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Item 1. Business

2025-02-27 compared with 2024-02-27 · 419 added, 308 removed, 164 unchanged (82% of the section changed)

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Heritage 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 as of December 31, 2024.

Heritage Bank also does business under the Whidbey Island Bank name on Whidbey Island, Washington.

The deposits of the Bank are insured by the FDIC.

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

We also make real estate construction and land development loans, consumer loans and residential real estate loans for sale or investment purposes on residential properties located primarily in our market.

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

Business Strategy

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Our commitment defines our relationships, sets expectations for our actions and directs decision-making in these four fundamental areas.

We will seek to achieve our business goals through the following strategies:

We seek to achieve our business goals through the following strategies:

Expand geographically as opportunities present themselves.

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We believe that consolidation across the community bank landscape will continue to take place and further believe that, with our capital and liquidity positions, our approach to credit management, and our extensive acquisition experience, we are well-positioned to take advantage of acquisitions or other business opportunities in our market areas.

In markets where we wish to enter or expand our business, we will also consider opening de novo branches, typically in conjunction with hiring commercial lending and deposit teams.

In markets where we wish to enter or expand our business, we also periodically consider opening de novo branches, typically in conjunction with hiring commercial lending and

deposit teams.

In the past, we have successfully integrated acquired institutions and opened de novo branches.

We will continue to be disciplined and opportunistic as it pertains to future acquisitions and de novo branching, focusing on the Pacific Northwest markets we know and understand.

We continue to be disciplined and opportunistic as it pertains to future acquisitions and de novo branching, focusing on the Pacific Northwest markets we know and understand.

Focus on asset quality.

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

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

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

We focus on loan relationships that are well-diversified in both size and industry types.

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In addition to our focus on underwriting, we believe the strength of our balance sheet provides us with the flexibility to manage through a variety of scenarios including additional growth-related activities.

As of December 31, 2023, our liquidity position was $225.0 million in cash and cash equivalents and $1.87 billion in total investment securities.

As of December 31, 2024, our on-balance sheet liquidity position was $117.1 million in cash and cash equivalents and $1.47 billion in total investment securities.

See also, Item 1A.

Risk Factors—Risks Related to Our Lending Activities.

For additional information, see Item 1A.

Risk Factors—Credit Risks this Form 10-K.

Supervision and Regulation

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

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

Any change in applicable laws, regulations, or regulatory policies may have a material effect on our business, operations, and prospects.

We cannot predict the nature or the extent of the effects on our business and earnings that any fiscal or monetary policies or new Federal or State laws may have in the future.

The following is a summary discussion of certain laws and regulations applicable to the Company and the Bank which is qualified in its entirety by reference to the actual laws and regulations.

Heritage Financial Corporation

As a bank holding company registered with the Federal Reserve, we are subject to comprehensive regulation and supervision by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve.

This regulation and supervision is generally intended to ensure that we limit our activities to those allowed by law and that we operate in a safe and sound manner without endangering the financial health of the Bank.

We are required to file annual and periodic reports with the Federal Reserve and provide additional information as the Federal Reserve may require.

The Federal Reserve may examine us, and any of our subsidiaries, and assess us for the cost of such examination.

The Federal Reserve has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders, or require that a holding company divest subsidiaries (including its bank subsidiary).

In general, enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.

The Federal Reserve may also order termination of non-banking activities by non-banking subsidiaries of bank holding companies, or divestiture of ownership and control of a non-banking subsidiary by a bank holding company.

Some violations may also result in criminal penalties.

Federal Reserve policy provides that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks.

A bank holding company’s failure to meet its obligation to serve as a source of strength by providing financial assistance to a subsidiary bank in financial distress is generally considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both.

As a bank holding company, we are required to obtain the prior approval of the Federal Reserve to acquire all, or substantially all, of the assets of any other bank or bank holding company.

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

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

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

Among other initiatives, the Executive Order encouraged federal banking agencies to review their current merger oversight practices and adopt a plan for revitalization of such practices.

There are many steps that must be taken by the agencies before any formal changes to the framework for evaluating bank mergers can be finalized and the prospects for such action are uncertain at this time.

Under the prompt corrective action provisions of the Federal Deposit Insurance Act, a bank holding company with an undercapitalized subsidiary bank must guarantee, within limitations, the capital restoration plan that is required to be implemented for its undercapitalized subsidiary bank.

If an undercapitalized subsidiary bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the Federal Reserve may, among other restrictions, prohibit the bank holding company or its undercapitalized subsidiary bank from paying any dividend or making any other form of capital distribution without the prior approval of the Federal Reserve.

Federal Reserve policy also provides that a bank holding company may pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition.

Bank regulations also require bank holding companies and banks to maintain minimum capital ratios and a capital conservation buffer.

For additional information, see “Capital Adequacy” below.

In addition, under Washington corporate law, a company generally may not pay dividends if, after that payment, the company would not be able to pay its liabilities as they become due in the usual course of business or its total assets would be less than its total liabilities.

Any subsidiaries which we may control are considered “affiliates” of the Company within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to numerous restrictions.

With some exceptions, we and our subsidiaries are prohibited from tying the provision of various products or services, such as extensions of credit, to other products or services offered by us, or our affiliates.

The stock of the Company is registered with the SEC under the Exchange Act.

As such, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act.

Heritage Bank

The Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the FDIC, and is subject to regulation by the FDIC and the DFI.

Applicable Federal and State statutes and regulations which govern a bank’s operations relate to minimum capital requirements, required reserves against deposits, investments, loans, legal lending limits, mergers and consolidation, borrowings, issuance of securities, payment of dividends, establishment of branches, privacy, anti-money laundering and other aspects of its operations, among other things.

The DFI and the FDIC also have authority to prohibit banks under their supervision from engaging in what they consider to be unsafe and unsound practices.

The Bank is required to file periodic reports with the FDIC and is subject to periodic examinations and evaluations by the FDIC and the DFI.

Based upon these evaluations, the regulators may revalue the assets of an institution and require that it establish specific reserves to compensate for the differences between the determined value and the book value of such assets.

These examinations must be conducted at least every 12 months.

The Bank pays dividends to the Company.

The FDIC and the DFI also have the general authority to restrict capital distributions by the Bank, including dividends paid by the Bank to the Company.

Such restrictions are generally tied to the Bank’s capital levels after giving effect to such distributions.

Our long-term ability to pay dividends to our stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company.

So long as the Bank remains “well-capitalized” after each capital distribution, and operates in a safe and sound manner, it is management's belief that the banking regulators will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.

Capital Adequacy

The Federal Reserve and FDIC have issued substantially similar risk-based and leverage capital regulations applicable to bank holding companies and banks, respectively.

In addition, these regulatory agencies may from time to time require that a bank holding company or bank maintain capital above the minimum levels, based on its financial condition or actual or anticipated growth.

These regulations implement the regulatory capital reforms required by the Dodd-Frank Act and the Basel III requirements, a comprehensive capital framework and rules for U.S.

banking organizations approved by the Federal Reserve Board and the FDIC in 2013.

Under these capital regulations, the minimum capital ratios are:

(1) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets;

(2) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%;

(3) a Tier 1 capital ratio of 6.0% of risk-weighted assets;

and (4) a total capital ratio of 8.0% of risk-weighted assets.

Common equity Tier 1 generally consists of common stock;

retained earnings;

AOCI unless an institution elects to exclude AOCI from regulatory capital;

and certain minority interests;

all subject to applicable regulatory adjustments and deductions.

Tier 1 capital generally consists of common equity Tier 1 and noncumulative perpetual preferred stock.

Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for credit losses up to 1.25% of risk-weighted assets.

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Statements And Supplementary Data.

FDIC-insured institutions, like the Bank, their holding companies and affiliates are extensively regulated under federal and state law.

As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various banking agencies, including the DFI, the Federal Reserve, the FDIC and the Consumer Financial Protection Bureau (“CFPB”).

Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB and PCAOB, securities laws administered by the SEC and state securities authorities, and anti-money and sanctions laundering laws enforced by the U.S.

Department of the Treasury (“Treasury”) have an impact on our business.

The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders.

These laws, and the regulations of the banking agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments that the Company and the Bank may make, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability of the Company or the Bank to merge, consolidate and acquire, dealings with our insiders and affiliates and the payment of dividends.

In reaction to the global financial crisis and particularly following the passage of the Dodd-Frank Act, we experienced heightened regulatory requirements and scrutiny.

Although the reforms primarily targeted large banking organizations and systemically important financial institutions, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase.

The Economic Growth Act eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving them of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds.

These reforms have been favorable to our operations.

It is anticipated that the Trump Administration and the current U.S.

Congress likely will not increase the regulatory burden on community banking organizations and may seek to reduce and streamline certain prudential and regulatory requirements

applicable to community banking organizations at a federal level based on statements made by relevant congressional leaders and the acting leaders of certain federal banking agencies.

At this time, however, it is not possible to predict with any certainty the actual impact that the Trump Administration may have on the banking industry or the operations of the Company or the Bank.

The supervisory framework for U.S.

banking organizations subjects banks and bank holding companies to regular examination by their respective banking agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their businesses.

These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity and various other factors.

The banking agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations.

The approach to supervision adopted by each banking agency may have significant impacts on the operations and results of the Company and the Bank, as well as the banking industry in general.

Based on recent statements made by congressional leaders and the acting leaders of certain federal banking agencies, there may be changes in the supervisory processes and approach made by the Trump Administration banking agencies, but it is not possible at this time to predict the specific changes (or the timing of any such changes) that may be made.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank.

It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described.

The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

The Role of Capital

Regulatory capital represents the net assets of a banking organization available to absorb losses.

FDIC-insured institutions, such as banks, as well as their holding companies (i.e., banking organizations) are required to hold more capital than other businesses, which directly affects our earnings capabilities.

Although capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banking organizations prior to that crisis was insufficient to absorb losses during periods of severe stress.

Capital Levels.

Banking organizations have been required to hold minimum levels of capital based on guidelines established by the banking agencies since 1983.

The minimums have been expressed in terms of ratios of “capital” divided by “total assets.” Beginning in 1989, the capital guidelines for U.S.

banking organizations have been based upon international capital accords (known as “Basel” accords) adopted by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S.

federal banking agencies on an interagency basis.

These accords recognized that bank assets for the purpose of the capital ratio calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations.

Following the global financial crisis, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as the Basel III accords, to address deficiencies recognized in connection with the global financial crisis.

The Basel III Rule.

federal bank regulatory agencies adopted the U.S.

Basel III regulatory capital reforms, and, at the same time, effected changes required by the Dodd-Frank Act, in regulations that were effective (with certain phase-ins) in 2015 (the “Basel III Rule”).

The Basel III Rule established capital standards for banking organizations that are meaningfully more stringent than those established previously and are still in effect today.

The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including national banks, state banks and savings and loan associations, as well as to most bank and savings and loan holding companies.

The Company and the Bank are each subject to the Basel III Rule.

Risk-Weighting Assets.

Three of the required capital ratios imposed under the Basel III Rule, as discussed immediately below, are calculated using a denominator of total “risk-weighted” assets.

In the calculation of so-called “risk weights,” which was introduced in the Basel I accord, bank assets were divided into four basic risk-weighted categories of 0%, 20%, 50%, and 100%.

The Basel III accords required a more complex, detailed and calibrated assessment of risk in the calculation of risk weightings.

Although it uses the same technique introduced by the Basel I accord in assigning assets to risk-weight categories, it significantly increases the number of categories and adds conditions to the assignment of certain risk weights.

Risk weights were established as high as 250% for certain commercial real estate exposures, and higher for certain derivatives.

The assignment of risk weights is likely to continue to be under review by the federal banking agencies as they seek to implement certain remaining elements of the Basel III accords.

In July 2023, the Biden Administration banking agencies proposed wide-ranging and significant changes to the Basel III Rules (the “Basel III Endgame Proposal”), which would have, among other requirements, imposed structural changes to the calculation of capital requirements and risk-weighted assets.

The Basel III Endgame Proposal would have primarily impacted the capital requirements applicable to banking organizations with $100 billion or more in total assets, and as a general matter, would not have impacted the Company.

The Basel III Endgame Proposal has not been, and is not expected to be, adopted in its proposed form.

The Trump Administration banking agencies may change or issue their own version of this proposal.

Minimum Capital Ratios.

The Basel III Rule also increased the required quantity and quality of capital.

Not only did it increase most of the required minimum capital ratios in effect prior to January 1, 2015, but, in requiring that forms of capital be of higher quality to absorb loss, it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain

regulatory adjustments.

The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations).

The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and required deductions from Common Equity Tier 1 Capital if such assets exceeded a percentage of a banking organization’s Common Equity Tier 1 Capital.

The Basel III Rule requires banking organizations to maintain minimum capital ratios as follows:

• A ratio of Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;

• A ratio of Tier 1 Capital equal to 6% of risk-weighted assets;

• A ratio of Total Capital (Tier 1 plus Tier 2) equal to 8% of risk-weighted assets;

• A leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, banking organizations that want to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction also must maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.

The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.

Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

Well-Capitalized Requirements.

The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized.” Banking agencies uniformly encourage banking organizations to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements.

For example, a banking organization that is well-capitalized may:

(i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities;

(ii) qualify for expedited processing of other required notices or applications;

and (iii) accept, roll-over or renew brokered deposits.

Higher capital levels also could be required if warranted by the particular circumstances or risk profiles of individual banking organizations.

For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.

Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Under the capital regulations of the Federal Reserve for the Company and the FDIC for the Bank, in order to be well capitalized, a banking organization, like the Company and the Bank, must maintain:

• A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;

• A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;

• A ratio of Total Capital to total risk-weighted assets of 10% or more;

• A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.

It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.

As of December 31, 2024:

(i) the Bank was not subject to a directive from the FDIC or the DFI to increase its capital and (ii) the Bank was well-capitalized, as defined by FDIC regulations.

As of December 31, 2024, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized.

As of December 31, 2024, we were also in compliance with the capital conservation buffer.

Prompt Corrective Action.

Federal statutes establish a supervisory framework for FDIC-insured institutions based on five capital categories:

well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

An institution’s category depends upon where its capital levels are in relation to relevant capital measures.

The well capitalized category is described in the Capital Adequacy section above.

An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits.

To be considered adequately capitalized, an institution must have the minimum capital ratios described in the Capital Adequacy section above.

Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized.

Failure by a bank to comply with applicable capital requirements would result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator.

Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.

Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.

As of December 31, 2023, the Company and the Bank met all minimum capital requirements and the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

See Note (20) Regulatory Capital Requirements of the Notes to Consolidated Financial Statements included in Item 8.

Financial Statements And Supplementary Data.

Commercial Real Estate Transactions

The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending.

The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution).

The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and maintaining capital levels commensurate with the level and nature of real estate concentrations.

A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:

total loans for construction, land development, and other land represent 100% or more of the bank’s total capital;

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

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

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

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

Deposit Insurance and Other FDIC Programs

The deposits of the Bank are insured up to $250,000 per separately insured category by the Deposit Insurance Fund, which is administered by the FDIC.

The FDIC is an independent federal agency that insures the deposits, up to applicable limits, of depository institutions.

As insurer of the Bank's deposits, the FDIC has supervisory and enforcement authority over the Bank and this insurance is backed by the full faith and credit of the United States government.

As insurer, the FDIC imposes deposit insurance assessments and is authorized to conduct examinations of and to require reporting by institutions insured by the FDIC.

It also may prohibit any FDIC-insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the institution and the Deposit Insurance Fund.

The FDIC also has the authority to initiate enforcement actions and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

Deposit insurance assessments are based on the average consolidated total assets less tangible equity capital of a financial institution.

In addition, the Dodd-Frank Act set the minimum designated reserve ratio of the Deposit Insurance Fund at 1.35%, required the FDIC to set a target for the ratio each year, and eliminated the requirement that the FDIC pay dividends to insured depository institutions when the ratio exceeds certain thresholds.

The FDIC set the target ratio at 2.0% and adopted a plan to achieve that target ratio.

Currently, total base assessment rates range from 1.5 to 40 basis points on an annualized basis, subject to certain adjustments.

Under current regulations, the ranges of assessment rates are scheduled to decrease as the ratio increases in increments above 2.0%.

No institution may pay a dividend if it is in default on its deposit insurance assessment.

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

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

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

Based on the FDIC’s recent projections, however, the FDIC determined that the Deposit Insurance Fund reserve ratio is at risk of not reaching the statutory minimum by the statutory deadline of September 30, 2028 without increasing the deposit insurance assessment rates.

The increased assessment would improve the likelihood that the Deposit Insurance Fund reserve ratio would reach the required minimum by the statutory deadline, consistent with the FDIC’s Amended Restoration Plan.

The FDIC also concurrently maintained the Designated Reserve Ratio (“DDR”) for the Deposit Insurance Fund at 2 percent for 2023.

The new assessment rate schedules will remain in effect unless and until the reserve ratio meets or exceeds 2 percent in order to support growth in the Deposit Insurance Fund in progressing toward the FDIC’s long-term goal of a 2 percent DRR.

Progressively lower assessment rate schedules will take effect when the reserve ratio reaches 2 percent, and again when it reaches 2.5 percent.

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

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

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

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

Bank Secrecy Act / Anti-Money Laundering Laws

The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001.

These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers.

Violations of these requirements can result in substantial civil and criminal sanctions.

In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

Privacy Standards and Cybersecurity

The Bank is subject to federal regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.

These regulations require the Bank to disclose its privacy policy, including informing consumers of their information sharing practices and informing consumers of their rights to opt out of certain practices.

In addition, on November 18, 2021, the federal banking agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents.

Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred.

Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector.

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

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

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

Cybersecur ity for annual disclosures.

Other Regulatory Developments

Community Reinvestment Act .

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

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

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

The concept of a banking organization being “well-capitalized” is part of a regulatory enforcement regime that provides the federal banking agencies with broad power to take “prompt corrective action” to resolve the problems of depository institutions based on the capital level of each particular institution.

The extent of the banking agencies’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation.

Depending upon the capital category to which a banking organization is assigned, the banking agencies’ corrective powers include:

(i) requiring the institution to submit a capital restoration plan;

(ii) limiting the institution’s asset growth and restricting its activities;

(iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself;

(iv) restricting transactions between the institution and its affiliates;

(v) restricting the interest rate that the institution may pay on deposits;

(vi) ordering a new election of directors of the institution;

(vii) requiring that senior executive officers or directors be dismissed;

(viii) prohibiting the institution from accepting deposits from correspondent banks;

(ix) requiring the institution to divest certain subsidiaries;

(x) prohibiting the payment of principal or interest on subordinated debt;

and (xi) ultimately, appointing a receiver for the institution.

Community Bank Capital Simplification.

Community banking organizations have long raised concerns with federal banking agencies about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule.

In response, the U.S.

Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion as part of the Economic Growth Act.

Section 201 of the Economic Growth Act specifically instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8% and 10%.

Under the final rule, a community banking organization is eligible to elect to comply with its capital requirements under the CBLR framework if it has:

(i) less than

$10 billion in total consolidated assets;

(ii) limited amounts of certain assets and off-balance sheet exposures;

and (iii) a CBLR greater than 9%.

We may elect the CBLR framework at any time, but have not elected to use the CBLR framework as of December 31, 2024.

Supervision and Regulation of the Company

The Company, as the sole shareholder of the Bank, is a bank holding company.

As a bank holding company, we are registered with, and subject to regulation, supervision and enforcement by, the Federal Reserve under the BHCA.

We are legally obligated to act as a source of financial and managerial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so.

Under the BHCA, we are subject to periodic examination by the Federal Reserve and are required to file with the Federal Reserve periodic reports of our operations and such additional information regarding us and the Bank as the Federal Reserve may require.

Acquisitions, Activities and Financial Holding Company Election.

The primary purpose of a bank holding company is to control and manage banks.

The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company.

Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States.

In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.

Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions.

For a discussion of the capital requirements, see “–The Role of Capital” above.

The BHCA generally prohibits us from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.

This general prohibition is subject to a number of exceptions.

The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking...

as to be a proper incident thereto.” This authority permits us to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage services.

The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

In addition to approval from the Federal Reserve, prior approval for acquisitions may be required from other agencies, such as the DFI or other agencies that regulate the target company of an acquisition.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity, as long as the activity does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

We have not currently elected to operate as a financial holding company.

Change in Control.

Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.

“Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Capital Requirements.

We are required to maintain consolidated capital in accordance with Federal Reserve capital adequacy requirements.

For a discussion of capital requirements, see “–The Role of Capital” above.

Dividend Payments.

Our ability to pay dividends to our shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.

As a Washington corporation, we are subject to the limitations of Washington corporate law, which does not allow us to pay dividends if, after that payment, the Company would not be able to pay its liabilities as they become due in the usual course of business or its total assets would be less than its total liabilities.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if:

(i) the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

(ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition;

or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.

Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

In addition, under the Basel III Rule, banking organizations that want to pay unrestricted dividends must maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer.

See “–The Role of Capital” above.

Incentive Compensation.

There have been a number of developments in recent years focused on incentive compensation plans sponsored by bank holding companies and their subsidiary banks, reflecting recognition by the federal banking agencies and the U.S.

Congress that flawed incentive compensation practices in the financial industry were one of many factors contributing to the global financial crisis.

The result was interagency guidance on sound incentive compensation practices for banking organizations.

The interagency guidance recognized three core principles.

Effective incentive plans should:

(i) provide employees incentives that appropriately balance risk and reward;

(ii) be compatible with effective controls and risk-management;

and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

Much of the guidance is directed at large banking organizations and, because of the size and complexity of their operations, the regulators expect those organizations to maintain systematic and formalized policies, procedures and systems for ensuring that the incentive compensation arrangements for all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards.

Under the interagency guidance, smaller banking organizations, like us, that use incentive compensation arrangements are expected to implement less extensive, formalized and detailed policies, procedures and systems than those of the larger banks.

In May 2024, certain of the federal banking and other financial services agencies released a proposed rule regarding certain incentive-based compensation arrangements at certain financial institutions with at least $1 billion in assets, as required under Section 956 of the Dodd-Frank Act.

This proposal was largely based on an earlier 2016 proposal.

The Federal Reserve and the SEC, however, did not join this proposal, signaling potential interagency misalignment and raising doubts regarding the likelihood of the proposed rule being finalized in its current form.

The FDIC has indicated that the agencies will continue to coordinate to reach consensus, but it is not yet clear whether this initiative will continue during the Trump Administration.

Monetary Policy.

The monetary policy of the Federal Reserve has a significant effect on the operating results of bank holding companies and their subsidiaries.

Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S.

government securities and changes in the discount rate on bank borrowings.

These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits, which may impact our business and the operations of the Company and the Bank.

Federal Securities Regulation.

Our common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Exchange Act.

Consequently, we are subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Corporate Governance.

The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that affect most U.S.

publicly traded companies.

It increased shareholder influence over boards of directors by requiring companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow shareholders to nominate and solicit voters for their own candidates using a company’s proxy materials.

The Dodd-Frank Act also directed the Federal Reserve, together with the federal banking and financial services agencies, to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

As discussed in the “Incentive Compensation” section above, the federal banking agencies and financial services agencies have proposed rules regarding incentive-based compensation arrangements for certain financial institutions, but no rule has been adopted at this time.

Supervision and Regulation of the Bank

The Bank is a Washington state-chartered bank.

The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category.

As a Washington state-chartered FDIC-insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFI, the chartering authority for Washington banks, and the FDIC, designated by federal law as the primary federal regulator of insured state banks that, like the Bank, are not members of the Federal Reserve System (nonmember banks).

Deposit Insurance.

As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC.

The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification.

For institutions like the Bank that are not considered large and highly complex banking organizations, the risk-based assessment is based on examination ratings and financial ratios.

The total base assessment rates, effective as of January 1, 2023, currently range from 2.5 basis points to 32 basis points.

However, the maximum rate is 18 basis points for FDIC-insured institutions in the top two categories of examination composite ratings.

At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking.

For this purpose, the reserve ratio is the DIF balance divided by estimated insured deposits.

In response to the global financial crisis, the Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35% of the estimated amount of total insured deposits.

In its October 2024 semiannual update, the FDIC stated that the reserve ratio likely will reach the statutory minimum by the September 30, 2028 deadline and that no adjustments to the base assessment rates are currently projected.

In addition, because the total cost of the failures of Silicon Valley Bank and Signature Bank to the DIF was approximately $24.1 billion, the FDIC adopted a special assessment for banking organizations having assets of $5 billion or more, at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024, and with an invoice payment date of June 28, 2024.

The FDIC will continue to collect special assessments for an anticipated total of eight quarterly assessment periods.

The special assessment amount for each FDIC-insured institution will be determined at a quarterly rate of 3.36 basis points,

multiplied by an institution’s estimated uninsured deposits, reported for the quarter that ended December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits of the institution (or of the banking organization as a whole for multi-bank holding companies, such as the Company).

Although the Company and the Bank are subject to the FDIC’s special assessment as a banking organization with assets of $5 billion or more, the Company does not have to pay the special assessment based on its amount of uninsured deposits.

Supervisory Assessments.

All Washington banks are required to pay supervisory assessments to the DFI to fund the operations of that agency as well as other examination fees.

The amount of the assessment is calculated on the basis of the Bank’s total assets.

During the year ended December 31, 2024, the Bank paid supervisory assessments to the DFI totaling approximately $0.2 million.

Capital Requirements.

Banks are generally required to maintain capital levels in excess of other businesses.

For a discussion of capital requirements, see “–The Role of Capital” above.

Liquidity Requirements.

Liquidity is a measure of the ability and ease with which bank assets may be converted to meet financial obligations such as deposits or other funding sources.

Banks are required to implement liquidity risk management frameworks that ensure they maintain sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events.

The level and speed of deposit outflows contributing to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in the first half of 2023 was unprecedented and contributed to acute liquidity and funding strain.

These events have further underscored the importance of liquidity risk management and contingency funding planning by insured depository institutions like the Bank, as highlighted in a 2023 addendum to existing interagency guidance on funding and liquidity risk management.

The primary role of liquidity risk management is to:

(i) prospectively assess the need for funds to meet obligations;

and (ii) ensure the availability of cash or collateral to fulfill those needs at the appropriate time by coordinating the various sources of funds available to the institution under normal and stressed conditions.

The Basel III Rule includes a liquidity framework that requires the largest insured institutions to measure their liquidity against specific liquidity tests.

One test, referred to as the Liquidity Coverage Ratio is designed to ensure that the banking organization has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario.

The other test, known as the Net Stable Funding Ratio, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon.

These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).

Although these tests do not apply to the Bank, we continue to review our liquidity risk management policies in light of regulatory requirements and industry developments.

For instance, in July 2024, the FDIC released a request for information on deposits, soliciting information on whether and to what extent certain types of deposits may behave differently from each other (particularly during periods of economic or financial stress), the results of which may impact liquidity monitoring and risk management requirements, including for FDIC-insured institutions like the Bank going forward.

Dividend Payments.

The Bank pays dividends to the Company.

Under the Washington Commercial Bank Act, Washington state-chartered banks may not declare or pay any dividend in an amount greater than its retained earnings, without approval from the DFI.

Under the prompt corrective action requirements, the payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.

As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2024.

Notwithstanding the availability of funds for dividends, however, the FDIC and the DFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice.

See “–The Role of Capital” above.

State Bank Investments, Activities and Acquisitions.

The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Washington law.

However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank.

Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF.

These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.

The Bank may be required to seek approval from the DFI, the FDIC and other banking or financial services agencies before engaging in certain acquisitions or mergers under applicable state and federal law.

In 2024, each of the OCC and the FDIC separately released updated policy statements—and in the case of the OCC, a final rule—regarding how each banking agency reviews applications submitted pursuant to the Bank Merger Act based on statutory factors.

The acting leader of the Trump Administration’s FDIC has indicated that the FDIC may seek to reverse the FDIC’s 2024 policy statement.

Insider Transactions.

The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank.

Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to “related interests” of such directors, officers and principal shareholders under state and federal law.

In addition, federal law and regulations may affect the terms on which any person who is a director or officer of the Company or the Bank, or a principal shareholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards/Risk Management.

The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions.

The standards apply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.

While regulatory standards do not have the force of law, if an institution operates in an unsafe and unsound manner, the FDIC-insured institution’s primary federal banking agency may require the institution to submit a plan for achieving and maintaining compliance.

If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal banking agency, the agency is required to issue an order directing the institution to cure the deficiency.

Until the deficiency cited in the regulator’s order is cured, the agency may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates that the institution pays on deposits or require the institution to take any action that the agency deems appropriate under the circumstances.

Noncompliance with safety and soundness may also constitute grounds for other enforcement action by the federal banking agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the banking agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise.

Properly managing risk has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets.

The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk.

The Bank is expected to have active board and senior management oversight;

adequate policies, procedures and limits;

adequate risk measurement, monitoring and management information systems;

and comprehensive internal controls.

The federal banking agencies also have released specific risk management guidance on certain topics, including third-party relationships, in response to the proliferation of relationships between banking organizations and financial technology companies (although the guidance applies more broadly).

Privacy and Cybersecurity.

The Bank is subject to many U.S.

federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of its customers.

These laws require the Bank to periodically disclose its privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances.

They also impact the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers.

In addition, the Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information.

These security and privacy policies and procedures are in effect across all businesses and geographic locations.

The Bank and the Company also are subject to a number of federal and state laws and regulations requiring notifications and disclosures regarding certain cybersecurity incidents.

The Bank must also consider and address cybersecurity considerations as part of its risk management processes.

Branching Authority.

Washington state-chartered banks, such as the Bank, have the authority under Washington Commercial Bank Act to establish branches anywhere in the State of Washington, subject to receipt of approval from the DFI and FDIC, as appropriate.

The establishment of new interstate branches has historically been permitted only in those states the laws of which expressly authorize such expansion.

The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments.

Federal law permits state banks to merge with banks in other states subject to:

(i) regulatory approval;

(ii) federal and state deposit concentration limits;

and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.

Federal Home Loan Bank System.

The Bank is a member of a FHLB, which serves as a central credit facility for its members.

The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system.

It makes loans to member banks in the form of FHLB advances.

All advances from the FHLB are required to be fully collateralized as determined by the FHLB.

Community Reinvestment Act Requirements.

The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods.

The FDIC regularly assesses the Bank’s record of meeting the credit needs of its communities in dedicated examinations.

The Bank’s CRA ratings derived from these examinations can have significant impacts on the activities in which the Bank and the Company may engage.

For example, a low CRA rating may impact the review of applications for acquisitions by the Bank.

On October 24, 2023, the federal banking agencies issued a final rule to strengthen and modernize the CRA regulations (the “CRA Rule”).

Elements of the CRA Rule were originally intended to become effective on April 1, 2024 (while other elements had much later effective dates).

However, the effective date of the CRA Rule was paused because of a preliminary injunction issued in connection with ongoing litigation claiming that the federal banking agencies exceeded their statutory authority in promulgating the CRA Rule.

Despite this lawsuit, management of the Bank are continuing to assess the impact of the CRA Rule on the Bank’s CRA lending and investment activities in their respective markets.

The CRA Rule is designed to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated.

More specifically, the federal banking agencies described the goals of the CRA Rule as follows:

(i) to expand access to credit, investment, and basic banking services in low- and moderate-income communities;

(ii) to adapt to changes in the banking industry, including mobile and internet banking, by modernizing assessment areas while maintaining a focus on branch-based areas;

(iii) to provide greater clarity, consistency, and transparency in the application of the regulations through the use of standardized metrics as part of CRA evaluation and clarifying eligible CRA activities focused on low- and moderate-income communities and underserved rural communities;

(iv) to tailor CRA rules and data collection to bank size and business model;

and (v) to maintain a unified approach among the regulators.

Anti-Money Laundering/Countering the Financing of Terrorism/Sanctions .

The Bank Secrecy Act (“BSA”) is the common name for a series of laws and regulations enacted in the United States to combat money laundering and the financing of terrorism.

They are designed to deny terrorists and criminals the ability to obtain access to the U.S.

financial system and have significant implications for FDIC-insured institutions and other businesses involved in the transfer of money.

The so-called Anti-Money Laundering / Countering the Financing of Terrorism (“AML/CFT”) regime under the BSA provides a foundation to promote financial transparency and deter and detect those who seek to misuse the U.S.

financial system to launder criminal proceeds, finance terrorist acts, or move funds for other illicit purposes.

The laws mandate financial services companies to have policies and procedures with respect to measures designed to address:

(i) customer identification programs;

(ii) money laundering;

(iii) terrorist financing;

(iv) identifying and reporting suspicious activities and currency transactions;

(v) currency crimes;

and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.

The Bank must also comply with stringent economic and trade sanctions regimes administered and enforced by the Office of Foreign Assets Control.

Concentrations in Commercial Real Estate.

Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment.

A concentration in CRE is one example of regulatory concern.

The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny:

(i) CRE loans exceeding 300% of capital and increasing 50% or more in the preceding three years;

or (ii) construction and land development loans exceeding 100% of capital.

The CRE Guidance does not limit banks’ levels of CRE activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their CRE concentrations.

On December 18, 2015, and again in recent years, the federal banking agencies have issued statements to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards.

The federal banking agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending.

In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk.

As of December 31, 2024, the Bank did not exceed these guidelines.

Consumer Financial Services.

The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws.

The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices.

The CFPB has examination and enforcement authority over providers with more than $10 billion in assets.

FDIC-insured institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.

Because abuses in connection with residential mortgages were a significant factor contributing to the global financial crisis, many initial rules issued by the CFPB, as required by the Dodd-Frank Act, addressed mortgage and mortgage-related products, their underwriting, origination, servicing and sales.

The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices.

In addition to numerous disclosure requirements, the Dodd Frank Act and the CFPB’s rules imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.”

Over the last several years, the CFPB has taken an aggressive approach to the regulation (and supervision, where applicable) of providers of consumer financial products and services.

For example, the CFPB has taken, or attempted to take, a proactive, multi-front approach to protect consumers from excessive overdraft and non-sufficient funds fees, including through proposed or final rules, interpretive opinions and enforcement actions.

Given the increased number and expansive nature of its regulatory initiatives, the CFPB has been subject to lawsuits brought by the banking industry and other providers of consumer financial products and services.

The CFPB’s approach may change under the Trump Administration, but it remains unclear exactly what changes will occur or how quickly.

In addition, certain rules that the Biden Administration CFPB finalized may be subject to reversal by either the U.S.

Congress or the new CFPB administration.

The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.

The Bank must also comply with certain state consumer protection laws and requirements in the states in which it operates.

Website Access to Company Reports

We post publicly available reports required to be filed with the SEC on our website, www.hf-wa.com, as soon as reasonably practicable after filing such reports.

The required reports are available free of charge through our website.

We post reports required to be filed with the SEC on our website, www.hf-wa.com, as soon as reasonably practicable after filing them.

Copies of the required reports are available free of charge through our website.

Code of Ethics

We have adopted a Code of Ethics that applies to our principal officers.

We have posted the text of our Code of Ethics at www.hf-wa.com in the section titled Overview:

We have adopted a Code of Ethics that applies to our directors, officers and employees, as well as those engaged by the Company, but who are not employees, such as contractors and those engaged through external agencies.

We have posted a copy of our Code of Ethics at www.hf-wa.com in the section titled Overview:

Governance Documents.

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

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

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

In accordance with SEC rules, significant changes or waivers of the Code of Ethics will be posted on our website at www.hf-wa.com in the section titled Overview:

Governance Documents.

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

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

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

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

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

Human Capital

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

Diversity, Equity, Inclusion (“DEI”)

Inclusive Workplace

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

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

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

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

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

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

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

All employees receive ongoing diversity training.

We focus on inclusion and belonging with a DEI Officer certified by the National Diversity Council (“NDC”) as well as a dedicated Diversity Council comprised of employees and members of management across different functional areas.

Both our Chief Executive Officer and Chief Human Resources Officer serve as executive sponsors to this council.

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

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

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• Workplace Inclusion:

Promote a culture that encourages collaboration, flexibility, and fairness to enable individuals to contribute to their full potential.

• Sustainability:

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

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

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

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

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

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

Promote a culture and develop long-term strategies that encourage collaboration, inclusion, flexibility and fairness to enable individuals to contribute to their full potential.

In 2023, our recruiting team achieved certification as “Diversity and Inclusion Recruiters” after completing the Advanced Internet Recruitment Strategies program.

All hiring managers are assigned "Interviewing and Selection" training to address and mitigate unconscious bias in hiring decisions.

This initiative has resulted in an enhanced diversity representation across the organization, with 43% of new hires in 2024 coming from underrepresented minority groups, compared to 37% in 2023.

Additionally, the Company continues to collaborate with an external consultant to provide inclusive leadership training to its managers.

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

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

Additional "Lunch & Learn" sessions are open to all employees and members of management, encouraging ongoing discussions and skills development in these areas.

As of December 31, 2024, the Company employed 733 full-time and 28 part-time employees across Washington, Oregon, and Idaho.

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During 2024, we hired 130 regular full-time and part-time employees.

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

Our average overall tenure was 7.1 years.

The average tenure of management was 9.9 years.

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

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

Organizational Level

Individual Contributor

70.13 % 29.87 %

Total Workforce

69.94 % 30.06 %

Organizational Level

Underrepresented Groups (%)

Individual Contributor 28.69 % 28.7 % 71.31 %

Manager 23.26 23.3 76.74

Director 7.14 7.1 92.86

Executive — — 100.00

Total Workforce 26.46 % 26.5 73.54 %

Voluntary workforce

turnover (rolling 12-month attrition) was 14.9% for the period ended December 31, 2024, compared to 16.6% for the period ended December 31, 2023.

At the end of 2024, our average overall tenure was 7.5 years and the average tenure of management was 9.7 years.

As of December 31, 2024, the Company’s individual contributors were 70.1% female and 29.9% male;

managers were 72.3% female and 27.7% male;

director-level employees (not members of the Board) were 54.2% female and 45.8% male;

and executives were 22.2% female and 77.8% male, with the Company’s total workforce being 69.5% female and 30.5% male.

As of December 31, 2024, the Company’s individual contributors were 29.4% members of underrepresented minority groups and 70.6% white;

managers were 23.5% members of underrepresented minority groups and 76.5% white;

director-level employees (not members of the Board) were 8.3% members of underrepresented minority groups and 91.7% white;

and executives were 100% white, with the Company’s total workforce being 27.1% members of underrepresented minority groups and 72.9% white.

Communication and Listening

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

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

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

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In recognition of our commitment to employee engagement, the Company earned a spot among the top 100 Best Places to Work in Washington and Oregon by the Puget Sound and Portland Business Journals based on the 2024 employee engagement survey.

The company received similar recognition in 2023.

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

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

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

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

For the past 10 years, Heritage Bank University has been recognized as a “Champion of Learning” by The Association for Talent Development for its commitment to employee learning.

In 2024, we launched two new Leadership Certificate Programs:

The Leadership Essentials Certificate is designed for employees interested in developing their leadership skills and preparing for leadership and management in the future, while the Leadership in Action Certificate is for current supervisors and managers interested in deepening their applied leadership skills.

Since the launch of these programs in April 2024, 33 Heritage Bankers have received their Leadership Certification through one of these programs.

The Company leverages an online succession planning tool to further identify next-generation leaders and establish development plans for these individuals.

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

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

As of December 31, 2024, the Company’s generational representation consisted of 17% Baby Boomers (born 1945 to 1964), 37% Gen X-ers (born 1965 to 1980), 35% Millennials (born 1981 to 1996), and 10% Gen Z-ers (born 1997 to 2010).

Management and the Board review leadership succession annually.

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

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

Throughout 2024, more than 3,700 e-cards were posted on Celebrate Great, with 32 individuals or teams receiving “Bravo” awards and 11 employees receiving “Standing Ovation” awards for their exceptional work.

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

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

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

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

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

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

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

Our hiring practices prioritize pay transparency, with job postings disclosing the pay range minimum and maximum, as well as the applicable benefits package, and we do not request salary history from job applicants.

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

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

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

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

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

annual floating holiday to be used at their discretion.

Further, full-time employees enjoy up to 11 paid holidays each year and receive an annual floating holiday to be used at their discretion.

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

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

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

The Bank also participated in a 2024 EcoChallenge, where 41 teams of employees engaged in friendly competition by undertaking environmentally sustainable actions and practices.

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

The collective efforts of the EcoChallenge resulted in 21,887 actions, contributing to a heightened awareness of environmental responsibility, fostering a sense of community engagement, and reinforcing a shared commitment to sustainability.

Executive Officers

The following table sets forth information with respect to executive officers of the Company at December 31, 2023:

Name Age as of

December 31, 2023

Position Has Served

the Company or Bank Since

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

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

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

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

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

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

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

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

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

In November 2010, Mr.

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

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

Prior to joining the Company and the Bank, Mr.

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

Prior to joining Washington Mutual, Mr.

Deuel was based in Philadelphia where he worked for Bank United, First Union Bank, CoreStates Bank, and First Pennsylvania Bank.

During his career Mr.

Deuel held a variety of leadership positions in commercial banking including lending, credit administration, portfolio management, retail, corporate strategies, and support services.

He earned his Bachelor’s degree at Gettysburg College.

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

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

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

Previously, Mr.

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

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

McDonald has extensive managerial experience in various sales, credit, operations, commercial banking and residential real estate areas.

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

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

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

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

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

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

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

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

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

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

Previously, Mr.

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

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

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

Prior to joining Puget Sound Bank, Mr.

Chalfant held commercial lending and leadership positions with U.S.

Bank for 11 years.

Chalfant started his career with the U.S.

Office of Comptroller of the Currency, working there for eight years.

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

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

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

Previously, Mr.

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

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

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

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

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

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

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 1. Business