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Item 7. Management’s Discussion and Analysis

2025-02-27 compared with 2024-02-27 · 196 added, 169 removed, 451 unchanged (45% of the section changed)

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

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

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

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

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

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

Factors that could cause such differences are discussed in the sections of this Form 10-K entitled “Cautionary Note Regarding Forward Looking Statements” and Item 1A.

Risk Factors.

Management’s discussion focuses on 2024 results compared to 2023 results.

For a discussion of 2023 results compared to 2022 results, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 27, 2024.

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

We provide financial services to our local communities with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality.

We provide financial services to our customers in our market areas with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality.

The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.

Accordingly, the information set forth in this report relates primarily to the Bank’s operations.

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

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

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

We also make real estate construction and land development loans, consumer loans and residential real estate loans on single family properties located primarily in our markets.

Our core profitability depends primarily on our net interest income.

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

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

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

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

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

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

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

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

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

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

Noninterest income primarily consists of service charges and other fees, card revenue and other income.

Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services.

Noninterest income primarily consists of gains or losses on the sale of investment securities, service charges and other fees, card revenue and other income.

Noninterest expense primarily consists of compensation and employee benefits, occupancy and equipment, data processing and professional services expense.

Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits.

Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consists primarily of lease expenses, depreciation charges, maintenance and utilities.

Data processing consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers.

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

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

Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consist primarily of lease expenses, depreciation charges, maintenance and utilities.

Data processing expense consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers.

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

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

See also "Cautionary Note Regarding Forward-Looking Statements."

Results of Operations

Net income was $43.3 million, or $1.24 per diluted common share, for the year ended December 31, 2024 down from $61.8 million, or $1.75 per diluted common share, for the year ended December 31, 2023.

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

$1.4 million during 2022.

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

Net income decreased $18.5 million, or 30.0%, compared to the year ended December 31, 2023 due primarily to a decrease in net interest income of $15.8 million to $209.4 million from $225.2 million and an increase in losses on sales of investment securities of $10.5 million to $22.7 million from $12.2 million, largely as a result of investment portfolio repositioning, which decreased noninterest income.

These decreases were partially offset by a decrease in noninterest expense of $8.3 million.

During the year ended December 31, 2024, the company also restructured its BOLI portfolio, incurring additional tax expense of $2.4 million and other costs of $508,000 related to the surrender of certain BOLI policies.

Net Interest Income and Margin Overview

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

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

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

Several factors affect net interest income, including, but not limited to:

the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities;

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

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and asset quality.

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

Market rates impact the results of the Company's net interest income, including the significant changes in the federal funds target rate that have been made by the Federal Reserve since 2022 in response to inflationary pressures.

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

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July 27, 2023 5.25% - 5.50% 0.25 %

September 19, 2024 4.75% - 5.00% (0.50) %

November 8, 2024 4.50% - 4.75% (0.25) %

December 19, 2024 4.25% - 4.50% (0.25) %

Average Balances, Yields and Rates Paid

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(1) Average balances are calculated using daily balances.

Average yield/rate is annualized.

(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield.

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

Year Ended December 31,

2024 Compared to 2023

Increase (Decrease) Due to changes in

Volume Yield/Rate Total % Change

Volume Yield/Rate Total

(Dollars in thousands)

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Net interest income $ (9,912) $ (5,879) $ (15,791)

Year Ended December 31,

2023 Compared to 2022

Increase (Decrease) Due to changes in

Volume Yield/Rate $ %

Volume Yield/Rate Total

(Dollars in thousands)

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Taxable securities 7,907 9,975 17,882

2022 Compared to 2021

Increase (Decrease) Due to changes in

Volume Yield/Rate $ %

Nontaxable securities (2,063) 429 (1,634)

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Total interest income increased $25.2 million, or 8.9%, to $309.7 million for the year ended December 31, 2024 compared to $284.5 million for the year ended December 31, 2023.

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

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

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

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

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

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

The increase was primarily due to a 40 basis point increase in the yield on interest earning assets to 4.93% for the year ended December 31, 2024, compared to 4.53% for the year ended December 31, 2023 following increases in market interest rates and secondarily due to a change in the mix of earning assets to higher yielding loan balances.

Total interest expense increased $41.0 million, or 69.2%, to $100.3 million for the year ended December 31, 2024 compared to $59.3 million for the year ended December 31, 2023 due primarily to increased costs of interest bearing deposits resulting from competitive rate pressures as well as customers transferring balances from non-maturity deposits to higher rate certificates of deposits and an increase in borrowing balances and rates.

The total cost of interest bearing liabilities increased 87 basis points to 2.27% for the year ended December 31, 2024, compared to 1.40% for the year ended December 31, 2023.

The net interest margin decreased 25 basis points to 3.33% for the year ended December 31, 2024 compared to 3.58% for the year ended December 31, 2023.

The decrease in net interest margin was due primarily to increases in the average cost of interest bearing liabilities as a result of upward market pressure related to deposit rates and an increase in borrowing balances and rates.

This was partially offset by increases in average yields on total interest earning assets as a result of increases in market interest rates.

Provision for Credit Losses Overview

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

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

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

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(Dollars in thousands)

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

Provision for credit losses on loans $ 6,983 $ 4,736 $ 2,247 47.4 %

Reversal of provision for credit losses on unfunded commitments (701) (456) (245) 53.7

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

Provision for credit losses $ 6,282 $ 4,280 $ 2,002 46.8 %

The provision for credit losses on loans recognized during the year ended December 31, 2024 was due primarily to growth in balances of collectively evaluated loans.

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

The ACL on loans to loans receivable decreased to 1.09% at December 31, 2024, compared to 1.11% at December 31, 2023 due to changes in the loan mix as loan growth occurred in segments requiring a lower calculated reserve as a percentage of loans.

The reversal of provision for credit losses on unfunded commitments recognized during the year ended December 31, 2024 was due primarily to an increase in utilization rates on lines of credit and a decrease in the unfunded exposure on construction loans.

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Nonintere st income decreased $11.2 million, or 60.0%, during the year ended December 31, 2024 compared to the same period in 2023.

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

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

This decline was primarily driven by a pre-tax loss of $22.7 million incurred on the sale of investment securities available for sale during the year ended December 31, 2024, compared to a pre-tax loss of $12.2 million incurred during the same period in 2023.

The loss on the sale of investment securities in 2024 was a consequence of strategically repositioning the Company's investment portfolio, involving the sale of $296.4 million in investment securities, with the aim of enhancing future earnings.

Card revenue declined due to lower deposit transaction volumes.

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

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

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

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

The decrease in other income during the year ended December 31, 2024 was primarily due to a one-time sale of Visa Inc.

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

Gain on sale of loans, net declined as the Company is no longer originating mortgage loans for sale.

These decreases were partially offset by an increase in the gain on sale of other assets, net due to a $1.5 million gain on the sale of an administrative building recognized during the year ended December 31, 2024 and an increase in service charges due primarily to an increase in service charge income on commercial deposit accounts.

Noninterest Expense Overview

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Total noninterest expense $ 158,296 $ 166,623 $ (8,327) (5.0) %

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

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

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

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

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

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

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

Noninterest expense decreased $8.3 million, or 5.0%, during the year ended December 31, 2024 compared to the same period in 2023.

Compensation and employee benefits decreased $1.6 million due primarily to a decrease in the average number of full-time equivalent employees to 751 as of December 31, 2024, compared to 803 as of December 31, 2023, in connection with expense management initiatives.

These expense management initiatives also impacted data processing expense, which decreased primarily due to a decline in ongoing costs resulting from prior technology-related contract renewals and terminations and decreased marketing and other expense.

Professional services expense decreased during the year ended December 31, 2024 due primarily to a $1.5 million expense related to renewal of the core vendor contract recognized during the prior year.

Amortization of intangible assets decreased due to the full amortization of the core deposit intangible related to a prior acquisition.

This was offset partially by an increase in state/municipal business and use tax expense due primarily to an increase in gross revenue.

Income Tax Expense Overview

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Effective income tax rate 17.2 % 15.3 % 1.9 % 12.4 %

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

Income tax expense decreased during the year ended December 31, 2024 primarily due to lower pre-tax income.

This decrease was partially offset by additional tax expense of $2.4 million related to the surrender of certain BOLI policies as part of a BOLI restructuring which occurred in the fourth quarter of 2024.

The effective income tax rate increased due primarily to the additional tax expense related to the surrender of BOLI policies.

Financial Condition Overview

The table below provides a comparison of the changes in the Company's financial condition for the periods indicated:

December 31, 2023 December 31, 2022 $ %

The table below provides a comparison of changes in key components of the Company's financial condition for the periods indicated:

December 31, Change

2024 2023 $ %

(Dollars in thousands)

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Liabilities and Stockholders' Equity

Deposits $ 5,599,872 $ 5,907,420 $ (307,548) (5.2) %

Deposits held for sale — 17,420 $ (17,420) (100.0)

Total deposits 5,684,613 5,599,872 $ 84,741 1.5

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Junior subordinated debentures 22,058 21,765 293 1.3

Securities sold under agreement to repurchase — 46,597 (46,597) (100.0)

Accrued expenses and other liabilities 153,080 200,059 (46,979) (23.5)

Total liabilities 6,242,751 6,321,696 (78,945) (1.2)

December 31, Change

2024 2023 $ %

Common stock 531,674 549,748 (18,074) (3.3)

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Total liabilities and stockholders' equity $ 7,106,278 $ 7,174,957 $ (68,679) (1.0) %

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

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

Total assets decreased due primarily to decreases in investment securities and cash and cash equivalents offset partially by an increase in loans receivable.

Total liabilities decreased due primarily to a decrease in borrowings and accrued expenses and other liabilities offset partially by an increase in deposits.

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

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

Investment Activities Overview

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

Our investment policy is established by the Board and monitored by the Risk Committee of the Board.

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

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

Investment in non-investment grade bonds and stripped mortgage-backed securities is not permitted under the policy.

Investment in sub-investment grade bonds is not permitted under the policy.

The following table provides information regarding our investment securities at the dates indicated:

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

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

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

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

Total investment securities decreased $406.1 million to $1.47 billion at December 31, 2024 from $1.87 billion at December 31, 2023 due to sales of investment securities available for sale in connection with a strategic repositioning of the Company's investment portfolio, as well as maturities and repayments of $165.7 million, offset partially by purchases of investment securities available for sale.

During the year ended December 31, 2024, the Company incurred a pre-tax loss of $22.7 million on the sale of investment securities available for sale due to the aforementioned strategic repositioning of its investment portfolio.

The Company sold $296.4 million in investment securities with an estimated weighted average book yield of 2.23% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05%.

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

The remaining proceeds were used for other balance sheet initiatives such as the funding of higher yielding loan growth.

The following table provides the weighted average yield of the Company's investment portfolio at December 31, 2024 calculated based upon the fair values of our investment securities available for sale and held to maturity, and excluding any income tax benefits of tax-exempt bonds:

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

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Total $ 18,781 3.35 % $ 181,366 3.85 % $ 165,782 2.91 % $ 398,465 3.53 % $ 764,394 3.46 %

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

Value Yield Fair

(Dollars in thousands)

Investment securities held to maturity:

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Total $ 4,802,123 100.0 % $ 4,335,627 100.0 % $ 466,496 10.8 %

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

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

Loans receivable increased $466.5 million, or 10.8%, to $4.80 billion at December 31, 2024 from $4.34 billion at December 31, 2023.

New loans funded in the year ended December 31, 2024 totaled $626.2 million and loan prepayments were $176.7 million.

Non-owner occupied CRE loans increased $211.5 million, or 12.5%, due primarily to new loan production during the year ended December 31, 2024 and advances on outstanding commitments.

Commercial and industrial loans increased $124.4 million, or 17.3%, due primarily to new loan production of $232.5 million during the year ended December 31, 2024, offset by pay downs on outstanding balances.

Commercial and multifamily construction loans increased $59.7 million, or 17.8%, during the year ended December 31, 2024 due primarily to new loan commitments of $149.3 million and advances on new and outstanding commitments.

Residential real estate loans increased $27.6 million, or 7.4%, due primarily to loan purchases during the year ended December 31, 2024.

Owner-occupied CRE and non-owner occupied CRE loans increased $256.2 million to $2.91 billion at December 31, 2024 compared to $2.66 billion at December 31, 2023 .

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Industrial 513,615 17.6 418,651 15.8 94,964 22.7

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

Multi-family 414,728 14.2 305,499 11.5 109,229 35.8

Retail store / shopping center 304,562 10.5 285,926 10.8 18,636 6.5

Mini-storage 161,390 5.5 171,778 6.5 (10,388) (6.0)

December 31, 2023 December 31, 2022 Change

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

(Dollars in thousands)

Mixed use property 156,627 5.4 154,674 5.8 1,953 1.3

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Office loans represented the l argest segment of owner-occupied and non-owner occupied CRE loans totaling $565.9 million, or 19.4% of the total owner-occupied CRE and non-owner occupied CRE at December 31, 2024.

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

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

Of this total, $291.5 million, or 51.5%, were owner-occupied CRE loans which have a lower risk profile as there is less tenant rollover risk, 81.0% have recourse to the owners and 24.6% of loans are borrowers in the health care and social assistance sectors, who are less likely to reduce office space.

The average individual loan balance of owner-occupied CRE and non-owner occupied CRE was $1.3 million at December 31, 2024.

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

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

See also Item 1.

Business - Commercial Business Lending of this Form 10-K for CRE underwriting standards.

Composition of loans receivable by contractual maturity and interest type

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333,827 60,627 394,454

Have predetermined interest rates (1)

Have floating or adjustable interest rates (1)

(Dollars in thousands)

Real estate construction and land development:

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

Loans classified as nonaccrual and performing modified loans and nonperforming assets

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

Loans classified as nonaccrual, performing modified loans and nonperforming assets

The following tables provide information about our nonaccrual loans, performing modified loans and nonperforming assets at the dates indicated:

December 31, 2024 December 31, 2023 $ %

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Commercial business $ 3,919 $ 4,468 $ (549) (12.3) %

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

Consumer 160 — 160 100.0

Total nonaccrual loans 4,079 4,468 (389) (8.7)

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Nonperforming assets to total assets 0.07 0.08 (0.01) (12.5)

(1) At December 31, 2024 and December 31, 2023, $1.0 million, and $3.2 million, respectively, of nonaccrual loans were guaranteed by government agencies.

Year Ended December 31, Change

2024 2023 $ %

(Dollars in thousands)

Modified loans:

Commercial business $ 21,162 $ 19,969 $ 1,193 6.0 %

Residential real estate —

Real estate construction and land development 28,030 9,643 18,387 190.7

Consumer 44 41 3 7.3

Total performing modified loans $ 49,236 $ 29,653 $ 19,583 66.0 %

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

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

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

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Additions 6,292 3,057 3,235 105.8

Year Ended December 31, Change

2023 2022 $ %

(Dollars in thousands)

Net principal payments, sales and transfers to accruing status (1,175) (1,508) 333 (22.1)

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Balance, end of period $ 4,079 $ 4,468 $ (389) (8.7) %

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

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

Nonaccrual loans decreased $0.4 million, or 8.7%, due primarily to ongoing collection efforts.

Additions during the year ended December 31, 2024 were due primarily to one $5.0 million owner occupied CRE loan of which $2.5 million was charged off.

Payoffs during the year ended December 31, 2024 were due primarily to the payoff of one commercial and industrial loan relationship.

Allowance for Credit Losses on Loans Overview

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Residential real estate

Real estate construction and land development — — (1)

Consumer (538) (586) (547)

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Total recoveries 977 1,582 2,081

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

Net (charge-offs) recoveries (2,514) 277 1,188

Provision for (reversal of) credit losses on loans 6,983 4,736 (563)

ACL on loans at the end of period $ 52,468 $ 47,999 $ 42,986

At or For the Years Ended December 31,

2024 2023 2022

(Dollars in thousands)

Credit quality ratios:

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Real estate construction and land development 446,713 362,919 242,528

At or For the Years Ended December 31,

2023 2022 2021

(Dollars in thousands)

Consumer 167,830 179,454 212,306

Total $ 4,536,465 $ 4,201,234 $ 3,893,852

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

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

2024 2023 2022

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

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

The provision for credit losses on loans of $7.0 million recognized during the year ended December 31, 2024 was due primarily to growth in balances of collectively evaluated loans and secondarily to $2.5 million in charge-offs.

The ACL on loans to loans receivable decreased to 1.09% as December 31, 2024, compared to 1.11% at December 31, 2023 due to changes in the loan mix as loan growth occurred in segments requiring a lower calculated reserve as a percentage of loans as well as a reduction in the baseline loss rates applied and weighted average life of the residential real estate and real estate construction and land development segments which contributed to a decrease in the ACL as a % of loans in these loan segments.

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

December 31, 2023 December 31, 2022 Change

ACL on loans Percent of

December 31, 2024 December 31, 2023

ACL on Loans ACL as a % of Loans in Loan Category % of Loans in Loan Category to

Total Loans ACL on Loans ACL as a % of Loans in Loan Category % of Loans in Loan Category to

(Dollars in thousands)

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Total ACL on loans $ 52,468 1.09 % 100.0 % $ 47,999 1.11 % 100.0 %

(1) Represents the percent of loans receivable by loan category to loans receivable.

Deposits Overview

1 unchanged sentence

December 31, 2024 December 31, 2023 Change

% of Total Balance (1)

% of Total $ %

Balance % of Total Balance % of Total $ %

(Dollars in thousands)

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Total deposits $ 5,684,613 100.0 % $ 5,599,872 100.0 % $ 84,741 1.5 %

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

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

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

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

During the three months ended September 30, 2023,

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

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

Total deposits increased $84.7 million, or 1.5%, to $5.68 billion at December 31, 2024, compared to $5.60 billion at December 31, 2023.

Certificates of deposit increased $284.3 million, or 41.0%, to $977.3 million from $693.0 million and money market accounts increased $72.6 million, or 6.6%, to $1.17 billion from $1.09 billion primarily due to transfers from lower yielding non-maturity deposit accounts as customers moved balances to higher yielding accounts.

Total deposits include uninsured deposits of approximately $2.27 billion and $2.10 billion at December 31, 2024 and 2023, respectively, calculated in accordance with FDIC guidelines.

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

Uninsured deposits included $267.8 million and $256.4 of fully collateralized deposits as of December 31, 2024 and December 31, 2023.

The Bank does not hold any foreign deposits.

The following table provides the estimated uninsured portion of certificates of deposit that are in excess of the FDIC insurance limit, by remaining time until maturity at December 31, 2024, by account, with a maturity of:

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Stockholders' Equity Overview

The Company’s stockholders' equity to assets ratio was 11.9% and 11.4% at December 31, 2023 and December 31, 2022.

The Company’s stockholders' equity to assets ratio was 12.2% and 11.9% at December 31, 2024 and 2023, respectively.

The following table provides the changes to stockholders' equity during the periods indicated:

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Balance, end of period $ 863,527 $ 853,261 $ 10,266 1.2 %

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

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

Stockholders' equity increased for the year ended December 31, 2024 primarily as a result of net income and an increase in AOCI as a result of a decrease in other comprehensive income (loss), net of tax, which was positively impacted by the fair value of our investment securities available for sale and losses recognized on investment sales.

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

Cash dividends and stock repurchases partially offset the increase in stockholders' equity during the year ended December 31, 2024.

On April 24, 2024, the Board authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,734,492 shares in total, under a new stock repurchase program.

The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will make any repurchases in the future.

Under the stock repurchase program, the Company may

repurchase shares of common stock from time to time in open market or privately negotiated transactions.

The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds and other factors, including opportunities to deploy the Company's capital.

The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the stock repurchase program’s expiration, without any prior notice.

The stock repurchase program authorized in April 2024 superseded the previous stock repurchase program authorized in March 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares.

At the time the April 2024 stock repurchase program was authorized, 3,910 shares remained available for purchase under the March 2020 stock repurchase program.

The Company repurchased 1,051,760 and 330,424 shares of its common stock under the Company's stock repurchase plan during the years ended December 31, 2024 and December 31, 2023, respectively.

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

The Company also repurchased 31,850 and 32,792 shares during the years ended December 31, 2024 and December 31, 2023, respectively, which represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units.

As of December 31, 2024, 990,522 shares remained available for future repurchases under the April 2024 stock repurchase program.

Liquidity and Capital Resources

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

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

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

The decrease in total deposits during 2023 was industry wide.

No assurance can be given as to future trends;

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

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

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

During the year ended December 31, 2024, financing activities used $86.5 million of funds resulting primarily from a decrease in short-term borrowings of $117.0 million, $31.8 million in dividend payments and $22.4 million in repurchases of common stock, offset partially by an increase in deposits of $84.7 million.

At December 31, 2024, we had outstanding loan commitments of $1.18 billion, primarily relating to undisbursed loans in process and unused credit lines as discussed in Note (18) Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8.

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

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

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

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

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

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

As of December 31, 2024, we had $17.8 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts.

In addition, as of December 31, 2024, we had $27.6 million of commitments under operating lease agreements.

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

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

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

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

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

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

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

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

At December 31, 2024, under these credit facilities based on pledged loan collateral, the Bank had $976.3 million of available credit capacity.

The Bank had $383.0 million in outstanding borrowings from the FHLB at December 31, 2024, and none at December 31, 2023.

In addition, the Bank has access to the FRB Discount Window and had access to the BTFP at December 31, 2023 and 2024, until the FRB ceased making new loans under the BTFP on March 11, 2024.

Based on pledged investment collateral, the Bank had available lines of credit from the FRB of approximately $360.1 million as of December 31, 2024.

The Bank had no outstanding borrowings from the FRB at December 31, 2024 and $500.0 million in outstanding borrowings under the BTFP at December 31, 2023.

At December 31, 2024, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $145.0 million.

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

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

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

No balances were outstanding under these agreements as of either December 31, 2024 or 2023.

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

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

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

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

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

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

The following table summarizes the Company's available liquidity as of the dates indicated:

2024 December 31,

(Dollars in thousands)

On-balance sheet liquidity

Cash and cash equivalents $ 117,100 $ 224,973

Unencumbered investment securities available for sale (1)

746,163 756,258

Total on-balance sheet liquidity

$ 863,263 $ 981,231

Off-balance sheet liquidity

FRB borrowing availability $ 360,104 $ 319,492

FHLB borrowing availability (2)

976,288 1,417,518

Fed funds line borrowing availability with correspondent banks 145,000 145,000

Total off-balance sheet liquidity

$ 1,481,392 $ 1,882,010

Total available liquidity $ 2,344,655 $ 2,863,241

(1) Investment securities available for sale at fair value.

(2) Includes FHLB borrowing availability of $1.36 billion at December 31, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.22 billion.

Capital Resources

The Company pays dividends to its shareholders.

The primary source of the Company's liquidity is dividends from the Bank to the Company.

The Bank is subject to strict regulatory capital ratios, and may not be able to issue dividends to the Company in an amount sufficient to maintain our current or anticipated dividend practices.

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

No assurances can be given that any dividends will be paid on our common stock in future periods or that, if paid, such dividends will not be reduced in amount.

Our current quarterly common stock dividend rate is $0.24 per share, as approved by our Board on January 22, 2025.

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

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

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

Assuming continued payment during 2025 at this rate, our average total dividend paid each quarter would be approximately $8.2 million based on the current number of our outstanding shares (assuming no increases or decreases in the number of shares).

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

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

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

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

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

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

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

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

The Company's current stock repurchase program authorizes us to repurchase up to 5% of the Company's outstanding common shares, or 1,734,492 in total, of which 990,522 shares remained available for future repurchases as of December 31, 2024.

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

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

Management believes that the Company's capital sources are adequate to meet all of the Company's reasonably foreseeable short-term and intermediate-term requirements.

Critical Accounting Estimates

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

financial condition or results of operations of the registrant.

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

Management's estimate of the ACL on loans relies on the identification, stratification and separate estimates of loss for loans individually evaluated for loss and loans collectively evaluated for loss.

The estimate of loss for loans collectively evaluated for loss particularly involves a significant level of estimation uncertainty due to its complexity and quantity of inputs including:

management's determination of baseline loss rate multipliers based on a third-party forecast of economic conditions, an estimate of the reasonable and supportable forecast period, an estimate of the baseline loss rate lookback period, an estimate of the reversion period from the reasonable and supportable forecast period to the baseline loss rate, and an estimate of the prepayment rate and related lookback period.

Management's estimate of the ACL on loans relies on the identification, stratification and separate estimates of loss for both loans individually evaluated for loss and loans collectively evaluated for loss.

The estimate of loss for loans collectively evaluated for loss in particular involves a significant level of estimation uncertainty due to its complexity and the quantity of relevant inputs, including:

management's determination of baseline loss rate multipliers based on a third party forecast of economic conditions, estimates of the reasonable and supportable forecast period, estimates of the baseline loss rate lookback period, estimates of the reversion period from the reasonable and supportable forecast period to the baseline loss rate and estimates of the prepayment rate and related lookback period.

Additionally, management considers other qualitative risk factors to further adjust the estimated ACL on loans through a qualitative allowance.

Management's estimates for these inputs are based on past events and current conditions, are inherently subjective, and are susceptible to significant revision as more information becomes available.

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

Management's estimates for these inputs are based on past events and current conditions, are inherently subjective and are susceptible to significant revision as new or different information becomes available.

While management utilizes its best judgment and information available at the time of evaluation to recognize credit losses on loans, future additions to the allowance

may be necessary based on declines in local and national economic conditions or other factors.

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

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

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

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

For additional information regarding the ACL on loans, its relation to the provision for credit losses, its risk related to asset quality and lending activity, see Item 1A.

Risk Factors—Our ACL on loans may prove to be insufficient to absorb losses in our loan portfolio as well as Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (4) Allowance for Credit Losses on Loans of the Notes to Consolidated Financial Statements included in Item 8.

Financial Statements And Supplementary Data.

ACL on Unfunded Commitments

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

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

For additional information regarding the ACL on unfunded commitments, see Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (19) Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8.

Financial Statements And Supplementary Data.

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

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

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

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

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

For additional information regarding the ACL on loans, its relation to the provision for credit losses and its risk related to asset quality and lending activity, see Item 1A.

Risk Factors—The Company’s allowance for credit losses may prove to be insufficient to absorb potential losses in its loan portfolio, as well as Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (4) Allowance for Credit Losses on Loans of the Notes to Consolidated Financial Statements included in Item 8.

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

Goodwill is tested for impairment at the reporting unit level on an annual basis as of December 31 each year, and more frequently if events or circumstances indicate that there may be impairment.

Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount.

If the fair value of the reporting unit is less than its carrying value, the difference is the amount of impairment and goodwill is written down to the fair value of the reporting unit.

The Company has a single reporting unit.

In testing goodwill, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

In this qualitative assessment, the Company evaluates events and circumstances which may include, but are not limited to:

the general economic environment;

banking industry and market conditions;

a significant adverse change in legal factors;

significant decline in our stock price and market capitalization;

unanticipated competition;

the testing for recoverability of a significant asset group within the reporting unit;

and an adverse action or assessment by a regulator.

If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, the Company performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill.

The determination of the fair value of a reporting unit is a subjective process that involves the use of estimates and judgments about economic and industry factors and the growth and earnings prospects of the Bank.

Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations.

The Company performed its annual goodwill impairment test during the fourth quarter of 2024 which consisted of a qualitative assessment and determined that it is more likely than not that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired for the year ended December 31, 2024.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis