What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2025-02-27 compared with 2024-02-27 · 372 added, 299 removed, 1563 unchanged (30% of the section changed)

31 unchanged sentences

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

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

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole,

and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans – Qualitative Allowance

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

As described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (4) Allowance for Credit Losses on Loans to the consolidated financial statements, the Company’s consolidated allowance for credit losses (“ACL”) on loans was $52.5 million at December 31, 2024 and provision for credit losses on loans was $7.0 million for the year then ended.

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

7 unchanged sentences

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

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

Qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have fully captured the associated impact to the ACL.

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

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

37 unchanged sentences

LIABILITIES AND STOCKHOLDERS' EQUITY

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

Deposits held for sale — 17,420

Non-interest bearing deposits $ 1,654,955 $ 1,715,847

Interest bearing deposits 4,029,658 3,884,025

Total deposits 5,684,613 5,599,872

1 unchanged sentence

Junior subordinated debentures 22,058 21,765

Securities sold under agreement to repurchase — 46,597

Accrued expenses and other liabilities 153,080 200,059

35 unchanged sentences

Card revenue 7,752 8,340 8,885

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

Loss on sale of investment securities, net ( 22,742 ) ( 12,231 ) ( 256 )

Gain on sale of loans, net 26 343 633

34 unchanged sentences

( 260 ) ( 248 ) ( 469 )

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

Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax benefit of $ 5,033 , $ 2,684 and $ 56 , respectively

17,709 9,547 200

29 unchanged sentences

Net income 61,755 61,755

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

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

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

14 unchanged sentences

( 29,767 ) ( 29,767 )

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

Balance at December 31, 2022 35,106,697 $ 552,397 $ 345,346 $ ( 99,850 ) $ 797,893

See accompanying Notes to Consolidated Financial Statements.

13 unchanged sentences

Proceeds from sale of mortgage loans held for sale 1,344 15,176 17,299

Deferred income tax (benefit) expense ( 15,291 ) ( 13,204 ) 871

Bank owned life insurance income ( 2,967 ) ( 2,934 ) ( 3,747 )

4 unchanged sentences

( 1,480 ) — ( 403 )

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

Gain on sale of branch — ( 610 ) —

Other 4,364 38,076 8,734

14 unchanged sentences

Proceeds from bank owned life insurance death benefit 1,157 20 2,114

Cash received from return of NMTC equity method investment — — 9,642

Proceeds from surrender of bank owned life insurance 29,790 — —

Capital contributions to tax credit partnerships ( 26,688 ) ( 38,248 ) ( 18,190 )

Net cash paid related to branch divestiture — ( 13,826 ) —

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

Net cash used by investing activities

( 85,903 ) ( 93,446 ) ( 1,207,779 )

Cash flows from financing activities:

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

Net increase (decrease) in deposits 84,741 ( 310,303 ) ( 469,450 )

Proceeds from borrowings 1,458,743 1,889,700 50,050

1 unchanged sentence

Common stock cash dividends paid ( 31,776 ) ( 30,820 ) ( 29,491 )

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

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

Repurchase of common stock ( 22,418 ) ( 6,974 ) ( 3,196 )

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

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

Net cash (used) provided by financing activities ( 86,453 ) 105,306 ( 506,379 )

Year Ended December 31,

2024 2023 2022

Net (decrease) increase in cash and cash equivalents ( 107,873 ) 121,383 ( 1,619,702 )

Cash and cash equivalents at beginning of period 224,973 103,590 1,723,292

4 unchanged sentences

Supplemental non-cash disclosures of cash flow information:

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

Investment in LIHTC partnerships and related funding commitment 100 37,007 85,888

2 unchanged sentences

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

Transfer of bank owned life insurance to prepaid expenses and other assets due to surrender of policies 4,507 — —

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

9 unchanged sentences

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

The Bank also makes real estate construction and land development loans, consumer loans and originates first mortgage loans on residential properties primarily located in its market areas.

The Bank's deposits are insured by the FDIC.

The Bank also makes real estate construction and land development loans, consumer loans and originates home equity loans on residential properties primarily located in its market areas.

The Bank's deposits are insured by the FDIC, subject to applicable limitations.

(b) Basis of Presentation

2 unchanged sentences

These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided.

Management believes that the judgments, estimates, and assumptions used in the preparation of the Consolidated Financial Statements are appropriate based on the facts and circumstances at the time.

Management believes that the judgments, estimates, and assumptions used in the preparation of the Consolidated Financial Statements were appropriate based on the facts and circumstances at the time.

Actual results, however, could differ significantly from those estimates.

6 unchanged sentences

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks and interest earning deposits due substantially from the Federal Reserve Bank.

Cash and cash equivalents include cash on hand and in banks and interest earning deposits due substantially from the FRB.

Cash equivalents have a maturity of 90 days or less at the time of purchase.

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

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

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

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

4 unchanged sentences

For investment securities available for sale in an unrealized loss position, the Company first assesses whether it intends to sell or it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement

to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit loss against income.

For investment securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit loss against income.

For investment securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline

in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors.

15 unchanged sentences

Any loan that management does not have the intent and ability to hold for the foreseeable future or until maturity or payoff is classified as held for sale at the time of origination, purchase, securitization or when such decision is made.

Unrealized losses on loans held for sale are recorded as a valuation allowance and included in "Other expense" on the Consolidated Statements of Income .

Unrealized losses on loans held for sale are recorded as a valuation allowance and included in "Other expense" in the Consolidated Statements of Income .

Loans Receivable

2 unchanged sentences

Interest on loans is calculated using the interest method based on the daily balance of the principal amount outstanding and is credited to interest income as earned.

Accrued interest receivable for loans receivable is reported within "Accrued interest receivable" on the Consolidated Statements of Financial Condition.

Accrued interest receivable for loans receivable is reported within "Accrued interest receivable" in the Consolidated Statements of Financial Condition.

The Company's policies for loans receivable generally do not differ by loan segments or classes unless specified in the following policies.

5 unchanged sentences

The difference between the initial amortized cost basis and the par value of PCD loans is the noncredit discount or premium for PCD loans.

The noncredit discount or premium for PCD loans and both the noncredit and credit discount or premium for non-PCD loans are accreted through the "Interest and fees on loans" line item on the Consolidated Statements of Income over the life of the loan using the interest method for non-revolving credits or the straight-line method, which approximates the effective interest method, for revolving credits.

The noncredit discount or premium for PCD loans and both the noncredit and credit discount or premium for non-PCD loans are accreted through the "Interest and fees on loans" line item in the Consolidated Statements of Income over the life of the loan using the interest method for non-revolving credits or the straight-line method, which approximates the effective interest method, for revolving credits.

Any unrecognized discount or premium for a purchased loan that is subsequently repaid in full is recognized immediately into income.

8 unchanged sentences

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

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

interest payment is applied to the principal balances.

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

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

7 unchanged sentences

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

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

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

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

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

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

Management reviews the adequacy of the prepayment assumption on an annual basis.

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

9 unchanged sentences

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

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

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

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

1 unchanged sentence

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

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

which was removed and replaced with a housing price index.

The commercial real estate segment had previously used gross domestic product as a macroeconomic variable which was removed and replaced with a housing price index.

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

1 unchanged sentence

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

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

Since historical information (such as historical net losses and economic cycles) may not always, by themselves, provide a sufficient basis for determining

future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL.

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

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

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

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

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

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

1 unchanged sentence

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

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

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

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

4 unchanged sentences

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

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

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

ACL on Accrued Interest Receivable

4 unchanged sentences

Mortgage Banking Operations

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

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

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

Commitments to fund residential real estate loans and commitments to subsequently sell residential real estate loans are made during the period between the taking of the loan application and the closing of the loan.

The timing of making these commitments is dependent upon the timing of the borrower’s election to lock-in the mortgage interest rate and fees prior to loan closing.

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

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

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

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

Commercial Loan Sales, Servicing, and Commercial Servicing Asset

The Company, on a limited basis, sells the guaranteed portion of SBA and USDA loans, with servicing retained, for cash proceeds and records a related servicing asset.

The Company does not sell loans with servicing retained unless it retains a participating interest.

A servicing asset is recorded at fair value upon sale which is estimated by discounting estimated net future cash flows from servicing using discount rates that approximate current market rates and using estimated prepayment rates.

Subsequent to initial recognition, all classes of servicing rights are carried at the lower of amortized cost or fair value and are amortized in proportion to and over the period of the estimated net servicing income.

The servicing asset is reported within "Prepaid expenses and other assets" on the Consolidated Statements of Financial Condition.

For purposes of evaluating and measuring impairment, the fair value of servicing rights is measured using a discounted estimated net future cash flow model as described above at least annually.

Impairment is determined by stratifying rights into groupings based on predominant risk characteristics including investor type, loan type and maturity and recognized through a valuation allowance for an individual stratum to the extent fair value is less than the carrying amount.

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

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

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

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

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

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

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

The amortization of mortgage servicing rights is netted against servicing fee income.

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

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

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

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

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

The Bank originated and sold certain residential real estate loans on a servicing-released basis.

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

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

In 2024, the Bank ceased the origination of residential real estate loans.

Other Real Estate Owned

2 unchanged sentences

After acquisition, all costs incurred in maintaining the property are expensed except for costs relating to the development and improvement of the property which are capitalized to the extent of the property’s net realizable value.

If the estimated realizable value of the other real estate owned property declines after the acquisition date, the valuation adjustment is charged to "Other real estate owned, net" on the Consolidated Statements of Income.

Premises and Equipment

1 unchanged sentence

Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the lease period, whichever is shorter.

The estimated useful lives used to compute depreciation and amortization for buildings and building improvements, including lease improvements, is 15 to 39 years;

The estimated useful lives used to compute depreciation and amortization for buildings and building improvements, including leasehold improvements, is 15 to 39 years;

and for furniture, fixtures and equipment is three to seven years .

The Company reviews premises and equipment, including leasehold improvements, for impairment whenever events or changes in the circumstances indicate that the undiscounted cash flows for the property are less than its carrying value.

The Company reviews premises and equipment, including leasehold improvements, for impairment whenever events or changes in the

circumstances indicate that the undiscounted cash flows for the property are less than its carrying value.

If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.

19 unchanged sentences

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

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

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

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

We hold equity investments in certain structures which deliver tax benefits, including LIHTC investments and a Solar Tax Credit investment.

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

20 unchanged sentences

Stock-Based Compensation

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

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

The Company maintains two stock-based incentive plans, which are discussed in more detail in Note (15) Stock-Based Compensation.

Since 2011, the Company has only granted restricted stock unit awards.

With respect to these restricted stock unit awards, compensation cost is recognized when awards are granted to employees and directors based on their fair value at the date of grant.

Compensation cost is generally recognized over the requisite service period, generally defined as the vesting period, on a straight-line basis.

Compensation cost for restricted stock units with market-based vesting is recognized over the service period to the extent the restricted stock units are expected to vest.

Compensation cost for restricted stock unit awards with market-based vesting is recognized over the service period to the extent the restricted stock unit awards are expected to vest.

Forfeitures are recognized as they occur.

The market price of the Company’s common stock at the date of grant is used to determine the fair value of the restricted stock awards and restricted stock units.

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

Certain restricted stock unit grants are subject to performance-based

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

The market price of the Company’s common stock at the date of grant is used to determine the fair value of the restricted stock unit awards.

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

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

the risk-free interest rate based on the U.S.

Treasury curve at the valuation date of the award;

the expected dividend yield based on expected dividends being payable to the holders;

the risk-free interest rate based on the Treasury curve at the valuation date of the award;

the expected dividend yield based on expected dividend equivalents being payable to the holders;

and the expected stock price volatility over the expected term based on the historical volatility over the equivalent historical term.

Tax Credit Investments

I nvestments in Tax Credit Structures

The Company has equity investments in LIHTC partnerships, which are indirect federal subsidies that finance low-income housing projects.

1 unchanged sentence

The federal income tax credits are earned over a 10-year period as a result of the investment properties meeting certain criteria and are subject to recapture for noncompliance with such criteria over a 15-year period.

The Company accounts for the LIHTCs under the proportional amortization method and amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance on the Consolidated Statements of Income as a component of "Income tax expense".

The Company accounts for the LIHTCs under the proportional amortization method and amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the Consolidated Statements of Income as a component of "Income tax expense".

The Company reports the carrying value of the equity investments in the unconsolidated LIHTCs as Prepaid expenses and other assets and the unfunded contingent commitments related to the equity investments as Accrued expenses and other liabilities on the Company’s Statements of Financial Condition.

4 unchanged sentences

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

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

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

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

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

The NMTC program provides federal tax incentives to investors to make investments in distressed communities and promotes economic improvements through the development of successful businesses in these communities.

The NMTC is available to investors over a seven-year period and is subject to recapture if certain events occur during such period.

The Company is required to fund 85 % of a tranche by a predetermined deadline to claim the entire tax credit.

The Company funded its tranche before the deadline.

The Company dissolved the NMTC investment during the year ended December 31, 2021 after gross tax credits related to the Company's certified development entities totaling $ 9.8 million were utilized during the seven year period ending December 31, 2020.

Prior to dissolution, the Company accounted for its NMTC on the equity method and reported the investment balance in "Prepaid expenses and other assets" on the Consolidated Statements of Financial Condition and the related investment income was recognized in "Other income" on the Consolidated Statements of Income.

Deferred Compensation Plans

The Company has a Deferred Compensation Plan and has entered into similar arrangements with certain executive officers.

The Company maintains a Deferred Compensation Plan in which certain executive officers participate.

Under the Deferred Compensation Plan, participants are permitted to elect to defer compensation, and the Company has the discretion to make additional contributions to the Deferred Compensation Plan on behalf of any participant based on a number of factors.

Such discretionary contributions are generally approved by the Compensation Committee of the Company's Board of Directors.

Such discretionary contributions are generally approved by the Compensation Committee of the Board.

The notional account balances of participants under the Deferred Compensation Plan earn interest on an annual basis.

1 unchanged sentence

Generally, a participant’s account is payable upon the earliest of the participant’s separation from service with the Company, the participant’s death or disability, or a specified date that is elected by the participant in accordance with applicable rules of the Internal Revenue Code, as amended.

Additionally, in conjunction with the Company's merger with Premier Commercial Bancorp in 2018, the Company assumed a Salary Continuation Plan.

Additionally, in conjunction with the Company's merger with Premier Commercial Bancorp in 2018, the Company assumed the Salary Continuation Plan.

The Salary Continuation Plan is an unfunded non-qualified deferred compensation plan for select former Premier Commercial executive officers, some of which are current Company officers.

2 unchanged sentences

As such, participants are general unsecured creditors of the Company with respect to their participation under both plans.

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

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

Since the amounts earned under the Deferred Compensation Plan are generally based on the Company’s annual performance, the Company records deferred compensation expense each year for an amount calculated based on that year’s financial performance.

16 unchanged sentences

Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.

Fee income related to interest rate swap derivative contract transactions is recorded in "Interest rate swap fees" on the Consolidated Statements of Income.

Fee income related to interest rate swap derivative contract transactions is recorded in "Interest rate swap fees" in the Consolidated Statements of Income.

The fair value of derivative positions outstanding is included in "Prepaid expenses and other assets" and "Accrued expenses and other liabilities" in the Consolidated Statements of Financial Condition.

5 unchanged sentences

Operating Segments

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

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

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

1 unchanged sentence

The Company's revenues are primarily composed of interest income on financial instruments, such as loans and investment securities.

The Company's revenue derived from contracts with customers are generally presented in "Service charges and other fees" and "Other income" on the Consolidated Statement of Income and includes the following:

The Company's revenue derived from contracts with customers are generally presented in "Service charges and other fees" and "Other income" in the Consolidated Statement of Income and includes the following:

• Service Charges on Deposit Accounts:

16 unchanged sentences

and recommended by the Alternative Reference Rates Committee.

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

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

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

Troubled Debt Restructurings and Vintage Disclosures , was issued in March 2022.

The ASU eliminates the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Specifically, rather than applying the recognition and measurement guidance for TDRs, the entity will apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or continuation of an existing loan.

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

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

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

This update requires prospective transition for the disclosures related to loan restructurings for borrowers experiencing financial difficulty and the presentation of gross write-offs in the vintage disclosures.

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

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

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

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

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

The Company’s instruments indexed to the London Interbank Offering Rate ("LIBOR") have all been transferred to another index.

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

5 unchanged sentences

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

The Company had already applied proportional amortization to its LIHTC investments prior to January 1, 2024.

The amendments in this ASU allow the Company to expand the use of proportional amortization to other types of qualifying tax credit investments.

The Company has chosen not to expand the use of proportional amortization beyond its LIHTC investment portfolio.

Thus, at this time, this ASU only impacts disclosure requirements.

FASB ASU 2023-06 , Disclosure Improvements:

Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative, was issued in October 2023 to clarify or improve disclosure and presentation requirements on a variety of topics and align the requirements in the FASB accounting standard codification with the Securities and Exchange Commission regulations.

The amendments will be effective for the Company only if the SEC removes the related disclosure requirement from its existing regulations no later than June 30, 2027.

If the SEC timely removes such a related requirement from its existing regulations, the corresponding amendments within the ASU will become effective for the Company on the same date with early adoption permitted.

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

FASB ASU 2023-07 , Segment Reporting - Improvements to Reportable Segment Disclosures (Topic 280), was issued in November 2023.

This accounting standards update was issued to improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses.

The ASU applies to all public entities that are required to report segment information in accordance with ASC 280.

For public companies, amendments in this ASU was effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted.

This ASU only impacts the Company's disclosure requirements and the adoption of this ASU did not have a material impact on its business operations or Consolidated Statements of Financial Condition.

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

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

FASB ASU 2024-02 , Codification Improvements - Amendments to Remove References to the Concepts Statements, was issued in March 2024.

This update contains amendments in the Codification that remove references to various Concepts Statements.

In most cases, the references were extraneous and not required to understand or apply the guidance.

In other instances, the references were used in previous Statements to provide guidance in certain topical areas.

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

An entity may apply the amendments in this ASU prospectively to all new transactions recognized on or after the date that the entity first applies the amendments, or retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied.

If applied retrospectively, an entity shall adjust the opening period of retained earnings as of the beginning of the comparative period presented.

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

FASB ASU 2024-03 , Disaggregation of Income Statement Expenses, was issued in November 2024.

This accounting standards update will require public companies to disclose, in the notes to financial statements, specified information about certain costs

and expenses at each interim and annual reporting period.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2026, with early adoption permitted.

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

(2) Investment Securities

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

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

government and agency securities from the available for sale classification to the held to maturity classification.

The net unrealized after tax gain remained in AOCI and is amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities.

No gains or losses were recognized at the time of the transfer.

There were no investment securities classified as trading at December 31, 2024 or December 31, 2023.

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

Therefore, no ACL on investment securities available for sale was recorded as of December 31, 2023 and December 31, 2022.

Therefore, no ACL on investment securities available for sale was recorded as of December 31, 2024 or December 31, 2023.

The Company also evaluated investment securities held to maturity for current expected credit losses as of December 31, 2024 and December 31, 2023.

There were no investment securities held to maturity classified as nonaccrual or past due as of December 31, 2023 and December 31, 2022 and all were issued by the U.S.

There were no investment securities held to maturity classified as nonaccrual or past due as of December 31, 2024 or December 31, 2023 and all were issued by the U.S.

government and its agencies and either explicitly or implicitly guaranteed by the U.S.

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Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero.

Therefore, no ACL on investment securities held to maturity was recorded as of December 31, 2023 and December 31, 2022.

Therefore, no ACL on investment securities held to maturity was recorded as of December 31, 2024 or December 31, 2023.

(d) Realized Gains and Losses

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FRB 434,534 373,410 845,098 742,197

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

Other securities pledged 53,296 48,169 54,636 49,032

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(g) Non-Marketable Securities

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

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

Class B common stock.

1 unchanged sentence

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

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

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

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

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

(3) Loans Receivable

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

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

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

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

(a) Loan Origination/Risk Management

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Terms of maturity typically range from 15 to 30 years.

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

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

In 2024, the Bank ceased the origination of residential real estate loans;

however, the Company may purchase pools of residential real estate loans.

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

3 unchanged sentences

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

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

Construction loans are typically short-term in nature and

priced with variable rates of interest.

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

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

The Company also purchased indirect consumer loans.

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

The Company ceased indirect consumer loan originations in March 2020.

(b) Concentrations of Credit

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

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

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

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

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

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

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

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

December 31, 2024 Revolving Loans Revolving Loans Converted (1)

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Total 488,339 403,599 609,850 451,707 289,221 1,333,793 174,281 4,232 3,755,022

Commercial business gross charge-offs

Current period — — 254 323 27 115 — — 719

Residential real estate

2 unchanged sentences

Total 32,857 52,317 135,947 132,936 21,909 26,988 — — 402,954

December 31, 2024 Revolving Loans Revolving Loans Converted (1)

Loans Receivable

Amortized Cost Basis by Origination Year

2024 2023 2022 2021 2020 Prior

Real estate construction and land development:

Pass 34,078 34,436 6,415 — 1,000 955 256 — 77,140

SM — — 2,139 — — — — — 2,139

SS — 1,000 — 5,750 — — — — 6,750

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SM — — 893 — 5,655 5,886 — — 12,434

SS — — — 15,625 — — — — 15,625

Total 37,022 169,816 148,682 25,490 5,655 8,888 — — 395,553

4 unchanged sentences

Total 71,100 205,252 155,097 31,240 6,655 9,843 256 — 479,443

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

Loans Receivable

Amortized Cost Basis by Origination Year

2023 2022 2021 2020 2019 Prior

Pass 1,882 1,513 1,477 339 3,196 20,518 133,355 820 163,100

1 unchanged sentence

Total 1,882 1,513 1,502 339 3,311 21,127 133,415 1,615 164,704

Consumer gross charge-offs:

Current period 7 10 30 29 106 152 252 — 586

Loans receivable

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Total $ 594,178 $ 662,681 $ 902,396 $ 616,222 $ 321,096 $ 1,391,751 $ 307,952 $ 5,847 $ 4,802,123

Gross charge-offs:

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

(1) Represents the loans receivable balance at December 31, 2024 which was converted from a revolving loan to a non-revolving amortizing loan during the year ended December 31, 2024.

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Total 90,775 138,505 166,617 85,725 147,574 329,424 — — 958,620

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

Loans Receivable

Amortized Cost Basis by Origination Year

2023 2022 2021 2020 2019 Prior

Non-owner-occupied CRE

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

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

Loans Receivable

Amortized Cost Basis by Origination Year

2022 2021 2020 2019 2018 Prior

Residential real estate

4 unchanged sentences

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

SM — — 2,139 — — — — — 2,139

SS 1,000 319 4,866 — — — — — 6,185

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

Commercial and multifamily

1 unchanged sentence

SM — — — 3,777 5,660 365 — — 9,802

SS — — — 37 — 394 — — 431

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

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

The following tables present the gross charge-offs by loan class and origination year, for the periods indicated:

Year Ended December 31, 2024

Current Period Gross Charge-offs by Origination Year Revolving Loans Total Gross Charge-Offs

2024 2023 2022 2021 2020 Prior

(Dollars in thousands)

Commercial business $ — $ 313 $ — $ — $ 4 $ 2,636 $ — $ 2,953

Consumer — 6 22 — 11 168 331 538

$ — $ 319 $ 22 $ — $ 15 $ 2,804 $ 331 $ 3,491

Year Ended December 31, 2023

Current Period Gross Charge-offs by Origination Year Revolving Loans Total Gross Charge-Offs

2023 2022 2021 2020 2019 Prior

(Dollars in thousands)

Commercial business $ — $ — $ 254 $ 323 $ 27 $ 115 $ — $ 719

Consumer 7 10 30 29 106 152 252 586

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

(d) Nonaccrual Loans

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Total commercial business 3,252 667 3,919

Consumer 160 — 160

Total $ 3,412 $ 667 $ 4,079

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Commercial and industrial $ 1,706 $ 2,557 $ 4,263

December 31, 2022

Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual

(Dollars in thousands)

Owner-occupied CRE — 205 205

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

Real estate construction and land development:

Commercial and multifamily

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

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Owner-occupied CRE ( 28 ) 144 — —

Non-owner occupied CRE — — — 774

Total commercial business ( 55 ) 605 ( 61 ) 347

Residential real estate

Real estate construction and land development:

Commercial and multifamily

— — ( 14 ) 65

Consumer ( 5 ) — — —

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162 — 162 375,180 375,342

December 31, 2023

30-89 Days 90 Days or

Greater Total Past

Due Current Loans Receivable

(Dollars in thousands)

Real estate construction and land development:

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Total $ 4,555 $ 4,452 $ 9,007 $ 4,326,620 $ 4,335,627

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

The following table present loans 90 days or more past due and still accruing interest:

December 31, 2024 December 31, 2023

(Dollars in thousands)

Commercial business:

Commercial and industrial $ 1,195 $ 887

Total commercial business 1,195 887

Real estate construction and land development:

Total real estate construction and land development — 319

Consumer — 87

Total $ 1,195 $ 1,293

(f) Collateral-dependent Loans

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Total commercial business 2,250 389 613 — 3,252

Consumer — — 160 — 160

Total $ 2,250 $ 389 $ 773 $ — $ 3,412

December 31, 2023

CRE Farmland Residential Real Estate Total

CRE Farmland Residential Real Estate Equipment Total

(Dollars in thousands)

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(g) Modification of Loans

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

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

This guidance was applied on a prospective basis.

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

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

Occasionally, the Company modifies loans to borrowers in financial distress by providing modifications of loans which may include interest rate reductions, principal or interest forgiveness, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

In some cases, the Company provides multiple types of concessions on one loan.

When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

The following tables present amortized cost of loans that were experiencing both financial difficulty and modified during the periods indicated:

Year Ended December 31, 2024

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Commercial and industrial $ 20,962 $ 200 $ 21,162 2.51 %

Total commercial business 20,962 200 21,162 0.56

Real estate construction and land development:

6,750 — 6,750 8.05

Commercial and multifamily

5,655 15,625 21,280 5.38

Total real estate construction and land development 12,405 15,625 28,030 5.85

Consumer 44 — 44 0.03

Total $ 33,411 $ 15,825 $ 49,236 1.03 %

Year Ended December 31, 2023

Term Extension Term Extension & Int.

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

(Dollars in thousands)

Commercial business:

Commercial and industrial $ 16,822 $ — $ 16,822 2.34 %

Owner-occupied CRE 209 — 209 0.02

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Commercial and industrial 1.10 % 0.85

Total commercial business 1.10 0.85

Real estate construction and land development:

Commercial and multifamily

Total real estate construction and land development 1.50 0.99

Consumer — 1.78

Total 1.50 % 0.93

Year Ended December 31, 2023

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

Commercial business:

Commercial and industrial — % 0.48

Owner-occupied CRE — 0.75

3 unchanged sentences

Commercial and multifamily

Total real estate construction and land development — 0.67

Consumer 1.00 2.64

1 unchanged sentence

There were no modified loans included in the tables above that were past due or on nonaccrual as of December 31, 2024.

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

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

There were no loans to borrowers experiencing financial difficulty that had a payment default during the year ended December 31, 2024 that were modified in the twelve months prior to that default.

At December 31, 2024, there were $ 4.3 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms had been modified during the year ended December 31, 2024.

At December 31, 2023, there were $ 6.6 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms had been modified during the year ended December 31, 2023.

The Company closely monitors the performance of loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The Company considers a modified loan as a payment default if the borrower is 90 or more days past due.

At December 31, 2024, there were no loans 90 days past due or in default that have been modified in the past 12 months.

(h) Related Party Loans

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The Company had $ 143,000 and $ 113,000 of unfunded commitments to related parties as of December 31, 2024 and December 31, 2023.

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

(i) Commercial Loan Sales and Servicing

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

3 unchanged sentences

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

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

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

The Company recognized $ 94,000 , $ 135,000 and $ 217,000 of servicing income for the years ended December 31, 2024, 2023 and 2022, respectively.

The Company's servicing asset at December 31, 2023 and December 31, 2022 was $ 128,000 and $ 192,000 , respectively.

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

(j) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled $ 14.5 million and $ 13.3 million at December 31, 2024 and December 31, 2023, respectively, and is excluded from the calculation of the ACL on loans as interest accrued , but not received, is reversed timely.

(k) Foreclosure proceedings in process

At December 31, 2024, there was one home equity loan valued at $ 160,000 , secured by residential real estate, for which formal foreclosure proceedings were in process.

At December 31, 2023, there were no loans secured by residential real estate for which formal foreclosure proceedings were in process.

(4) Allowance for Credit Losses on Loans

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

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

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

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

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Year Ended December 31, 2023

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

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

(Dollars in thousands)

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Valley Community Bancshares in 2013;

Western Washington Bancorp in 2006 and North Pacific Bank in 1998.

Western Washington Bancorp in 2006;

and North Pacific Bank in 1998.

The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit).

There were no additions to goodwill during the years ended December 31, 2024, 2023, and 2022.

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

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

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

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

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

At December 31, 2024, the Company's analysis concluded the fair value of the reporting unit exceeded the carrying value so the Company's goodwill was not considered impaired.

Similarly, no goodwill impairment charges were recorded for the years ended December 31, 2023 and 2022.

Even though there was no goodwill impairment at December 31, 2024, changes in economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company's operating results.

(b) Other Intangible Assets

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

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

There were no additions during the years ended December 31, 2024, 2023, and 2022.

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

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

However, the settlement values of the Company's net derivative assets with customers had no change as of December 31, 2024 and December 31, 2023 and increased $ 66,000 as of December 31, 2022 due to the change in the credit valuation adjustment.

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

7 unchanged sentences

Total deposits $ 5,684,613 $ 5,599,872

Deposit accounts overdrawn and reclassified to loans receivable were $ 293,000 and $ 317,000 as of December 31, 2023 and December 31, 2022, respectively.

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

Deposit accounts overdrawn and reclassified to loans receivable were $ 313,000 and $ 293,000 as of December 31, 2024 and 2023, respectively.

Accrued interest payable on deposits was $ 214,000 and $ 250,000 as of December 31, 2024 and 2023, respectively and is included in "Accrued expenses and other liabilities" in the Consolidated Statements of Financial Condition.

Scheduled maturities of certificates of deposit for years after December 31, 2024 are as follows, in thousands:

5 unchanged sentences

(9) Junior Subordinated Debentures

As part of the acquisition of Washington Banking Company on May 1, 2014, the Company assumed trust preferred securities and junior subordinated debentures with a total fair value of $ 18.9 million at the merger date.

As part of the acquisition of Washington Banking Company on May 1, 2014, the Company assumed junior subordinated debentures with a total fair value of $ 18.1 million at the merger date.

At December 31, 2024 and December 31, 2023, the balance of the junior subordinated debentures, net of unaccreted discount, was $ 22.1 million and $ 21.8 million, respectively.

Washington Banking Master Trust, a Delaware statutory business trust, was a wholly owned subsidiary of the Washington Banking Company created for the exclusive purposes of issuing and selling capital securities and utilizing sale proceeds to acquire junior subordinated debentures issued by the Washington Banking Company.

Washington Banking Master Trust, a Delaware statutory business trust (the "Trust"), was a wholly-owned subsidiary of the Washington Banking Company created for the exclusive purposes of issuing and selling capital securities and utilizing sale

proceeds to acquire junior subordinated debentures issued by the Washington Banking Company.

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

5 unchanged sentences

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

For financial reporting purposes, the Company's investment in the Master Trust is accounted for under the equity method and is included in "Prepaid expenses and other assets" on the Consolidated Statements of Financial Condition.

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

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

(10) Securities Sold Under Agreement to Repurchase

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

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

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

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

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

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

December 31, 2023 December 31, 2022

(Dollars in thousands)

Commercial CMO and MBS $ — $ 46,597

Total $ — $ 46,597

For financial reporting purposes, the Company's investment in the Master Trust is accounted for under the equity method and is included in "Prepaid expenses and other assets" in the Consolidated Statements of Financial Condition.

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

As of December 31, 2024, the junior subordinated debentures qualified as additional tier 1 capital of the Company under the Federal Reserve's capital adequacy guidelines.

(10) Other Borrowings

At year end, advances from the FHLB were as follows:

Amount Amount

(Dollars in thousands)

Matures in 2025, fixed rate at rates from 4.51% to 5.16%, averaging 4.69 %

$ 348,000 $ —

Matures in 2025, floating rate at 4.62 %

$ 383,000 $ —

The FHLB functions as a member-owned cooperative providing credit for member financial institutions.

1 unchanged sentence

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

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances.

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

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

At December 31, 2023 and December 31, 2022 the Bank had no FHLB advances outstanding.

The advances are collateralized by $ 1,359 million and $ 1,418 million of loans under a blanket lien arrangement at December 31, 2024 and December 31, 2023 At December 31, 2024, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $ 976.3 million.

Advances from the FHLB may be collateralized by FHLB stock owned by the Bank, deposits at the FHLB, certain commercial and residential real estate loans, investment securities or other assets.

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

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

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

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

The advance rate on the collateral is at par value.

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

The Bank maintains a credit facility with the FRB through the Discount Window with available borrowing capacity of $ 360.1 million as of December 31, 2024.

The Bank had no FRB borrowings outstanding at December 31, 2024.

All advances are currently secured by investment securities.

The Bank had $ 500.0 million of FRB borrowings outstanding at December 31, 2023 through the BTFP, which is no longer available.

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

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The majority of the leases contain renewal options and provisions for increases in rental rates based on an agreed upon index or predetermined escalation schedule.

As of December 31, 2023 and December 31, 2022, the Company’s operating lease ROU asset was $ 23.6 million and $ 22.7 million, respectively, and is included in " Prepaid expenses and other assets " on the Consolidated Statements of Financial Condition.

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

As of December 31, 2024 and December 31, 2023, the Company’s operating lease ROU asset was $ 22.4 million and $ 23.6 million, respectively, and is included in " Prepaid

expenses and other assets" in the Consolidated Statements of Financial Condition.

The related operating lease ROU liability was $ 24.9 million and $ 25.5 million, respectively and is included in " Accrued expenses and other liabilities " in the Consolidated Statements of Financial Condition.

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

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Total lease payments 27,578

Implied interest ( 2,644 )

Imputed interest ( 2,658 )

ROU liability $ 24,920

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

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

(12) Employee Benefit Plans

(a) 401(k) Plan

The Company provides its eligible employees with a Plan, including funding certain Plan costs as incurred.

All employees may participate in the Plan commencing with the first of the month following the start of employment or concurrent to their hire date if starting the first of the month.

(a) Heritage Financial Corporation 401(k) Profit Sharing Plan and Trust

Eligible employees of the Company and Bank may participate in the Plan.

The Company funds certain Plan costs as they are incurred.

All eligible employees may participate in the Plan commencing with the first of the month following the start of employment or concurrent to their hire date if starting the first of the month.

Participants may contribute a portion of their salary, which is matched by the Company at 50 %, not to be greater than 3 % of eligible compensation, up to Internal Revenue Service limits.

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For the years ended December 31, 2024, 2023 and 2022, the Company made no employer profit sharing contributions.

(b) Employment Agreements

The Company has entered into contracts with certain senior officers that provide benefits under certain conditions following termination without cause or following a change in control of the Company.

(b) Employment Agreements and Change in Control Agreements

The Company has entered into employment agreements with certain officers that provide severance benefits following a termination of the applicable officer by the Company without “cause” or a resignation by the applicable officer for “good reason.” If such termination or resignation occurs in connection with a change in control of the Company, the employment agreements provide for an enhanced severance benefit.

Additionally, the Company has entered into change in control agreements with certain officers that provide severance benefits following a termination of the applicable officer by the Company without “cause” or a resignation by the applicable for “good reason” in connection with a change in control of the Company.

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

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

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

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

The expense incurred for the deferred compensation for the years ended December 31, 2024, 2023, and 2022 was $ 604,000 , $ 409,000 , and $ 882,000 , respectively.

As a result, the Company recorded a deferred compensation liability of $ 4.7 million and $ 4.5 million at December 31, 2024 and 2023, respectively.

(d) Salary Continuation Plan

In conjunction with the Company's merger with Premier Commercial Bancorp in 2018, the Company assumed an unfunded deferred compensation plan for select former Premier Commercial executive officers, some of which are current Company officers.

In conjunction with the Company's merger with Premier Commercial Bancorp in 2018, the Company assumed an unfunded salary continuation plan for select former Premier Commercial executive officers, some of which are current Company officers.

The following table presents a summary of the changes in the Salary Continuation Plan during the periods indicated:

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Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.

The following table summarizes the dividend activity during the most recent three year period:

The following table summarizes the Company's dividend activity during the most recent three year period:

Declared Cash Dividend per Share Record Date Paid Date

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October 23, 2024 $ 0.23 November 6, 2024 November 20, 2024

The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company.

The FDIC and the DFI have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company.

Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.

Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.

See “Supervision And Regulation—Supervision and Regulation of the Company—Dividend Payments” and “Supervision And Regulation—Supervision and Regulation of the Bank—Dividend Payments” above, for additional detail regarding restrictions on the payment of dividends by the Company and the Bank.

The Company has implemented stock repurchase programs since March 1999.

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

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

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

Year Ended December 31,

2023 2022 2021 Plan Total (1)

Twelfth Stock Repurchase Plan

Repurchased shares 330,424 100,090 904,972 1,491,264

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

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

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

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

Year Ended December 31,

2023 2022 2021

Repurchased shares to pay withholding taxes 32,792 10 26,944 26,869

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

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

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 repurchase program, with 990,522 shares remaining available for repurchase under this new repurchase program at December 31, 2024.

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 further repurchases going forward.

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 Program’s expiration, without any prior notice.

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

(14) Fair Value Measurements

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

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

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

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

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

39 unchanged sentences

Equity security 297 297 — —

Derivative assets - interest rate swaps 23,867 — 23,867 —

December 31, 2024

1 unchanged sentence

(Dollars in thousands)

Derivative assets - interest rate swaps 23,195 — 23,195 —

Derivative liabilities - interest rate swaps $ 23,867 $ — $ 23,867 $ —

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Owner-occupied CRE $ 2,250 $ — $ — $ 2,250

Total commercial business 2,250 — — 2,250

Consumer 160 — — 160

Total assets measured at fair value on a nonrecurring basis $ 2,410 $ — $ — $ 2,410

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Certificates of deposit 692,973 701,029 — 701,029 —

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

Borrowings 500,000 499,861 — 499,861 —

Junior subordinated debentures 21,765 19,750 — — 19,750

2 unchanged sentences

(15) Stock-Based Compensation

On May 3, 2023, based upon the recommendation of the Compensation Committee, the Company's shareholders approved the Heritage Financial Corporation 2023 Omnibus Equity Plan, or "Equity Plan", that provides for the issuance of 1,250,000 shares of the Company's common stock in the form of various types of stock-based compensation.

On May 3, 2023, based upon the recommendation of the Compensation Committee of the Board, the Company's shareholders approved the Heritage Financial Corporation 2023 Omnibus Equity Plan (the "Equity Plan"), which provides for the issuance of up to 1,250,000 shares of the Company's common stock in the form of various types of stock-based awards.

As of December 31, 2024, there were 938,362 shares available for future issuance under the Equity Plan.

The Equity Plan replaces the Heritage Financial Corporation 2014 Omnibus Equity Plan (the "2014 Plan").

All remaining shares available for future issuance under the 2014 Plan were terminated upon approval of the Equity Plan.

All shares issued under the 2014 Plan remain outstanding and are governed by the 2014 Plan.

The Equity Plan replaced the Heritage Financial Corporation 2014 Omnibus Equity Plan (the "2014 Plan").

Upon shareholder approval of the Equity Plan by the Company’s shareholders, the 2014 Plan was frozen so that no future awards could be made thereunder.

All outstanding awards under the 2014 Plan remain in full force and effect, and are governed by the terms of the 2014 Plan and the related award agreements.

(a) Restricted Stock Units

Restricted stock units generally vest ratably over three years , participate in dividends and are subject to service conditions in accordance with each award agreement.

Performance-based restricted stock units have a three-year cliff vesting schedule, participate in dividends and are additionally subject to performance-based vesting.

Time-based restricted stock unit awards generally vest ratably over three years , participate in dividend equivalents and are subject to service conditions in accordance with each award agreement.

Performance-based restricted stock unit awards have a three-year cliff vesting schedule, participate in dividend equivalents and are additionally subject to performance-based vesting.

The conditions of the grants allow for an actual payout ranging between no payout and 150 % of target.

The payout level is calculated based on the percentile level of the market condition, which includes the ratio of the Company's total shareholder return and the ratio of the Company's return on average assets and return on tangible common equity over the performance period in relation to the performance of these metrics of a predetermined peer group.

The fair value of each performance-based restricted stock unit, inclusive of the market condition, was determined using a Monte Carlo simulation and will be recognized over the vesting period.

The payout level is calculated based on the Company's return on tangible common equity and three-year total shareholder return relative to a defined peer group of banks.

The fair value of each performance-based restricted stock unit award, inclusive of the performance metrics, was determined using a Monte Carlo simulation and will be recognized over the vesting period.

The Monte Carlo simulation model uses the same input assumptions as the Black-Scholes model;

however, it also further incorporates into the fair value determination the possibility the market condition may not be satisfied.

Compensation costs related to these awards are recognized regardless of whether the market condition is satisfied, provided the requisite service has been provided.

The Company used the following assumptions to estimate the fair value of performance-based restricted share units granted for the periods indicated:

however, it also further incorporates into the fair value determination the possibility that the performance metrics may not be satisfied.

Compensation costs related to these awards are recognized regardless of whether the performance metrics are satisfied, provided that the requisite service has been provided.

The Company used the following assumptions to estimate the fair value of performance-based restricted stock unit awards granted for the periods indicated:

Year Ended December 31,

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Expected volatilities in the model were estimated using a historical period consistent with the performance period of approximately three years .

The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant.

For the years ended December 31, 2023, 2022 and 2021, the Company recognized compensation expense related to restricted stock units of $ 4.3 million, $ 3.8 million, and $ 3.7 million respectively, and a related tax benefit of $ 949,000 , $ 833,000 , and $ 802,000 , respectively.

As of December 31, 2023, the total unrecognized compensation expense related to non-vested restricted stock units was $ 6.8 million and the related weighted-average period over which the compensation expense is expected to be recognized was approximately 2.1 years.

The vesting date fair value of the restricted stock units that vested during the years ended December 31, 2023, 2022 and 2021 was $ 3.5 million, $ 3.3 million and $ 3.6 million, respectively.

The risk-free interest rate was based on Treasury rates for a term commensurate with the expected life of the grant.

For the years ended December 31, 2024, 2023 and 2022, the Company recognized compensation expense related to restricted stock unit awards of $ 4.3 million, $ 4.3 million, and $ 3.8 million respectively, and a related tax benefit of $ 961,000 , $ 949,000 , and $ 833,000 , respectively.

As of December 31, 2024, the total unrecognized compensation expense related to non-vested restricted stock unit awards was $ 6.6 million and the related weighted-average period over which the compensation expense is expected to be recognized was approximately 2.0 years.

The vesting date fair value of the restricted stock unit awards that vested during the years ended December 31, 2024, 2023 and 2022 was $ 3.1 million, $ 3.5 million and $ 3.3 million, respectively.

The following table summarizes the unit activity for the periods indicated:

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480,385 $ 22.02

(17) Cash Restriction

The Company had no cash restrictions at December 31, 2023 and December 31, 2022.

(16) Investments in Tax Credits Structures

The Company's tax credit investments include LIHTC investments and a Solar Tax Credit investment.

LIHTC investments promote qualified affordable housing projects, some of which also support the Company’s regulatory compliance with the Community Reinvestment Act.

The Company’s investments in these entities generate a return primarily through the realization of federal income tax credits and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods.

These tax credits and deductions are recognized as a reduction to income tax expense.

LIHTC Investments

The carrying values of investments in unconsolidated LIHTCs were $ 187.2 million and $ 207.3 million as of December 31, 2024 and 2023, respectively, as a component of prepaid expense and other assets in the Consolidated Statements of Financial Condition.

LIHTCs are accounted for using the proportional amortization method.

During the years ended December 31, 2024, 2023 and 2022 the Company recognized proportional amortization of $ 20.0 million, $ 16.5 million and $ 10.9 million, respectively as a component of income tax in the Consolidated Statements of Income.

Total unfunded contingent commitments related to the Company’s LIHTC investments totaled $ 81.2 million and $ 107.9 million at December 31, 2024 and 2023, respectively, as a component of accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.

The Company expects to fund LIHTC commitments totaling $ 65.3 million during the year ending December 31, 2025 and $ 5.5 million during the year ending December 31, 2026, with the remaining commitments of $ 10.4 million to be funded by December 31, 2041.

There were no impairment losses on the Company’s LIHTC investments during the years ended December 31, 2024, 2023 and 2022.

Solar Tax Credit Investment

The Solar Tax Credit investment is accounted for using the equity method.

During the years ended December 31, 2024 and 2023, respectively, the Company recognized amortization expense of $ 101 and $ 21 , respectively, which was included within other expense in the Consolidated Statements of Income.

(17) Income Taxes

Income tax expense is substantially due to Federal income taxes as the provision for the state of Oregon income taxes is insignificant and the state of Washington does not charge an income tax in lieu of a business and occupation tax.

Income tax expense is substantially due to federal income taxes as the provision for the states of Oregon and Idaho income taxes are insignificant and the state of Washington does not charge an income tax in lieu of a business and occupation tax.

Income tax expense consisted of the following for the periods indicated:

6 unchanged sentences

The effective tax rate was 17.2 % for the December 31, 2024 compared to an effective tax rate of 15.3 % and 17.7 % for the years ended December 31, 2023 and 2022, respectively.

The decrease in the effective tax rate during the year ended December 31, 2023 was due primarily to the change in income before income taxes earned between the periods, including a decrease in annual pre-tax income for the year ended December 31, 2023 which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing and solar tax credits.

The increase in the effective tax rate during the year ended December 31, 2024 was due primarily to tax expense related to the surrender of BOLI of $ 2.4 million.

The following table presents the reconciliation of income taxes computed at the Federal statutory income tax rate of 21 % to the actual effective rate for the periods indicated:

5 unchanged sentences

Tax-exempt instruments ( 850 ) ( 1,311 ) ( 1,733 )

BOLI surrender $ 2,371 — —

Federal tax credits and other benefits (1)

3 unchanged sentences

Income tax expense $ 9,001 $ 11,160 $ 17,561

(1) Federal tax credits are provided for under the NMTC, Solar Tax Credits and LIHTC programs as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements.

(1) Federal tax credits are provided for under the Solar Tax Credits and LIHTC programs as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements.

The following table presents major components of the deferred income tax asset (liability) resulting from differences between financial reporting and tax basis at the dates indicated:

19 unchanged sentences

Junior subordinated debentures ( 813 ) ( 873 )

December 31, 2024 December 31, 2023

(Dollars in thousands)

ROU lease asset ( 4,938 ) ( 5,170 )

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Due to sufficient earnings history and other positive evidence, management has no t recorded a valuation allowance on the net operating loss carryforward as of December 31, 2024 and December 31, 2023.

At December 31, 2023, the Company had a tax credit carryforward of $11,085,000 that expires in 2043.

At December 31, 2024, the Company had a tax credit carryforward of $ 24.6 million that expires in 2044.

Due to sufficient earnings history and other positive evidence, management has not recorded a valuation allowance on the tax credit carryforward as of December 31, 2024.

As of December 31, 2024 and December 31, 2023, the Company had an insignificant amount of unrecognized tax benefits, none of which would materially affect its effective tax rate if recognized.

The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next 12 months.

The amount of interest and penalties accrued as of December 31, 2023 and December 31, 2022 and recognized during the years ended December 31, 2023, 2022 and 2021 were immaterial.

The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months following December 31, 2024.

The amount of interest and penalties accrued as of December 31, 2024 and December 31, 2023 were immaterial.

The Company has qualified under provisions of the Internal Revenue Code to compute income taxes after deductions of additions to the bad debt reserves when it was registered as a Savings Bank.

19 unchanged sentences

Total commercial business 629,741 578,240

December 31, 2024 December 31, 2023

(Dollars in thousands)

Real estate construction and land development:

5 unchanged sentences

Total outstanding commitments $ 1,181,073 $ 1,269,099

(b) Variable Interests - LIHTC Investments

The carrying values of investments in unconsolidated LIHTCs were $ 206.8 million and $ 191.3 million as of December 31, 2023 and December 31, 2022, respectively.

During the years ended December 31, 2023, 2022 and 2021 the Company recognized tax benefits of $ 19.6 million, $ 12.9 million and $ 11.4 million, respectively, and proportional amortization of $ 20.9 million, $ 10.9 million and $ 9.7 million, respectively.

Total unfunded contingent commitments related to the Company’s LIHTC investments totaled $ 107.9 million and $ 109.2 million at December 31, 2023 and December 31, 2022, respectively.

The Company expects to fund LIHTC commitments totaling $ 29.5 million during the year ending December 31, 2024 and $ 62.6 million during the year ending December 31, 2025, with the remaining commitments of $ 15.9 million to be funded by December 31, 2041.

There were no impairment losses on the Company’s LIHTC investments during the years ended December 31, 2023, 2022 and 2021.

The equity method balance of the NMTC investment was $ 25.2 million at December 31, 2020.

The Company recognized related investment income of $247,000 during the year ended December 31, 2021.

(19) Regulatory Capital Requirements

The Company is a bank holding company under the supervision of the Federal Reserve Bank.

The Company is a bank holding company under the supervision of the Federal Reserve.

Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve.

1 unchanged sentence

The Federal Reserve capital requirements generally parallel the FDIC requirements.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements and operations.

Management believes as of December 31, 2023, the Company and the Bank meet all capital adequacy requirements to which they are subject.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect in the Consolidated Financial Statements and operations.

Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers.

Management believes that as of December 31, 2024, the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2024 and December 31, 2023, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes have changed the Bank's categories.

The following table presents the actual capital ratios of the Company and the Bank at the dates indicated:

Company Heritage Bank

December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022

There have been no conditions or events since that notification that management believes have changed the Bank's categories.

The following table summarizes the Company's consolidated and the Bank's capital ratios compared to the regulatory "adequately capitalized" capital ratios and the regulatory minimum capital ratios needed to qualify as a "well capitalized" institution, as calculated under regulatory guideline at the dates presented:

Actual Adequately Capitalized Well-Capitalized (1)

(Dollars in thousands)

December 31, 2024

Total capital ratio

Company $ 749,854 13.3 % $ 450,307 8.0 % $ 562,884 10.0 %

Bank 742,222 13.2 450,002 8.0 562,503 10.0

Tier 1 capital ratio

Company 698,412 12.4 337,730 6.0 450,307 8.0

Bank 690,780 12.3 337,502 6.0 450,002 8.0

Common equity Tier 1 capital ratio

Company 676,354 12.0 253,298 4.5 365,874 6.5

Bank 690,780 12.3 253,126 4.5 365,627 6.5

Leverage ratio

Tier 1 capital ratio 13.3 13.2 12.9 12.9

Company 698,412 10.0 278,910 4.0 348,637 5.0

Bank 690,780 9.9 278,749 4.0 348,436 5.0

December 31, 2023

Total capital ratio

Capital conservation buffer 6.1 6.0 5.8 5.7

As of December 31, 2023 and 2022, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allowed the Bank the option to delay for two years until December 31, 2021 an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.

Company $ 750,945 14.1 % $ 425,084 8.0 % $ 531,355 10.0 %

Bank 732,379 13.8 424,808 8.0 531,009 10.0

Tier 1 capital ratio

Company 704,839 13.3 318,813 6.0 425,084 8.0

Bank 686,273 12.9 318,606 6.0 424,808 8.0

Common equity Tier 1 capital ratio

Company 683,074 12.9 239,110 4.5 345,381 6.5

Bank 686,273 12.9 238,954 4.5 345,156 6.5

Leverage ratio

Company 704,839 10.0 281,673 4.0 352,092 5.0

Bank 686,273 9.8 281,539 4.0 351,923 5.0

(1) The ratios to meet the requirements to be deemed “well-capitalized” under prompt corrective action regulations are only applicable to the Bank.

However, the Company manages its capital position as if the requirements apply to the consolidated Company and has presented the ratios as if they also applied on a consolidated basis.

As of December 31, 2024 and 2023, the capital measures reflected the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that provided banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.

(20) Heritage Financial Corporation (Parent Company Only)

Following are the condensed financial statements of the Parent Company.

Following are the condensed financial statements of the Parent Company, excluding the Bank.

HERITAGE FINANCIAL CORPORATION

55 unchanged sentences

Cash and cash equivalents at the end of year $ 4,732 $ 15,752 $ 12,926

(21) Segment Information

The Company's reportable segments are determined by the Chief Executive Officer, who is the designated chief operating decision maker ("CODM"), based upon information provided about the Company's products and services offered, primarily

banking operations.

The segment is also distinguished by the level of information provided to the CODM, who uses such information to review performance of various components of the business, such as branches, which are then aggregated if operating performance, products/services, and customers are similar.

The CODM will evaluate the financial performance of the Company's business components by evaluating revenue streams, significant expenses, and budget to actual results in assessing the Company's segment and in the determination of allocating resources.

The CODM uses revenue streams to evaluate product pricing and significant expenses to assess performance and evaluate return on assets.

The CODM uses consolidated net income to benchmark the Company against its competitors.

The benchmarking analysis coupled with monitoring of budget to actual results are used in assessment performance and in establishing compensation.

Loans, investments, and deposits provide the revenues of the banking operation.

Interest expense, provisions for credit losses, and payroll provide the significant expenses in the banking operation.

All operations are domestic.

Accounting policies for segments are the same as those described in Note 1.

Segment performance is evaluated using consolidated net income.

Information reported internally for performance assessment by the CODM follows, inclusive of reconciliations of significant segment totals to the financial statements:

Year Ended December 31,

2024 2023 2022

(Dollars in thousands)

Total interest income $ 309,712 $ 284,465 $ 227,457

Reconciliation of revenue

Other revenues 7,473 18,663 29,591

Total consolidated revenues 317,185 303,128 257,048

Total interest expense 100,348 59,310 8,072

Provision for (reversal of) credit losses 6,282 4,280 ( 1,426 )

Compensation and employee benefits 98,527 100,083 92,092

Other segment expenses (1)

59,769 66,540 58,874

Income tax expense 9,001 11,160 17,561

Segment net income/consolidated net income $ 43,258 $ 61,755 $ 81,875

Other segment disclosures

Total interest income 309,712 284,465 227,457

Total interest expense 100,348 59,310 8,072

Depreciation 6,567 6,255 5,421

Amortization of intangible assets 1,640 2,434 2,750

Other significant noncash items:

Provision for (reversal of) credit losses 6,282 4,280 ( 1,426 )

Segment assets $ 7,106,278 $ 7,174,957 $ 6,980,100

Expenses for segment assets 273,927 241,373 175,173

Reconciliation of assets:

Total assets for reportable segments 7,106,278 7,174,957 6,980,100

Other assets — — —

Total consolidated assets $ 7,106,278 $ 7,174,957 $ 6,980,100

(1) Other segment expenses include expenses for occupancy and equipment, data processing, marketing, professional services and other overhead costs.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data