doubtful or Loss — — — — — — — — —

Total 134,432 169,671 94,505 157,096 69,138 311,951 — 247 937,040

9 unchanged sentences

Total 544,386 462,270 340,142 489,308 229,012 995,633 155,902 587 3,217,240

December 31, 2022 Revolving Loans Revolving Loans Converted (1)

Loans Receivable

Amortized Cost Basis by Origination Year

2022 2021 2020 2019 2018 Prior

Residential real estate

Pass 132,510 149,934 24,668 16,803 4,207 15,337 — — 343,459

SM — — — — — — — — —

SS — — — — — 172 — — 172

2 unchanged sentences

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

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

Commercial and multifamily

8 unchanged sentences

Total 116,689 150,301 11,376 9,869 3,433 2,444 — — 294,112

December 31, 2021

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

Loans Receivable

2021 2020 2019 2018 2017 Prior

Pass 3,379 509 9,848 27,370 15,563 19,855 116,605 435 193,564

SM — — — — — — — — —

SS — — 168 559 320 1,120 44 100 2,311

5 unchanged sentences

Total $ 796,964 $ 763,014 $ 386,202 $ 543,909 $ 252,535 $ 1,034,561 $ 272,551 $ 1,122 $ 4,050,858

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

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

(d) Nonaccrual Loans

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

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

December 31, 2023

Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual

(In thousands)

(Dollars in thousands)

Commercial business:

2 unchanged sentences

Total commercial business 1,706 2,762 4,468

Real estate construction and land development:

Commercial and multifamily

Total $ 1,706 $ 2,762 $ 4,468

1 unchanged sentence

Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual

(In thousands)

(Dollars in thousands)

Commercial business:

Commercial and industrial $ 4,503 $ 1,154 $ 5,657

December 31, 2022

Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual

(Dollars in thousands)

Owner-occupied CRE — 212 212

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

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

Residential real estate

Real estate construction and land development:

Commercial and multifamily

Consumer — 29 29

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

The following table presents the reversal of interest income on loans due to the write-off of accrued interest receivable upon the initial classification of loans as nonaccrual loans and the interest income recognized due to payment in full or sale of previously classified nonaccrual loans during the following periods:

Year Ended December 31, 2022

Year Ended December 31, 2021

Year Ended December 31, 2023 Year Ended December 31, 2022

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

(In thousands)

(Dollars in thousands)

Commercial business:

7 unchanged sentences

— — ( 14 ) 65

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

Consumer — — — 68

Total $ ( 61 ) $ 347 $ ( 28 ) $ 1,242

For the years ended December 31, 2022 and 2021, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.

For the year ended December 31, 2023 and 2022, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.

(e) Past due loans

The Bank performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due.

The amortized cost of past due loans as of December 31, 2022 and December 31, 2021 were as follows:

The Company performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due.

The following tables present the amortized cost of past due loans at the dates indicated:

December 31, 2023

2 unchanged sentences

Due Current Loans Receivable

(In thousands)

(Dollars in thousands)

Commercial business:

Commercial and industrial $ 2,289 $ 3,857 $ 6,146 $ 712,145 $ 718,291

SBA PPP 236 — 236 1,232 1,468

Owner-occupied CRE — 189 189 958,431 958,620

14 unchanged sentences

Due Current Loans Receivable

(In thousands)

(Dollars in thousands)

Commercial business:

Commercial and industrial $ 822 $ 6,104 $ 6,926 $ 686,642 $ 693,568

SBA PPP 223 293 516 145,324 145,840

December 31, 2021

30-89 Days 90 Days or

Greater Total Past

Due Current Loans Receivable

(In thousands)

Owner-occupied CRE — 189 189 936,851 937,040

10 unchanged sentences

Total $ 5,449 $ 6,293 $ 11,742 $ 4,039,116 $ 4,050,858

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

Loans 90 days or more past due and still accruing interest were $ 1.3 million and $ 1.6 million as of December 31, 2023 and December 31, 2022, respectively.

(f) Collateral-dependent Loans

The type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral as of December 31, 2022 and December 31, 2021 was as follows, with b alances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan :

The following tables present the type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral at the dates indicated, with b alances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan :

December 31, 2023

CRE Farmland Residential Real Estate Total

(In thousands)

CRE Farmland Residential Real Estate Equipment Total

(Dollars in thousands)

Commercial business:

1 unchanged sentence

Owner-occupied CRE 189 — — — 189

Total commercial business 449 389 621 304 1,763

Total $ 449 $ 389 $ 621 $ 304 $ 1,763

December 31, 2022

CRE Farmland Residential Real Estate Other Total

(In thousands)

CRE Farmland Residential Real Estate Total

(Dollars in thousands)

Commercial business:

1 unchanged sentence

Owner-occupied CRE 189 — — 189

Non-owner occupied CRE 1,273 — — — 1,273

Total commercial business 1,428 1,977 929 4,334

Real estate construction and land development:

Commercial and multifamily

571 — — — 571

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

There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the year ended December 31, 2023, except changes due to additions or removals of loans in this classification.

(g) Troubled Debt Restructured Loans

Loans that were modified as TDR loans are set forth in the following tables for the periods indicated:

(g) Modification of Loans

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty.

This guidance was applied on a prospective basis.

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

The following table presents loan modifications by type of modification at amortized cost that were modified as a result of experiencing both financial difficulty and modified during the period indicated:

Year Ended December 31, 2023

2022 2021 2020

Contracts Amortized Cost (1) (2)

Term Extension Term Extension & Int.

Rate Reduction Total Modified Loans % of Modified Loans to Loans Receivable, net

(Dollars in thousands)

4 unchanged sentences

Total commercial business 19,732 237 19,969 0.59

Residential real estate

— — 1 178 1 22

Real estate construction and land development:

5 unchanged sentences

Total $ 29,401 $ 252 $ 29,653 0.68 %

(1) Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications.

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

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

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

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

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

The following tables present the financial effect of the loan modifications presented in the preceding table during the periods indicated:

Year Ended December 31, 2023

2022 2021 2020

Contracts (1)

Amortized Cost (1)

Contracts (1)

Amortized Cost (1)

Contracts (1)

Amortized Cost (1)

(Dollars in thousands)

Weighted Average % of Interest Rate Reductions Weighted Average Years of Term Extensions

Commercial business:

3 unchanged sentences

Total commercial business 3.00 0.57

Real estate construction and land development:

Commercial and multifamily

Consumer 1.00 2.64

Total 3.00 % 0.61

(1) Number of contracts and amortized cost represent TDR loans which have balances as of period end, net of subsequent payments after modifications.

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

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

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

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

There were no modified loans included in the tables above that were past due or on nonaccrual as of December 31, 2023.

There were no loans to borrowers experiencing financial difficulty that had a payment default within the year ended December 31, 2023 that were modified in the twelve months prior to that default.

There were $6.6 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms have been modified during the year ended December 31, 2023 through either principal forgiveness, interest rate reduction, term extension, or other than insignificant payment delay.

(h) Related Party Loans

In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates.

Activity in related party loans during the periods indicated was as follows:

The following table presents the activity in related party loans during the periods indicated:

Year Ended December 31,

2023 2022 2021

(In thousands)

(Dollars in thousands)

Balance outstanding at the beginning of year $ 6,879 $ 7,122 $ 7,694

2 unchanged sentences

Balance outstanding at the end of year $ 6,749 $ 6,879 $ 7,122

The Company had $ 5,000 and $ 255,000 of unfunded commitments to related parties and all related party loans were performing in accordance with the underlying loan agreements as of December 31, 2022 and December 31, 2021.

(i) Residential Real Estate Loan Sales

The Bank originates residential real estate loans;

a portion of which are sold on the secondary market.

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

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

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

Year Ended December 31,

2022 2021 2020

(In thousands)

Originated (1)

$ 15,190 $ 190,734 $ 191,207

Sold 16,666 89,899 137,580

Gain on sale of loans, net (2)

633 3,644 5,044

(1) Includes loans originated for sale in the secondary market or for the Bank's loan portfolio.

(2) Excludes net gains on sales of SBA and other loans.

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

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

All related party loans were performing in accordance with the underlying loan agreements as of December 31, 2023 and December 31, 2022.

The Company had $ 113,000 and $ 5,000 of unfunded commitments to related parties as of December 31, 2023 and December 31, 2022.

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

The following table presents the details of loans serviced for others at the dates indicated:

December 31, 2023 December 31, 2022

(In thousands)

(Dollars in thousands)

Loans serviced for others with participating interest, gross loan balance $ 11,715 $ 17,375

Loans serviced for others with participating interest, participation balance owned by Bank (1)

Loans serviced for others with participating interest, participation balance owned by Company (1)

(1) Included in the balance of "Loans receivable " on the Consolidated Statements of Financial Condition.

2 unchanged sentences

There was no valuation allowance on the Company's servicing asset as of December 31, 2023 and December 31, 2022.

(k) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled $ 11.3 million and $ 10.1 million at December 31, 2022 and December 31, 2021, respectively.

It is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.

(j) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled $ 13.3 million and $ 11.3 million at December 31, 2023 and December 31, 2022, respectively and is excluded from the calculation of the ACL on loans as interest accrued , but not received, is reversed timely.

(4) Allowance for Credit Losses on Loans

Effective January 1, 2020, the Bank adopted ASU 2016-13.

CECL Adoption replaced the allowance for loan losses with the ACL on loans and replaced the related provision for loan losses with the provision for credit losses on loans.

The baseline loss rates used to calculate the ACL on loans at December 31, 2022 utilized the Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date.

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

The Bank believes the historic loss rates are viable inputs to the current CECL model as the Bank's lending practice and business has remained relatively stable throughout the periods.

While the Bank's assets have grown, the credit culture has stayed relatively consistent.

Prepayments included in the CECL model at December 31, 2022 were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation of future prepayment activity.

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

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

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

Management believes forecasts beyond this seven quarter time period tend to diverge in economic assumptions and may be less comparable to actual future events.

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

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

The reversal of provision for credit losses was driven by a $ 3.4 million reduction in the ACL on loans individually evaluated for losses and their related ACL offset partially by an increase related to the growth in balances of certain segments of collectively evaluated loans.

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

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

Year Ended December 31,

2022 2021 2020

(In thousands)

Balance at the beginning of the year $ 42,361 $ 70,185 $ 36,171

Impact of CECL Adoption — — 1,822

Balance at the beginning of the year, as adjusted 42,361 70,185 37,993

Charge-offs ( 893 ) ( 1,946 ) ( 5,622 )

Recoveries of loans previously charged-off 2,081 1,420 2,381

(Reversal of) provision for credit losses on loans ( 563 ) ( 27,298 ) 35,433

Balance at the end of the year $ 42,986 $ 42,361 $ 70,185

During the year ended December 31, 2023, the ACL on loans increased $ 5.0 million, or 11.7 %, due primarily to a provision for credit losses on loans of $ 4.7 million.

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 following tables detail the activity in the ACL on loans by segment and class for the periods indicated:

Year Ended December 31, 2023

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

(In thousands)

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

(Dollars in thousands)

Commercial business:

14 unchanged sentences

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

(In thousands)

(Dollars in thousands)

Commercial business:

1 unchanged sentence

Owner-occupied CRE 6,411 ( 36 ) — 1,105 7,480

Year Ended December 31, 2021

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

(In thousands)

Non-owner occupied CRE 8,861 — — 415 9,276

9 unchanged sentences

Year Ended December 31, 2021

Beginning Balance Impact of CECL Adoption Beginning Balance,

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

(In thousands)

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

(Dollars in thousands)

Commercial business:

10 unchanged sentences

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

Unallocated 899 ( 899 ) — — — — —

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

(5) Other Real Estate Owned

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

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

December 31, 2020

(In thousands)

Balance at the beginning of the year $ 841

Additions 270

Proceeds from dispositions ( 1,290 )

Gain (loss) on sale, net 179

Balance at the end of the year $ —

At December 31, 2022, there were no consumer mortgage loans secured by residential real estate properties (included in "Loans receivable" on the Consolidated Statements of Financial Position) for which formal foreclosure proceedings were in process.

The following table details the activity in the ACL on unfunded commitments during the periods indicated:

Year Ended December 31,

2023 2022 2021

(Dollars in thousands)

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

Reversal of credit losses on unfunded commitments

( 456 ) ( 863 ) ( 2,074 )

Balance, end of period $ 1,288 $ 1,744 $ 2,607

(5) Premises and Equipment

1 unchanged sentence

December 31, 2023 December 31, 2022

(In thousands)

(Dollars in thousands)

Land $ 18,721 $ 19,565

13 unchanged sentences

There were no additions to goodwill during the years ended December 31, 2023, 2022, and 2021.

At December 31, 2022, the Company’s analysis concluded the fair value of the reporting unit exceeded the carrying value so the Company's goodwill was not considered impaired.

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

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

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

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

At December 31, 2023, the Company determined that goodwill was not considered impaired as no material adverse changes had occurred since the quantitative assessment performed as of May 31, 2023 and the fair value of the reporting unit still exceeded the carrying value.

Similarly, no goodwill impairment charges were recorded for the years ended December 31, 2022 and 2021.

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

(b) Other Intangible Assets

Other intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years .

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

Thereafter 152

There were no additions during the years ended December 31, 2023, 2022, and 2021.

The following table presents the changes in carrying value of other intangible assets at the dates indicated:

December 31, 2023 December 31, 2022

(Dollars in thousands)

Gross Carrying Value

$ 30,455 30,455

Accumulated amortization

( 25,662 ) ( 23,228 )

Net carrying value

$ 4,793 $ 7,227

The following table presents the estimated aggregate amortization of other intangible assets at the dates indicated:

December 31, 2023

Estimated amortization expense

Total $ 4,793

3 unchanged sentences

Notional Amounts Estimated Fair Value Notional Amounts Estimated Fair Value

(In thousands)

(Dollars in thousands)

Non-hedging interest rate derivatives:

5 unchanged sentences

The estimated fair value of derivatives with third-parties was $ 22.5 million and $ 30.1 million as of December 31, 2023 and December 31, 2022, respectively.

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

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

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

However, the settlement values of the Company's net derivative assets with customers had no change as of December 31, 2023, and increased $ 66,000 , and $ 355,000 as of December 31, 2022, and December 31, 2021, respectively, due to the change in the credit valuation adjustment.

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

December 31, 2022 December 31, 2021 Change

Amount % of Total Amount % of Total $ %

Amount Amount

(Dollars in thousands)

3 unchanged sentences

Savings accounts 487,956 623,833

Total non-maturity deposits 5,617,267 94.8 6,051,451 94.6 ( 434,184 ) ( 7.2 )

Certificates of deposit 692,973 307,573

2 unchanged sentences

Accrued interest payable on deposits was $ 250,000 and $ 70,000 as of December 31, 2023 and December 31, 2022, respectively and is included in "Accrued expenses and other liabilities" in the Consolidated Statements of Financial Condition.

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

Year Ended December 31,

2022 2021 2020

(In thousands)

Interest bearing demand deposits $ 3,239 $ 2,497 $ 3,234

Money market accounts 1,745 1,485 2,830

Savings accounts 381 367 527

Certificates of deposit 1,407 1,811 5,674

Total interest expense $ 6,772 $ 6,160 $ 12,265

Scheduled maturities of certificates of deposit for future years as of December 31, 2022 are as follows, in thousands:

2023 $ 270,575

Scheduled maturities of certificates of deposit for years after December 31, 2023 are as follows, in thousands:

2024 $ 666,454

Thereafter 20

Total $ 692,973

6 unchanged sentences

During 2007, the Trust issued $ 25.0 million of trust preferred securities with a 30 -year maturity, callable after the fifth year.

The trust preferred securities have a quarterly adjustable rate based upon the three-month LIBOR plus 1.56 %.

The trust preferred securities have a quarterly adjustable rate based upon the three-month SOFR plus 1.56 %.

On the merger date, the Company acquired the Trust, which retained the Washington Banking Master Trust name, and assumed the performance and observance of the covenants under the indenture related to the trust preferred securities.

The adjustable rate of the trust preferred securities at December 31, 2023 and December 31, 2022 was 7.23 % and 6.33 %, respectively.

The weighted average rate of the junior subordinated debentures for the years ended December 31, 2022, 2021 and 2020 was 5.42 %, 3.53 % and 4.29 %, respectively.

The weighted average rate includes the accretion of the discount established at the merger date which is amortized over the life of the trust preferred securities.

The junior subordinated debentures are the sole assets of the Trust and payments under the junior subordinated debentures are the sole revenues of the Trust.

All of the common securities of the Trust are owned by the Company.

All the common securities of the Trust are owned by the Company.

The Company has fully and unconditionally guaranteed the capital securities along with all obligations of the Trust under the trust agreements.

1 unchanged sentence

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

As of December 31, 2023, the junior subordinated debentures qualified as tier 1 capital of the Parent Company under the FRB's capital adequacy guidelines.

(10) Securities Sold Under Agreement to Repurchase

The Company utilizes securities sold under agreement to repurchase with one day maturities as a supplement to funding sources.

Securities sold under agreement to repurchase are secured by pledged investment securities.

Under the securities sold under agreement to repurchase , the Company is required to maintain an aggregate market value of securities pledged greater than the balance of the securities sold under agreement to repurchase .

The Company is required to pledge additional securities to cover any declines below the balance of the securities sold under agreement to repurchase .

For additional information on the total value of investment securities pledged for securities sold under agreement to repurchase see Note (2) Investment Securities.

The following table presents the balance of the Company's securities sold under agreement to repurchase obligations by class of collateral pledged at the dates indicated:

The Company has utilized securities sold under agreement to repurchase with one day maturities as a supplement to funding sources in the past.

Securities sold under agreement to repurchase were secured by pledged investment securities.

Under the securities sold under agreement to repurchase , the Company was required to maintain an aggregate market value of securities pledged greater than the balance of the securities sold under agreement to repurchase .

The Company was required to pledge additional securities to cover any declines below the balance of the securities sold under agreement to repurchase .

The Company discontinued utilizing these instruments during the year ended December 31, 2023.

The following table presents the balance of the Company's securities sold under agreement to repurchase obligations by class of collateral pledged at the date indicated:

December 31, 2023 December 31, 2022

(In thousands)

Treasury and U.S.

Government-sponsored agencies $ — $ 4,914

Residential CMO and MBS — 4,134

(Dollars in thousands)

Commercial CMO and MBS $ — $ 46,597

4 unchanged sentences

Each credit program has its own interest rate and range of maturities.

Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB’s assessment of the institution’s

creditworthiness.

Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB’s assessment of the institution’s creditworthiness.

At December 31, 2023, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $ 1.42 billion.

2 unchanged sentences

In accordance with the pledge agreement, the Company must maintain unencumbered collateral in an amount equal to varying percentages ranging from 100 % to 160 % of outstanding advances depending on the type of collateral.

(b) Federal Funds Purchased

The Bank maintains advance lines with five correspondent banks to purchase federal funds totaling $ 215.0 million as of December 31, 2022.

The lines generally mature annually or are reviewed annually.

As of December 31, 2022 and December 31, 2021, there were no federal funds purchased.

The Bank maintains a credit facility with the Federal Reserve Bank with available borrowing capacity of $ 46.8 million as of December 31, 2022.

There were no borrowings outstanding as of December 31, 2022 and December 31, 2021.

The Bank maintains a credit facility with the FRB through both the Discount Window and BTFP with available borrowing capacity of $ 819.5 million as of December 31, 2023.

The Bank had $ 500.0 million in BTFP borrowings outstanding at December 31, 2023.

The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities.

The advance rate on the collateral is at par value.

The average rate on borrowings from the BTFP was 4.74 %.

The Bank had no FRB borrowings outstanding at December 31, 2022.

All advances are currently secured by investment securities.

Any advances on the credit facility would be secured by either investment securities or certain types of the Bank's loans receivable.

The Bank maintains advance lines with four correspondent banks to purchase federal funds totaling $ 145.0 million as of December 31, 2023.

The lines generally mature annually or renewed annually.

As of December 31, 2023 and December 31, 2022, there were no federal funds purchased.

(d) Related Party Borrowings

4 unchanged sentences

The related operating lease ROU liability was $ 25.5 million and $ 24.4 million, respectively and is included in " Accrued expenses and other liabilities " on the Consolidated Statements of Financial Condition.

In addition, the Company has one operating sublease agreement in which the Company is the intermediate lessor.

The operating sublease is for five years with rental increases on a predetermined escalation schedule with a projected future cash flow of $ 1.7 million.

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

1 unchanged sentence

Year Ended December 31,

(In thousands)

(Dollars in thousands)

Operating lease cost $ 5,279 $ 4,942

12 unchanged sentences

ROU liability $ 25,542

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

During the year ended December 31, 2023, the Company entered into two lease agreements for $ 2.9 million and $ 700,000 commencing on January 22, 2024 and February 1, 2024.

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

14 unchanged sentences

The Company has a Deferred Compensation Plan which provides its directors and select executive officers with the opportunity to defer current compensation.

The following table presents a summary of the changes in the Deferred Compensation Plan during the periods indicated:

Year Ended December 31,

2022 2021 2020

(In thousands)

Balance outstanding at the beginning of the year $ 3,854 $ 4,101 $ 4,244

Employer contributions 793 634 207

Employer contributions 110 — —

Interest credited 99 78 128

Benefits Paid ( 519 ) ( 959 ) ( 478 )

Balance outstanding at the end of the year $ 4,337 $ 3,854 $ 4,101

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

The expense incurred for the deferred compensation for the years ended December 31, 2023, 2022, and 2021 was $ 409,000 , $ 882,000 , and $ 713,000 .

As a result, the Company recorded a deferred compensation liability of $ 4.5 million and $ 4.3 million at December 31, 2023 and 2022.

(d) Salary Continuation Plan

3 unchanged sentences

2023 2022 2021

(In thousands)

(Dollars in thousands)

Obligation, at the beginning of the year $ 3,576 $ 3,835 $ 4,162

4 unchanged sentences

(a) Earnings Per Common Share

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

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

Year Ended December 31,

2023 2022 2021

(In thousands, except shares)

Net income $ 81,875 $ 98,035 $ 46,570

Dividends and undistributed earnings allocated to participating securities (1)

(Dollars in thousands, except shares)

Net income allocated to common shareholders $ 61,755 $ 81,875 $ 98,035

Weighted average common shares outstanding 35,022,247 35,103,465 35,677,851

Restricted stock awards — — ( 4,182 )

Total basic weighted average common shares outstanding 35,103,465 35,677,851 36,014,445

Basic weighted average common shares outstanding 35,022,247 35,103,465 35,677,851

4 unchanged sentences

171,010 872 7,043

(1) Represents dividends paid and undistributed earnings allocated to unvested restricted stock awards.

(2) Represents the effect of the assumed exercise of stock options and vesting of restricted stock awards and units.

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

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

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

(b) Dividends

19 unchanged sentences

The Company has had various stock repurchase programs since March 1999.

On October 23, 2014, the Company's Board of Directors authorized the repurchase of up to 5 % of the Company's outstanding common shares, or approximately 1,512,600 shares, under the eleventh stock repurchase plan.

On March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5 % of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan after all shares under the eleventh stock repurchase plan had been repurchased.

The Company has implemented stock repurchase programs since March 1999.

On March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5 % of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan.

The number, timing and price of shares repurchased under the twelfth stock repurchase plan will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.

The following table provides total repurchased shares and average share prices under the applicable plans for the periods indicated:

The following table provides total repurchased shares and average share prices under the repurchase plan for the periods indicated:

Year Ended December 31,

2023 2022 2021 Plan Total (1)

Eleventh Stock Repurchase Plan

Repurchased shares — — 639,922 1,512,600

Stock repurchase average share price $ — $ — $ 23.95 $ 21.69

Twelfth Stock Repurchase Plan

1 unchanged sentence

Stock repurchase average share price $ 18.92 $ 25.07 $ 24.43 $ 22.82

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

In addition to the stock repurchases under a stock repurchase plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units.

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

In addition to the stock repurchases under a stock repurchase plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock units.

The following table provides total shares repurchased to pay withholding taxes during the periods indicated:

3 unchanged sentences

Stock repurchase to pay withholding taxes average share price $ 22.01 $ 25.52 $ 29.10

(d) Issuance of Common Stock

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

(15) Fair Value Measurements

4 unchanged sentences

Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.

Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions.

Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models,

discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions.

Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

12 unchanged sentences

Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available.

The Bank also incorporates an estimate of cost to sell the collateral when the sale is probable.

The Company also incorporates an estimate of cost to sell the collateral when the sale is probable.

Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value.

1 unchanged sentence

Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.

Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Bank.

Once received, the Bank's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Once received, the Company's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Derivative Financial Instruments :

The Bank obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3).

Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties.

As of December 31, 2022 and December 31, 2021, the Bank assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives.

As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.

Branches held for sale :

Branches held for sale are recorded at fair value less costs to sell when transferred from premises and equipment, net to "Prepaid expenses and other assets" on the Consolidated Statements of Financial Condition with any valuation adjustment recorded within "Other expense" on the Consolidated Statements of Income.

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

Adjustments are routinely made in the appraisal and broker price opinion process by independent appraisers and commercial real estate brokers, respectively, to adjust for differences between the comparable sales and income data available.

Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value.

Additionally, the fair value of branches held for sale can be adjusted based on executed agreements of sale to be completed at a future date.

The Company obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3).

Although the Company has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties.

As of December 31, 2023 and December 31, 2022, the Company assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives.

As a result, the Company has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.

Recurring Basis

2 unchanged sentences

Total Level 1 Level 2 Level 3

(In thousands)

(Dollars in thousands)

Investment securities available for sale:

2 unchanged sentences

Residential CMO and MBS (1)

512,049 — 512,049 —

Commercial CMO and MBS (1)

504,258 — 504,258 —

Corporate obligations 7,613 — 7,613 —

2 unchanged sentences

Equity security 314 314 — —

December 31, 2023

Total Level 1 Level 2 Level 3

(Dollars in thousands)

Derivative assets - interest rate swaps 23,195 — 23,195 —

Derivative liabilities - interest rate swaps $ 23,195 $ — $ 23,195 $ —

government agency and government-sponsored enterprise CMO and MBS.

December 31, 2022

Total Level 1 Level 2 Level 3

(In thousands)

(Dollars in thousands)

Investment securities available for sale:

2 unchanged sentences

Residential CMO and MBS (1)

424,386 — 424,386 —

Commercial CMO and MBS (1)

664,421 — 664,421 —

Corporate obligations 3,834 — 3,834 —

4 unchanged sentences

Derivative liabilities - interest rate swaps $ 30,107 $ — $ 30,107 $ —

government agency and government-sponsored enterprise CMO and MBS.

Nonrecurring Basis

1 unchanged sentence

These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following tables below represent assets measured at fair value on a nonrecurring basis at the dates indicated:

The following tables presents assets measured at fair value on a nonrecurring basis at the dates indicated:

Fair Value at December 31, 2023

Total Level 1 Level 2 Level 3

(In thousands)

Collateral-dependent loans:

2 unchanged sentences

Total assets measured at fair value on a nonrecurring basis $ 173 $ — $ — $ 173

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

Fair Value at December 31, 2022

Total Level 1 Level 2 Level 3

(In thousands)

Collateral-dependent loans:

Commercial business:

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

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

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

Real estate construction and land development:

Commercial and multifamily

991 534 — — 534

Total 3,515 1,772 — — 1,772

Prepaid expenses and other assets:

Branch held for sale (2)

698 698 — — 698

Total assets measured at fair value on a nonrecurring basis $ 182 $ — $ — $ 182

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

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

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

Year ended December 31,

2022 2021 2020

(In thousands)

Collateral-dependent loans:

Commercial business:

Commercial and industrial $ 23 $ ( 691 ) $ ( 8 )

Owner-occupied CRE ( 7 ) ( 359 ) —

Total commercial business 16 ( 1,050 ) ( 8 )

Real estate construction and land development:

Commercial and multifamily

Prepaid expenses and other assets:

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

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

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

1 unchanged sentence

Value Valuation

Technique(s) Unobservable Input(s) Range of Inputs;

Technique(s) Unobservable Input(s) Range of Inputs Weighted Average (1)

(Dollars in thousands)

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

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

Collateral-dependent loans $ 173 Market approach Adjustments to reflect current conditions and selling costs 16.5 % - 16.5 %

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

December 31, 2022

Value Valuation

Technique(s) Unobservable Input(s) Range of Inputs;

Technique(s) Unobservable Input(s) Range of Inputs Weighted Average (1)

(Dollars in thousands)

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

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

Collateral-dependent loans $ 182 Market approach Adjustments to reflect current conditions and selling costs 14.6 % - 14.6 %

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

(b) Fair Value of Financial Instruments

4 unchanged sentences

There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results.

For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

For all these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

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

2 unchanged sentences

Level 1 Level 2 Level 3

(In thousands)

(Dollars in thousands)

Financial Assets:

3 unchanged sentences

Loans receivable, net 4,287,628 4,159,513 — — 4,159,513

December 31, 2022

Value Fair Value Fair Value Measurements Using:

Level 1 Level 2 Level 3

Accrued interest receivable 19,518 19,518 96 6,127 13,295

4 unchanged sentences

Certificates of deposit 692,973 701,029 — 701,029 —

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

Borrowings 500,000 499,861 — 499,861 —

Junior subordinated debentures 21,765 19,750 — — 19,750

4 unchanged sentences

Level 1 Level 2 Level 3

(In thousands)

(Dollars in thousands)

Financial Assets:

2 unchanged sentences

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

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

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

10 unchanged sentences

(16) Stock-Based Compensation

On July 24, 2014, the Company's shareholders approved the Equity Plan that provides for the issuance of 1,500,000 shares of the Company's common stock in the form of various types of stock-based compensation.

As of December 31, 2022, shares remaining available for future issuance under the Equity Plan totaled 330,398 .

(a) Stock Option Awards

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

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

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

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

Shares Weighted-Average Exercise Price

Outstanding at December 31, 2019

8,657 $ 14.77

Exercised ( 8,248 ) 14.77

Forfeited or expired ( 409 ) 14.77

Outstanding at December 31, 2020

(b) Restricted Stock Awards

Restricted stock awards generally had a four-year cliff vesting or four-year ratable vesting schedule.

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

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

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

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

Shares Weighted-Average Grant Date Fair Value

Nonvested at December 31, 2019

20,707 $ 17.59

Vested ( 20,707 ) 17.59

Nonvested at December 31, 2020

Restricted stock units generally vest ratably over three years and are subject to service conditions in accordance with each award agreement.

On May 3, 2023, based upon the recommendation of the Compensation Committee, the Company's shareholders approved the Heritage Financial Corporation 2023 Omnibus Equity Plan, or "Equity Plan", that provides for the issuance of 1,250,000 shares of the Company's common stock in the form of various types of stock-based compensation.

As of December 31, 2023, there were 1,200,714 shares available for future issuance under the Equity Plan.

The Equity Plan replaces the Heritage Financial Corporation 2014 Omnibus Equity Plan (the "2014 Plan").

All remaining shares available for future issuance under the 2014 Plan were terminated upon approval of the Equity Plan.

All shares issued under the 2014 Plan remain outstanding and are governed by the 2014 Plan.

(a) Restricted Stock Units

Restricted stock units generally vest ratably over three years , participate in dividends and are subject to service conditions in accordance with each award agreement.

Performance-based restricted stock units have a three-year cliff vesting schedule, participate in dividends and are additionally subject to performance-based vesting.

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Weighted Average Fair Value 23.85 25.87 24.49

Correlation coefficient ABA NASDAQ Community Bank Index ABA NASDAQ Community Bank Index ABA NASDAQ Community Bank Index

Range of peer company volatilities 25.8 %- 107.5 %

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31.4 %- 136.4 %

Range of peer company correlation coefficients 49.7 %- 94.4 %

34.1 %- 94.8 %

16.1 %- 90.2 %

Company volatility 35.8 % 41.3 % 40.2 %

Company correlation coefficient 90.4 % 90.1 % 80.5 %

Expected volatilities in the model were estimated using a historical period consistent with the performance period of approximately three years .

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For the years ended December 31, 2023, 2022 and 2021, the Company recognized compensation expense related to restricted stock units of $ 4.3 million, $ 3.8 million, and $ 3.7 million respectively, and a related tax benefit of $ 949,000 , $ 833,000 , and $ 802,000 , respectively.

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

As of December 31, 2023, the total unrecognized compensation expense related to non-vested restricted stock units was $ 6.8 million and the related weighted-average period over which the compensation expense is expected to be recognized was approximately 2.1 years.

The vesting date fair value of the restricted stock units that vested during the years ended December 31, 2023, 2022 and 2021 was $ 3.5 million, $ 3.3 million and $ 3.6 million, respectively.

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(17) Cash Restriction

The Bank had no cash restrictions at December 31, 2022 and had restricted cash included in interest earning deposits of $ 9.8 million at December 31, 2021, relating to collateral required on interest rate swaps from third-parties as discussed in Note (8) Derivative Financial Instruments.

The Bank does not have a collateral requirement with customers.

The Company had no cash restrictions at December 31, 2023 and December 31, 2022.

(18) Income Taxes

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2023 2022 2021

(In thousands)

(Dollars in thousands)

Current tax expense $ 24,364 $ 16,690 $ 20,896

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Income tax expense $ 11,160 $ 17,561 $ 22,472

The CARES Act, among other things, permitted net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021.

In addition, the CARES Act allowed net operating loss carrybacks incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

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

The effective tax rate was 15.3 % for the December 31, 2023 compared to an effective tax rate of 17.7 % and 18.6 % for the years ended December 31, 2022 and 2021, respectively.

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

The decrease in the effective tax rate during the year ended December 31, 2023 was due primarily to the change in income before income taxes earned between the periods, including a decrease in annual pre-tax income for the year ended December 31, 2023 which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing and solar tax credits.

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

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2023 2022 2021

(In thousands)

(Dollars in thousands)

Income tax expense at Federal statutory rate $ 15,312 $ 20,882 $ 25,307

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Tax-exempt instruments ( 1,311 ) ( 1,733 ) ( 1,929 )

Year Ended December 31,

2022 2021 2020

(In thousands)

Federal tax credits and other benefits (1)

1 unchanged sentence

Effects of BOLI ( 564 ) ( 735 ) ( 474 )

Tax benefit of CARES Act carryback — — ( 967 )

Other, net 101 190 238

Income tax expense $ 11,160 $ 17,561 $ 22,472

(1) Federal tax credits are provided for under the NMTC and LIHTC programs as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements.

Gross tax credits related to the Company's NMTC totaling $ 9.8 million were utilized during the seven year period ended December 31, 2020.

The following table presents major components of the deferred income tax asset (liability) resulting from differences between financial reporting and tax basis:

(1) Federal tax credits are provided for under the NMTC, Solar Tax Credits and LIHTC programs as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements.

The following table presents major components of the deferred income tax asset (liability) resulting from differences between financial reporting and tax basis at the dates indicated:

December 31, 2023 December 31, 2022

(In thousands)

(Dollars in thousands)

Deferred tax assets:

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Net unrealized losses on investment securities 20,395 28,061

Tax Credit Carryforward

Other deferred tax assets 503 120

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ROU lease asset ( 5,170 ) ( 4,967 )

Net unrealized gains on investment securities — ( 2,537 )

Other deferred tax liabilities ( 167 ) ( 163 )

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As of December 31, 2023, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management expects to realize the benefits of these deductible differences.

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

At December 31, 2023 and December 31, 2022, the Company had a net operating loss carryforward of $ 691,000 and $ 789,000 , respectively, that does not expire.

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

Due to sufficient earnings history and other positive evidence, management has no t recorded a valuation allowance on the net operating loss carryforward as of December 31, 2023 and December 31, 2022.

At December 31, 2023, the Company had a tax credit carryforward of $11,085,000 that expires in 2043.

Due to sufficient earnings history and other positive evidence, management has not recorded a valuation allowance on the tax credit carryforward as of December 31, 2023.

As of December 31, 2023 and December 31, 2022, the Company had an insignificant amount of unrecognized tax benefits, none of which would materially affect its effective tax rate if recognized.

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

The amount of interest and

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

The amount of interest and penalties accrued as of December 31, 2023 and December 31, 2022 and recognized during the years ended December 31, 2023, 2022 and 2021 were immaterial.

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

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

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

The Company and its Bank subsidiary file a United States consolidated federal income tax return, Oregon State and local income tax returns, and Idaho State tax return.

The tax years subject to examination by the Internal Revenue Service are the years ended December 31, 2023, 2022, 2021 and 2020.

(19) Commitments and Contingencies

(a) Commitments to Extend Credit

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

The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations.

In the ordinary course of business, the Company may enter into various types of transactions that include commitments to extend credit that are not included in its Consolidated Financial Statements.

The Company applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations.

The majority of the commitments presented below are variable rate.

Loan commitments can be either revolving or non-revolving.

The Bank’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.

The Company’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.

The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:

December 31, 2023 December 31, 2022

(In thousands)

(Dollars in thousands)

Commercial business:

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Total outstanding commitments $ 1,269,099 $ 1,280,349

The following table details the activity in the ACL on unfunded commitments during the periods indicated:

Year Ended December 31,

2022 2021 2020

(In thousands)

Balance, beginning of period $ 2,607 $ 4,681 $ 306

Impact of CECL Adoption — — 3,702

Adjusted balance, beginning of period 2,607 4,681 4,008

(Reversal of) provision for credit losses on unfunded commitments ( 863 ) ( 2,074 ) 673

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

(b) Variable Interests - LIHTC Investments

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Total unfunded contingent commitments related to the Company’s LIHTC investments totaled $ 107.9 million and $ 109.2 million at December 31, 2023 and December 31, 2022, respectively.

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

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

The Company expects to fund LIHTC commitments totaling $ 29.5 million during the year ending December 31, 2024 and $ 62.6 million during the year ending December 31, 2025, with the remaining commitments of $ 15.9 million to be funded by December 31, 2041.

There were no impairment losses on the Company’s LIHTC investments during the years ended December 31, 2023, 2022 and 2021.

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

The Company recognized related investment income of $ 247,000 and $ 694,000 during the years ended December 31, 2021 and 2020, respectively.

The Company recognized related investment income of $247,000 during the year ended December 31, 2021.

(20) Regulatory Capital Requirements

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

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

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

Company Heritage Bank

5 unchanged sentences

Capital conservation buffer 6.1 6.0 5.8 5.7

As of both December 31, 2022 and December 31, 2021, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allowed the Bank the option to delay for two years until December 31, 2021 an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.

As of December 31, 2023 and 2022, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allowed the Bank the option to delay for two years until December 31, 2021 an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.

(21) Heritage Financial Corporation (Parent Company Only)

4 unchanged sentences

December 31, 2023 December 31, 2022

(In thousands)

(Dollars in thousands)

Cash and cash equivalents $ 15,752 $ 12,926

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2023 2022 2021

(In thousands)

(Dollars in thousands)

INTEREST INCOME:

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2023 2022 2021

(In thousands)

(Dollars in thousands)

Cash flows from operating activities:

7 unchanged sentences

Common stock cash dividends paid ( 30,820 ) ( 29,491 ) ( 28,937 )

Proceeds from exercise of stock options — — 122

Repurchase of common stock ( 6,974 ) ( 3,196 ) ( 22,889 )

5 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data