FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



x	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the quarterly period ended ~~September 30, 2017~~March 31, 2023 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 000-29480



¨			~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~Commission File Number 000-29480~~

HERITAGE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



~~Washington~~

~~91-1857900~~

Washington

91-1857900

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

201 Fifth Avenue SW, ~~Olympia, WA~~

Olympia

98501

(Address of principal executive offices)

(Zip Code)

(360) 943-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	HFWA	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ý☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

x☐

Non-accelerated filer

☐

Smaller reporting company

¨☐

Emerging ~~Growth Company~~growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ ��☐ No ý☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of ~~November 1, 2017~~April 26, 2023, there were ~~29,929,106~~35,061,897 shares of the registrant's common stock, no par value per share, outstanding.

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

~~INDEX~~March 31, 2023

~~September 30, 2017~~

TABLE OF CONTENTS



		Page
~~FORWARD LOOKING STATEMENTS~~GLOSSARY OF ACRONYMS, ABBREVIATIONS AND TERMS				3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS					3
~~Part~~
PART I.	FINANCIAL INFORMATION			45
~~Item~~ITEM 1.	FINANCIAL STATEMENTS			45
	~~Condensed Consolidated Statements of Financial Condition as of September 30, 2017 and December~~CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF MARCH 31, ~~2016~~2023 AND DECEMBER 31, 2022			45
	~~Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022			56
	~~Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022			67
	~~Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016~~CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022			78
	~~Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022			89
	~~Notes to Condensed Consolidated Financial Statements~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			1011
~~Item 2.~~	NOTE 1.		DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	11
	NOTE 2.		INVESTMENT SECURITIES	12
	NOTE 3.		LOANS RECEIVABLE	15
	NOTE 4.		ALLOWANCE FOR CREDIT LOSSES ON LOANS	23

	NOTE 5.		GOODWILL AND OTHER INTANGIBLE ASSETS	24
	NOTE 6.		DERIVATIVE FINANCIAL INSTRUMENTS	24
	NOTE 7.		STOCKHOLDERS’ EQUITY	25
	NOTE 8.		FAIR VALUE MEASUREMENTS	27
	NOTE 9.		CASH RESTRICTION	30
	NOTE 10.		COMMITMENTS AND CONTINGENCIES	30

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			4731
~~Item 3.~~	OVERVIEW			31
	RESULTS OF OPERATIONS			33
			AVERAGE BALANCES, YIELDS AND RATES PAID	33
			NET INTEREST INCOME AND MARGIN OVERVIEW	34
			PROVISION FOR CREDIT LOSSES OVERVIEW	35
			NONINTEREST INCOME OVERVIEW	36
			NONINTEREST EXPENSE OVERVIEW	36
			INCOME TAX EXPENSE OVERVIEW	37
	FINANCIAL CONDITION OVERVIEW			37
			INVESTMENT ACTIVITIES OVERVIEW	38
			LOAN PORTFOLIO OVERVIEW	38
			ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	40
			DEPOSITS OVERVIEW	41
			STOCKHOLDERS' EQUITY OVERVIEW	41
	REGULATORY REQUIREMENTS OVERVIEW			42
	LIQUIDITY AND CAPITAL RESOURCES			42
	CRITICAL ACCOUNTING POLICIES			43
	RECONCILIATIONS OF NON-GAAP MEASURES			43
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			6844
~~Item~~ITEM 4.	CONTROLS AND PROCEDURES			6845

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PART II.			OTHER INFORMATION		45

~~Part II.~~ITEM 1.	~~OTHER INFORMATION~~LEGAL PROCEEDINGS			6845
~~Item 1.~~ITEM 1A.			~~LEGAL PROCEEDINGS~~RISK FACTORS		6845
~~Item 1A.~~ITEM 2.			~~RISK FACTORS~~		68
~~Item 2.~~	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6945
~~Item~~ITEM 3.			DEFAULTS UPON SENIOR SECURITIES		6946
~~Item~~ITEM 4.			MINE SAFETY DISCLOSURES		6946
~~Item~~ITEM 5.			OTHER INFORMATION		6946
~~Item~~ITEM 6.			EXHIBITS		7046
			SIGNATURES		7047

GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms “we”, “our”, or “us” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.

~~Table of Contents~~


2022 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, 2022
ACL			Allowance for credit losses
AOCI			Accumulated other comprehensive income (loss), net

ASU			Accounting Standards Update
Bank			Heritage Bank
CECL			Current Expected Credit Loss
CMO			Collateralized Mortgage Obligation
Company			Heritage Financial Corporation
COVID-19 Pandemic			Coronavirus Disease of 2019 pandemic
CRE			Commercial real estate
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
Federal Reserve			Board of Governors of the Federal Reserve System
Federal Reserve Bank			Federal Reserve Bank of San Francisco

GAAP			U.S. Generally Accepted Accounting Principles
LIBOR			London Interbank Offering Rate
LIHTC			Low-Income Housing Tax Credit
MBS			Mortgage-backed security
PPP			Paycheck Protection Program
SBA			Small Business Administration
SEC			Securities and Exchange Commission
SM			Special Mention
SS			Substandard
TDR			Troubled debt restructured

~~FORWARD LOOKING STATEMENTS:~~CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

~~“Safe Harbor” statement under~~This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of ~~1995: This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking~~1995. Forward-looking statements that are subject to risks and uncertainties, including, but not limited to: the expected revenues, cost savings, synergies and other benefits from our pending merger with Puget Sound Bancorp, Inc., ("Puget Sound") might not be realized within the expected time frames or at all, and costs or difficulties relating to integration matters, including but not limited to, customer and employee retention might be greater than expected; the proposed Puget Sound merger may not close when expected or at all because required regulatory, shareholder or other approvals and conditions to closing are not ~~received~~statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or ~~satisfied on a timely basis~~similar expressions or ~~at all~~future or ~~adverse regulatory conditions may be imposed in connection with governmental approvals of the merger; the credit risks of lending activities, including changes in the level~~conditional verbs such as “may,” “will,” “should,” “would” and ~~trend of loan delinquencies and write-offs and changes in~~“could.” These statements relate to our allowance for loan losses and provision for loan losses that may be effected by deterioration in the housing and commercial real estate markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses no longer being adequate to cover actual losses, and require us to increase our allowance for loan losses; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;financial condition, results of ~~examinations of us by the Board of Governors of the Federal Reserve System~~operations, beliefs, plans, objectives, goals, expectations, assumptions and ~~of our bank subsidiary by the Federal Deposit Insurance Corporation ("FDIC"), the Washington State Department of Financial Institutions, Division of Banks~~statements about future performance or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings; legislative or regulatory changes; our ability to control operating costs and expenses; increases in premiums for deposit insurance; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our Condensed Consolidated Statements of Financial Condition; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our growth strategies; increased competitive pressures among financial service companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed from time to time in our filings with the Securities and Exchange Commission including our Annual Report on Form 10-K for the year ended December 31, 2016.

business. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such ~~statements.~~statements whether as a result of new information, future events or otherwise. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual

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results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price performance. These risks include, but are not limited to:

~~As used throughout this report,~~•potential adverse impacts to economic conditions nationally or in our local market areas, other markets where the ~~terms “we”, “our”, “us”,~~Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to new COVID-19 variants;

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our ACL on loans and provision for credit losses on loans that may be affected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;

•the uncertain impacts of quantitative tightening and current and future monetary policies of the Federal Reserve;

•changes in the levels of general interest rates, and the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

•the transition away from LIBOR toward new interest rate benchmarks;

•the impact of repricing and competitors' pricing initiatives on loan and deposit products;

•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

•secondary market conditions for loans and our ability to sell loans in the secondary market;

•results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;

•legislative or regulatory changes that adversely affect our business, including changes in banking, securities, and tax law, regulatory policies and principles, or the ~~“Company” refer~~interpretation of regulatory capital or other rules;

•our ability to ~~Heritage Financial Corporation~~attract and ~~its consolidated subsidiaries, unless~~retain deposits;

•liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;

•our ability to control operating costs and expenses;

•effects of critical accounting policies and judgments, including the ~~context otherwise requires.~~use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•the effectiveness of our risk management framework;

•difficulties in reducing risk associated with our loans;

•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

•our ability to retain key members of our senior management team;

•costs and effects of litigation, including settlements and judgments;

•our ability to implement our business strategies and manage our growth;

•future goodwill impairment due to changes in our business, market conditions, or other factors;

•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;

•risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar;

•increased competitive pressures among financial service companies;

•changes in consumer spending, borrowing and savings habits;

•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

•our ability to pay dividends on our common stock;

•the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets, including market liquidity;

•inability of key third-party providers to perform their obligations to us;

•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and

•other risks detailed from time to time in our filings with the SEC including our 2022 Annual Form 10-K.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

(In thousands, except shares)

September 30, 2017 December 31, 2016
(Dollars in thousands)
ASSETS
Cash on hand and in banks $ 82,905

$ 77,117
Interest earning deposits 28,353

26,628
Cash and cash equivalents 111,258

103,745
Investment securities available for sale, at fair value 800,060

794,645
Loans held for sale 5,368
11,662
Loans receivable, net 2,797,513
2,640,749
Allowance for loan losses (31,400 ) (31,083 )
Total loans receivable, net 2,766,113
2,609,666
Other real estate owned 523

754
Premises and equipment, net 60,457

63,911
Federal Home Loan Bank stock, at cost 9,343

7,564
Bank owned life insurance 71,474
70,355
Accrued interest receivable 12,295

10,925
Prepaid expenses and other assets 87,728

79,351
Other intangible assets, net 6,408

7,374
Goodwill 119,029

119,029
Total assets $ 4,050,056

$ 3,878,981
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 3,320,818
$ 3,229,648
Federal Home Loan Bank advances 117,400
79,600
Junior subordinated debentures 19,936
19,717
Securities sold under agreement to repurchase 28,668
22,104
Accrued expenses and other liabilities 55,626
46,149
Total liabilities 3,542,448
3,397,218
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016 —
—
Common stock, no par value, 50,000,000 shares authorized; 29,929,106 and 29,954,931 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively 360,113
359,060
Retained earnings 145,677
125,309
Accumulated other comprehensive income (loss), net 1,818
(2,606 )
Total stockholders’ equity 507,608
481,763
Total liabilities and stockholders’ equity $ 4,050,056
$ 3,878,981


	March 31, 2023		December 31, 2022
ASSETS
Cash on hand and in banks	$	68,969	$	74,295
Interest earning deposits	232,512		29,295
Cash and cash equivalents	301,481		103,590
Investment securities available for sale, at fair value, net (amortized cost of $1,424,969 and $1,460,033, respectively)	1,318,072		1,331,443
Investment securities held to maturity, at amortized cost, net (fair value of $684,647 and $673,434, respectively)	760,163		766,396
Total investment securities	2,078,235		2,097,839

Loans receivable	4,127,472		4,050,858
Allowance for credit losses on loans	(44,469)		(42,986)
Loans receivable, net	4,083,003		4,007,872

Premises and equipment, net	80,094		76,930
Federal Home Loan Bank stock, at cost	23,697		8,916
Bank owned life insurance	122,767		122,059
Accrued interest receivable	18,548		18,547
Prepaid expenses and other assets	281,438		296,181
Other intangible assets, net	6,604		7,227
Goodwill	240,939		240,939
Total assets	$	7,236,806	$	6,980,100
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	$	5,771,787	$	5,907,420
Deposits held for sale	17,235		17,420
Total deposits	5,789,022		5,924,840
Federal Home Loan Bank advances	383,100		—
Junior subordinated debentures	21,546		21,473
Securities sold under agreement to repurchase	39,161		46,597
Accrued expenses and other liabilities	177,895		189,297
Total liabilities	6,410,724		6,182,207
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively	—		—
Common stock, no par value, 50,000,000 shares authorized; 35,108,120 and 35,106,697 shares issued and outstanding, respectively	550,869		552,397
Retained earnings	358,010		345,346
Accumulated other comprehensive loss, net	(82,797)		(99,850)
Total stockholders’ equity	826,082		797,893
Total liabilities and stockholders’ equity	$	7,236,806	$	6,980,100

See accompanying Notes to Condensed Consolidated Financial ~~Statements.~~

Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except shares and per share amounts)


													Three Months Ended March 31,
	Three Months Ended September 30,						Nine Months Ended September 30,						2023		2022
	2017			2016			2017			2016
	(Dollars in thousands, except per share amounts)
INTEREST INCOME
INTEREST INCOME:												INTEREST INCOME:
Interest and fees on loans	$	32,595		$	30,915		$	94,580		$	91,595	Interest and fees on loans	$	50,450	$	41,025
Taxable interest on investment securities	3,117			2,888			9,307			8,522		Taxable interest on investment securities	14,657		6,003
Nontaxable interest on investment securities	1,354			1,235			3,926			3,599		Nontaxable interest on investment securities	586		860
Interest and dividends on other interest earning assets	258			76			461			225
Interest on interest earning deposits												Interest on interest earning deposits	972		706
Total interest income	37,324			35,114			108,274			103,941		Total interest income	66,665		48,594
INTEREST EXPENSE
INTEREST EXPENSE:												INTEREST EXPENSE:
Deposits	1,628			1,269			4,301			3,765		Deposits	4,528		1,424
Junior subordinated debentures	261			221			748			647		Junior subordinated debentures	482		194
Other borrowings	444			18			908			78		Other borrowings	1,813		32
Total interest expense	2,333			1,508			5,957			4,490		Total interest expense	6,823		1,650
Net interest income	34,991			33,606			102,317			99,451		Net interest income	59,842		46,944
Provision for loan losses	884			1,495			2,882			3,754
Net interest income after provision for loan losses	34,107			32,111			99,435			95,697
NONINTEREST INCOME
Provision for (reversal of) credit losses												Provision for (reversal of) credit losses	1,825		(3,577)
Net interest income after provision for (reversal of) credit losses												Net interest income after provision for (reversal of) credit losses	58,017		50,521
NONINTEREST INCOME:												NONINTEREST INCOME:
Service charges and other fees	4,769			3,630			13,408			10,462		Service charges and other fees	2,624		2,474
Gain on sale of investment securities, net	44			345			161			1,106
Card revenue												Card revenue	2,000		2,263
Loss on sale of investment securities, net												Loss on sale of investment securities, net	(286)		—
Gain on sale of loans, net	1,229			3,435			6,562			5,406		Gain on sale of loans, net	49		241
Interest rate swap fees	328			742			743			1,105		Interest rate swap fees	53		279
Bank owned life insurance income												Bank owned life insurance income	709		1,695
Gain on sale of other assets, net												Gain on sale of other assets, net	2		204
Other income	2,024			1,715			5,532			5,354		Other income	3,107		1,382
Total noninterest income	8,394			9,867			26,406			23,433		Total noninterest income	8,258		8,538
NONINTEREST EXPENSE
NONINTEREST EXPENSE:												NONINTEREST EXPENSE:
Compensation and employee benefits	15,823			15,633			48,119			45,652		Compensation and employee benefits	25,536		21,252
Occupancy and equipment	3,979			3,926			11,607			11,873		Occupancy and equipment	4,892		4,331
Data processing	2,090			1,943			6,007			5,564		Data processing	4,342		4,061
Marketing	933			745			2,545			2,254		Marketing	402		266
Professional services	1,453			830			3,515			2,508		Professional services	628		699
State and local taxes	640			820			1,828			2,031
State/municipal business and use taxes												State/municipal business and use taxes	1,008		796
Federal deposit insurance premium	433			296			1,090			1,316		Federal deposit insurance premium	850		600
Other real estate owned, net	(88		)	(142		)	(36		)	330

Amortization of intangible assets	319			359			966			1,057		Amortization of intangible assets	623		704
Other expense	2,373			2,408			7,346			7,079		Other expense	3,324		3,011
Total noninterest expense	27,955			26,818			82,987			79,664		Total noninterest expense	41,605		35,720
Income before income taxes	14,546			15,160			42,854			39,466		Income before income taxes	24,670		23,339
Income tax expense	3,922			4,121			11,086			10,441		Income tax expense	4,213		3,582
Net income	$	10,624		$	11,039		$	31,768		$	29,025	Net income	$	20,457	$	19,757
Basic earnings per common share	$	0.35		$	0.37		$	1.06		$	0.97
Diluted earnings per common share	$	0.35		$	0.37		$	1.06		$	0.97
Dividends declared per common share	$	0.13		$	0.12		$	0.38		$	0.35
Basic earnings per share												Basic earnings per share	$	0.58	$	0.56
Diluted earnings per share												Diluted earnings per share	$	0.58	$	0.56
Dividends declared per share												Dividends declared per share	$	0.22	$	0.21
Average number of basic shares outstanding												Average number of basic shares outstanding	35,108,390		35,094,725
Average number of diluted shares outstanding												Average number of diluted shares outstanding	35,445,340		35,412,098

See accompanying Notes to Condensed Consolidated Financial ~~Statements.~~

Statements (Unaudited).

Table of Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(LOSS) (Unaudited)

(In thousands)


	Three Months Ended March 31,
	2023		2022
Net Income	$	20,457	$	19,757
Change in fair value of investment securities available for sale, net of tax of $4,517 and $(12,113), respectively	16,890		(43,482)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(15) and $(39), respectively	(60)		(142)
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax of $63 and $0, respectively	223		—
Other comprehensive income (loss)	17,053		(43,624)
Comprehensive income (loss)	$	37,510	$	(23,867)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Dollars in thousands)
Net income $ 10,624
$ 11,039
$ 31,768
$ 29,025
Change in fair value of investment securities available for sale, net of tax of $157, $(570), $2,442 and $4,983, respectively 289
(1,055 ) 4,528
9,223
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $(16), $(121), $(57) and $(388), respectively (28 ) (224 ) (104 ) (718 )
Other comprehensive income (loss) 261
(1,279 ) 4,424
8,505
Comprehensive income $ 10,885
$ 9,760
$ 36,192
$ 37,530

See accompanying Notes to Condensed Consolidated Financial ~~Statements.~~

Statements (Unaudited).

Table of Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except shares and per share amounts)

Number of
common
shares

Common
stock

Retained
earnings

Accumulated
other
comprehensive income (loss), net

Total
stock-
holders’
equity
(Dollars in thousands, except per share amounts)
Balance at December 31, 2015 29,975
$ 359,451
$ 107,960
$ 2,559
$ 469,970
Restricted stock awards granted, net of forfeitures 111
—
—
—
—
Exercise of stock options (including excess tax benefits from nonqualified stock options) 28
421
—
—
421
Stock-based compensation expense —
1,367
—
—
1,367
Net excess tax benefits from vesting of restricted stock —
99
—
—
99
Common stock repurchased (167 ) (2,887 ) —
—
(2,887 )
Net income —
—
29,025
—
29,025
Other comprehensive income, net of tax —
—
—
8,505
8,505
Cash dividends declared on common stock ($0.35 per share) —
—
(10,488 ) —
(10,488 )
Balance at September 30, 2016 29,947
$ 358,451
$ 126,497
$ 11,064
$ 496,012

Balance at December 31, 2016 29,955
$ 359,060
$ 125,309
$ (2,606 ) $ 481,763
Restricted stock awards forfeited (10 ) —
—
—
—
Exercise of stock options 12
159
—
—
159
Stock-based compensation expense —
1,568
—
—
1,568
Common stock repurchased (28 ) (674 ) —
—
(674 )
Net income —
—
31,768
—
31,768
Other comprehensive income, net of tax —
—
—
4,424
4,424
Cash dividends declared on common stock ($0.38 per share) —
—
(11,400 ) —
(11,400 )
Balance at September 30, 2017 29,929
$ 360,113
$ 145,677
$ 1,818
$ 507,608


	Three Months Ended March 31, 2023
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2022	35,106,697	$	552,397	$	345,346	$	(99,850)	$	797,893

Restricted stock units vested	116,502	—		—		—		—
Stock-based compensation expense	—	1,099		—		—		1,099
Common stock repurchased	(115,079)	(2,627)		—		—		(2,627)
Net income	—	—		20,457		—		20,457
Other comprehensive income, net of tax	—	—		—		17,053		17,053

Cash dividends declared on common stock ($0.22 per share)	—	—		(7,793)		—		(7,793)
Balance at March 31, 2023	35,108,120	$	550,869	$	358,010	$	(82,797)	$	826,082


	Three Months Ended March 31, 2022
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2021	35,105,779	$	551,798	$	293,238	$	9,396	$	854,432

Restricted stock units vested	101,683	—		—		—		—
Stock-based compensation expense	—	950		—		—		950
Common stock repurchased	(105,090)	(2,652)		—		—		(2,652)
Net income	—	—		19,757		—		19,757
Other comprehensive loss, net of tax	—	—		—		(43,624)		(43,624)

Cash dividends declared on common stock ($0.21 per share)	—	—		(7,414)		—		(7,414)
Balance at March 31, 2022	35,102,372	$	550,096	$	305,581	$	(34,228)	$	821,449

See accompanying Notes to Condensed Consolidated Financial ~~Statements.~~

Statements (Unaudited).

Table of Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 31,768
$ 29,025
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,117
9,543
Changes in net deferred loan costs, net of amortization (656 ) (971 )
Provision for loan losses 2,882
3,754
Net change in accrued interest receivable, prepaid expenses and other assets, accrued expenses and other liabilities 8,315
(193 )
Stock-based compensation expense 1,568
1,367
Net excess tax benefit from exercise of stock options and vesting of restricted stock —
(119 )
Amortization of intangible assets 966
1,057
Origination of loans held for sale (82,767 ) (99,513 )
Proceeds from sale of loans 91,576
101,574
Earnings on bank owned life insurance (1,108 ) (1,086 )
Valuation adjustment on other real estate owned —
383
Gain on sale of loans, net (6,562 ) (5,406 )
Gain on sale of investment securities, net (161 ) (1,106 )
Gain on sale of assets held for sale (53 ) —
Gain on sale of other real estate owned, net (111 ) (173 )
Loss on sale or write-off of furniture, equipment and leasehold improvements 12
107
Net cash provided by operating activities 53,786
38,243
Cash flows from investing activities:
Loans originated, net of principal payments (178,800 ) (190,798 )
Maturities of other interest earning deposits —
1,248
Maturities, calls and payments of investment securities available for sale 75,800
94,328
Purchase of investment securities available for sale (101,017 ) (188,164 )
Purchase of premises and equipment (2,221 ) (5,128 )
Proceeds from sales of other loans 24,142
12,931
Proceeds from sales of other real estate owned 374
2,486
Proceeds from sales of investment securities available for sale 21,850
94,380
Proceeds from sale of assets held for sale 265
—
Proceeds from redemption of Federal Home Loan Bank stock 21,788
15,416
Purchases of Federal Home Loan Bank stock (23,567 ) (16,356 )
Proceeds from sale of premises and equipment —
659
Purchase of bank owned life insurance —
(8,000 )
Capital contribution to low-income housing tax credit partnership (8,506 ) (3,315 )
Net cash used in investing activities (169,892 ) (190,313 )


	March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	20,457	$	19,757
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	807		(1,572)
Provision for (reversal of) credit losses	1,825		(3,577)
Stock-based compensation expense	1,099		950
Amortization of intangible assets	623		704
Origination of mortgage loans held for sale	(1,351)		(5,833)
Proceeds from sale of mortgage loans held for sale	1,400		6,408
Bank owned life insurance income	(709)		(1,695)

Valuation adjustment on interest rate swaps	—		(53)
Gain on sale of mortgage loans held for sale, net	(49)		(241)
Loss on sale of investment securities available for sale, net	286		—

Gain on sale of assets held for sale	—		(204)
Other	(991)		(3,716)
Net cash provided by operating activities	23,397		10,928
Cash flows from investing activities:
Loan originations and purchases, net of payments	(75,839)		(988)
Maturities and repayments of investment securities available for sale	26,949		42,327
Maturities and repayments of investment securities held to maturity	5,995		6,644
Purchase of investment securities available for sale	(14,994)		(244,409)
Purchase of investment securities held to maturity	—		(45,849)
Purchase of premises and equipment	(4,653)		(724)
Purchase of bank owned life insurance	—		(105)

Purchases of Federal Home Loan Bank stock	(28,604)		(983)


Proceeds from sales of investment securities available for sale	22,688		—
Proceeds from redemption of Federal Home Loan Bank stock	13,823		—

Proceeds from sales of premises and equipment	2		1,173
Capital contributions to low-income housing tax credit partnerships	(369)		—


Net cash provided by investing activities	(55,002)		(242,914)
Cash flows from financing activities:
Net (decrease) increase in deposits	(135,818)		97,210
Federal Home Loan Bank advances	715,100		—
Repayment of Federal Home Loan Bank advances	(332,000)		—


Common stock cash dividends paid	(7,723)		(7,372)
Net decrease in securities sold under agreement to repurchase	(7,436)		(1,770)
Repurchase of common stock	(2,627)		(2,652)
Net cash provided by financing activities	229,496		85,416
Net increase (decrease) in cash and cash equivalents	197,891		(146,570)
Cash and cash equivalents at beginning of period	103,590		1,723,292
Cash and cash equivalents at end of period	$	301,481	$	1,576,722

Table of Contents


	March 31,
	2023		2022
Supplemental disclosures of cash flow information:
Cash paid for interest	$	6,501	$	1,555


Supplemental non-cash disclosures of cash flow information:


Investment in LIHTC partnership and related funding commitment	12		670
Right of use assets obtained in exchange for new operating lease liabilities	1,296		55

Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Cash flows from financing activities:
Net increase in deposits 91,170
134,134
Federal Home Loan Bank advances 582,500
403,100
Repayments of Federal Home Loan Bank advances (544,700 ) (385,400 )
Common stock cash dividends paid (11,400 ) (10,488 )
Net increase (decrease) in securities sold under agreement to repurchase 6,564
(789 )
Proceeds from exercise of stock options 159
401
Net excess tax benefit from exercise of stock options and vesting of restricted stock —
119
Repurchase of common stock (674 ) (2,887 )
Net cash provided by financing activities 123,619
138,190
Net increase (decrease) in cash and cash equivalents 7,513
(13,880 )
Cash and cash equivalents at beginning of period 103,745
126,640
Cash and cash equivalents at end of period $ 111,258
$ 112,760

Supplemental disclosures of cash flow information:
Cash paid for interest $ 6,024
$ 4,533
Cash paid for income taxes 1,500
9,000

Supplemental non-cash disclosures of cash flow information:
Transfers of loans receivable to other real estate owned $ 32
$ 677
Transfers of premises and equipment, net to prepaid expenses and other assets for properties held for sale 2,687
—
Investment in low income housing tax credit partnership and related funding commitment 14,267
19,663

See accompanying Notes to Condensed Consolidated Financial ~~Statements.~~

Statements (Unaudited).

Table of Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements


~~(1)~~	~~Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements~~

(a) Description of Business

~~Heritage Financial Corporation ("Heritage" or the “Company”) is a bank holding company that was incorporated in the State of Washington in August 1997.~~ The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, ~~Heritage Bank (the “Bank”). The Bank is a Washington-chartered commercial bank and its deposits are insured by~~ the ~~FDIC.~~Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 5951 branch offices located throughout Washington State, ~~and~~ the greater Portland, Oregon ~~area.~~area, Eugene, Oregon and Boise, Idaho. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public. 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.

~~On July 26, 2017,~~ The Bank's deposits are insured by the ~~Company announced the execution of a definitive agreement~~FDIC subject to purchase Puget Sound Bancorp, Inc., ("Puget Sound"), the holding company of Puget Sound Bank, a business bank headquartered in downtown Bellevue, Washington with one branch location and $567.2 million in total assets, $366.6 million in total loans receivables, net and $505.1 million in total deposits as of June 30, 2017. Upon consummation of the merger, the shareholders of Puget Sound will own approximately 13.5% of the combined company and Puget Sound will be merged into Heritage Bank. For additional information regarding the proposed transaction, see Note (16), Definitive Agreement.limitations.

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with ~~the accounting principles generally accepted in the United States (“U.S. GAAP”)~~GAAP for interim financial information and pursuant to the rules and regulations of the ~~Securities and Exchange Commission ("SEC").~~SEC. Accordingly, they do not include all of the information and footnotes required by ~~U.S.~~ GAAP for complete financial statements. It is recommended ~~that~~ these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the ~~Company's Annual Report on Form 10-K for the year ended December 31, 2016 (“2016~~2022 Annual Form ~~10-K”).~~10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017. In preparing the~~2023.

To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management ~~is required to make~~makes estimates and assumptions ~~that~~based on available information. These estimates and assumptions affect the amounts reported ~~amounts of assets, liabilities, revenues, expenses~~in the financial statements and ~~related disclosures.~~the disclosures provided. Management believes ~~that~~ the judgments, estimates and assumptions used in the preparation of the ~~financial statements~~unaudited Condensed Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of the ACL on investment securities, management's estimate of the ACL on loans, management's estimate of the ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.

There have been reclassifications in certain prior year amounts in the unaudited Condensed Consolidated Statements of Income. Reclassifications had no effect on the prior year's net income or stockholders’ equity.

The significant accounting policies used in preparation of the ~~Company's~~unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the ~~2016~~2022 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the ~~2016~~2022 Annual Form 10-K ~~except for accounting policies for stock-based compensation relating to~~during the ~~issuance of restricted stock units, including grants subject to performance-based and market-based vesting conditions, adopted January 1, 2017 as discussed below.~~

~~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. Compensation cost is 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. With the adoption of FASB Accounting Standards Update ("ASU" or "Update") 2016-09 on January 1, 2017, 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

~~Table of Contents~~

cliff vest based on those conditions, and the fair value is estimated using a Monte Carlo simulation pricing model. The assumptions used in the Black-Scholes-Merton option pricing model and 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; and the expected stock price volatility over the expected term based on the historical volatility over the equivalent historical term.three months ended March 31, 2023.

(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU ~~2014-09~~2020-04, ~~Revenue from Contracts with Customers~~Reference Rate Reform (Topic 848), as amended by ASU 2021-01, and ASU 2022-06 was issued in ~~May 2014. Under~~March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ~~Update,~~ASU are effective for all entities as of March 12, 2020. In December 2022, FASB ~~created a new~~amended this ASU and deferred the sunset date of Topic ~~606 which is in response~~848 from December 31, 2022, to ~~a joint initiative~~December 31, 2024. The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Bank’s interest rate swap-related transactions are the majority of ~~FASB and~~the Company's LIBOR exposure. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International ~~Accounting Standards Board to clarify~~Swaps and Derivatives Association, Inc. and recommended by the ~~principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and international financial reporting standards that would:~~

~~Remove inconsistencies and weaknesses in revenue requirements.~~

~~Provide a more robust framework for addressing revenue issues.~~

~~Improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets.~~

~~Provide more useful information to users of financial statements through improved disclosure requirements.~~

~~Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.~~

~~The original effective date for this Update was deferred in FASB ASU 2015-14 below.~~

~~FASB ASU 2015-14~~, ~~Revenue from Contracts with Customers (Topic 606)~~, was issued in August 2015 and defers the effective date of the above-mentioned FASB ASU 2014-09 for certain entities. Public business entities, certain not-for-profit entities and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is now permitted, but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company expects to adopt the revenue recognition guidance on January 1, 2018 using the modified retrospective approach. A significant amount of the Company’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. With respect to noninterest income and related disclosures, the Company is in its preliminary stages of identifying and evaluating the revenue streams and underlying revenue contracts within the scope of the guidance. To date, the Company has not yet identified any significant changes in the timing of revenue recognition when considering the amended accounting guidance; however, the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date. The Company expects to develop processes and procedures to ensure it is fully compliant with these amendments at the adoption date.

~~FASB ASU 2016-01~~, ~~Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)~~, was issued in January 2016, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This Update contains several provisions, including but not limited to 1) requiring equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; 2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate fair value; and 4) requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The Update also changes certain financial statement disclosure requirements, including requiring disclosures of the fair value of financial instruments be made on the basis of exit price. The Update is effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.Alternative Reference Rates Committee. The Company does not expect the adoption of this ~~Update will~~ASU to have a ~~significant~~material impact on ~~the Company’s statements of financial condition~~its business operations or income. Management is in the planning stages of developing processes and procedures to comply with the disclosures requirements of this Update, which could impact the disclosures the Company makes related to fair value of its financial instruments.

~~FASB ASU 2016-02~~, ~~Leases (Topic 842)~~ was originally issued in February 2016, to increase transparency and comparability of leases among organizations and to disclose key information about leasing arrangements. The Update sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The Update requires lessees to apply a dual approach, classifying leases as either a finance or operating lease. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a

~~Table of Contents~~

lease liability for all leases with a term greater than 12 months regardless of their classification. All cash payments will be classified within operating activities in the statement of cash flows. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Update is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company anticipates adopting the Update on January 1, 2019. Upon adoption of the guidance, the Company expects to report increased assets and increased liabilities on its Condensed Consolidated Statements of Financial Condition as a result of recognizing right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, which currently are not reflected in its Condensed Consolidated Statements of Financial Condition. During 2017, management began its evaluation of its leasing contracts and activities. Management is in the initial stages of developing its methodology to estimate the right-of use assets and lease liabilities. The Company anticipates electing an accounting policy to not recognize lease assets and lease liabilities for leases with a term of twelve months or less. The Company was committed to $14.7 million of minimum lease payments under noncancelable operating lease agreements at December 31, 2016. The Company does not expect the adoption of this amendment will have a significant impact to its Condensed Consolidated Financial Statements.

FASB ASU ~~2016-08~~2022-02, ~~Revenue from Contracts with Customers~~Financial Instruments - Credit Losses (Topic ~~606)~~326): ~~Principal versus Agent Considerations~~Troubled Debt Restructurings and Vintage Disclosures, was issued in March ~~2016~~2022. The ASU eliminates the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and it clarifies the implementation guidance of the above-mentioned FASB ASU 2014-09 as it relates to principal versus agent considerations. The Update addresses identifying the unit of account and nature of the goods or services as well asrestructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the ~~control principle~~recognition and ~~interactions with~~measurement guidance for TDRs, the ~~control principle. The amendments~~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 Update do not change the core principle of the guidance. The effective date, transition requirements and impact on the Company's Condensed Consolidated Financial Statements for this Update are the same as those described in FASB ASU ~~2015-14 above.~~

~~FASB ASU 2016-09~~, ~~Stock Compensation (Topic 718), issued in March 2016, is intended to simplify several aspects of the accounting for share-based payment award transactions. For~~requires public business entities ~~the guidance is effective~~to disclose current-period gross write-offs by year of origination for annual periods after December 15, 2016, including interim periods within those annual periods with early adoption permitted. Certain amendments are required to be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Other amendments are applied retroactively (such as presentation of employee taxes paid on the statement of cash flows) or prospectively (such as recognition of excess tax benefits on the income statement). The Company adopted this standard effective January 1, 2017. The Company made an accounting policy election to account for forfeitures as they occurfinancing receivables and this change resulted in a cumulative adjustment that was immaterial to all periods presented. Changes to the statement of cash flows have been applied prospectively and the Company recorded excess tax benefits in its income tax expense. Adoption of all other changes under this Update did not have a material impact on the Condensed Consolidated Financial Statements.

~~FASB ASU 2016-10~~, ~~Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing~~, was issued in April 2016 which clarifies the implementation guidance of the above-mentioned FASB ASU 2014-09 as it relates to identifying performance obligations and licensing. The effective date, transition requirements and impact on the Company's Condensed Consolidated Financial Statements for this Update are the same as those described in FASB ASU 2015-14 above.

~~FASB ASU 2016-12~~, ~~Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients~~, was issued in May 2016. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update affect only the narrow aspects of Topic 606. The effective date, transition requirements and impact on the Company's Condensed Consolidated Financial Statements for this Update are the same as those described in FASB ASU 2015-14 above.

~~FASB ASU 2016-13~~, ~~Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~, was issued in June 2016. Commonly referred to as the current expected credit loss model ("CECL"), this Update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. The amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables and any other financial asset not excluded from the scope that have the contractual right to receive cash. The Update replaces the incurred loss impairment methodology, which generally only considered past events and current conditions, with a methodology that reflects the expected credit losses and required consideration of a broader range of reasonable and supportable information to estimate all expected

~~Table of Contents~~

credit losses. The Update additionally addresses purchased assets and introduces the purchased financial asset with a more-than-insignificant amount of credit deterioration since origination ("PCD"). The accounting for these PCD assets is similar to the existing accounting guidance of FASB Accounting Standards Codification ("ASC") 310-30, ~~Loans and Debt Securities Acquired with Deteriorated Credit Quality~~, for purchased credit impaired ("PCI") assets, except the subsequent improvements in estimated cash flows will be immediately recognized into income, similar to the immediate recognition of subsequent deteriorations in cash flows. Current guidance only allows for the prospective recognition of these cash flow improvements. Because the terminology has been changed to a "more-than-insignificant" amount of credit deterioration, the presumption is that more assets might qualify for this accounting under the Update than those under current guidance. For public business entities, the Update isleases. These amendments are effective for fiscal years beginning after December 15, ~~2019,~~2022, including interim periods within those fiscal years, with early adoption permitted for fiscal years after December 15, 2018. An entity will apply the Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. A prospective transition approach is required for debt securities. An entity that has previously applied the guidance of FASB ASC 310-30 will prospectively apply the guidance in this Update for PCD assets. A prospective transition approach should be used for PCD assets where upon adoption, the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses. The Company is anticipating adopting the Update on January 1, 2020. Upon adoption,since the Company expects a change in the processes, internal controls and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on PCI loans; however, the Company is still in the process of determining the magnitude of the increase and its impact on the Condensed Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. During 2017, the Company's management created a CECL steering committee which will begin developing and implementing processes and procedures to ensure it is fully compliant withpreviously adopted the amendments ~~at the adoption date. To date, the CECL steering committee has reviewed proposals from several vendors to assist the Company~~ in ~~the adoption.~~

~~FASB~~ ASU ~~2016-15~~, ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~, was issued in August 2016. The Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.2016-13. Early adoption is permitted in any interim period if an entity has adopted ASU 2016-13 and

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such election may be made individually to adopt the guidance related to TDRs, including related disclosures, and ~~must~~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 ~~applied using~~adopted on a prospective or modified retrospective ~~transitional method to each period presented.~~ transition method.

The Company ~~has evaluated~~adopted ASU 2022-02 on a prospective basis January 1, 2023. The Company elected at the ~~new~~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 ~~and does not anticipate that its~~in ASC 310-20. The adoption of this ~~Update on January 1, 2018 will have a significant impact on its Condensed Consolidated Financial Statements.~~

~~FASB~~ ASU ~~2017-03~~, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)~~, was issued in January 2017. The SEC staff view is that a registrant should evaluate FASB ASC Updates that have~~did not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an update, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent FASB ASC amendments to Topic 326, Financial Instruments - Credit Losses; Topic 842, Leases; and Topic 606, Revenue from Contracts with Customers; although, the amendments apply to any subsequent amendments to guidance in the FASB ASC. The Company adopted the amendments in this Update during the fourth quarter of 2016 and appropriate disclosures have been included in this Note for each recently issued accounting standard.

~~FASB ASU 2017-04~~, ~~Goodwill (Topic 350)~~, was issued in January 2017 and eliminates Step 2 from the goodwill impairment test. Under the amendments, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized, however, should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Update is effective for annual periods or any interim goodwill impairment tests beginning after December 15, 2019 using a prospective transition method and early adoption is permitted. The Company does not expect the Update will have a material impact on ~~its Condensed~~business operations or the Consolidated Statements of Financial ~~Statements.~~Condition.

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(2)Investment Securities

~~FASB ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities~~ was issued in March 2017 and changes the accounting for certain purchased callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call date rather than to the maturity date. Accounting for purchased callable debt securities held at a discount does not change. The discount would continue to amortize to the maturity date. The updated is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect the Update will have a material impact on its Condensed Consolidated Financial Statements as the Company had been accounting for premiums as prescribed under this guidance. The Company anticipates early adopting this Update in January 2018.

~~FASB ASU 2017-09~~, ~~Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting~~ was issued in May 2017 to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this Update, an entity should account for the effects of a modification unless the fair value, vesting conditions and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The Update is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company does not expect the Update will have a material impact on its Condensed Consolidated Financial Statements.


~~(2)~~	~~Investment Securities~~

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

~~Table of Contents~~

There were no investment securities classified as trading at March 31, 2023 or December 31, 2022.

(a) Investment Securities by Classification, Type and Maturity

The ~~amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment securities available for sale at~~following tables present the ~~dates indicated were as follows:~~

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
(In thousands)
September 30, 2017
U.S. Treasury and U.S. Government-sponsored agencies $ 9,464
$ 12
$ (73 ) $ 9,403
Municipal securities 248,420
5,429
(1,043 ) 252,806
Mortgage-backed securities and collateralized mortgage obligations⁽¹⁾:

Residential 275,128
879
(1,646 ) 274,361
Commercial 214,793
699
(2,209 ) 213,283
Collateralized loan obligations 6,007
15
—
6,022
Corporate obligations 15,583
247
—
15,830
Other securities 27,850
505
—
28,355
Total $ 797,245
$ 7,786
$ (4,971 ) $ 800,060

December 31, 2016
U.S. Treasury and U.S. Government-sponsored agencies $ 1,563
$ 6
$ —
$ 1,569
Municipal securities 237,305
2,427
(2,476 ) 237,256
Mortgage-backed securities and collateralized mortgage obligations⁽¹⁾:

Residential 310,391
985
(2,200 ) 309,176
Commercial 211,259
599
(3,540 ) 208,318
Collateralized loan obligations 10,505
4
(31 ) 10,478
Corporate obligations 16,611
104
(9 ) 16,706
Other securities 11,005
156
(19 ) 11,142
Total $ 798,639
$ 4,281
$ (8,275 ) $ 794,645


~~(1)~~	~~Issued and guaranteed by U.S. Government-sponsored agencies.~~

~~There were~~ no ~~securities classified as trading or held to maturity at~~ ~~September 30, 2017~~ or ~~December 31, 2016~~.

~~The~~ amortized cost and fair value of investment securities, and the corresponding amounts of gross unrealized and unrecognized gains and losses including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI, at ~~September 30, 2017~~,the dates indicated:


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Investment securities available for sale:
U.S. government and agency securities	$	68,514	$	—	$	(3,964)	$	64,550
Municipal securities	146,525		218		(14,246)		132,497
Residential CMO and MBS	481,380		—		(47,668)		433,712
Commercial CMO and MBS	704,156		47		(40,706)		663,497
Corporate obligations	4,000		—		(183)		3,817
Other asset-backed securities	20,394		—		(395)		19,999
Total	$	1,424,969	$	265	$	(107,162)	$	1,318,072


	March 31, 2023
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	150,969	$	—	$	(28,298)	$	122,671

Residential CMO and MBS	285,337		12		(12,315)		273,034
Commercial CMO and MBS	323,857		—		(34,915)		288,942


Total	$	760,163	$	12	$	(75,528)	$	684,647


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Investment securities available for sale:
U.S. government and agency securities	$	68,912	$	—	$	(5,053)	$	63,859
Municipal securities	171,087		172		(18,233)		153,026
Residential CMO and MBS	479,473		—		(55,087)		424,386
Commercial CMO and MBS	714,136		19		(49,734)		664,421

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	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Corporate obligations	4,000		—		(166)		3,834
Other asset-backed securities	22,425		14		(522)		21,917
Total	$	1,460,033	$	205	$	(128,795)	$	1,331,443


	December 31, 2022
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	150,936	$	—	$	(33,585)	$	117,351

Residential CMO and MBS	290,318		—		(17,440)		272,878
Commercial CMO and MBS	325,142		—		(41,937)		283,205


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

The following table presents the amortized cost and fair value of investment securities by contractual maturity ~~are set forth below.~~at the date indicated. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2023
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	29,254	$	28,962	$	—	$	—
Due after one year through five years	38,323		36,884		—		—
Due after five years through ten years	43,983		41,429		83,235		70,107
Due after ten years	107,479		93,589		67,734		52,564
Total investment securities due at a single maturity date	219,039		200,864		150,969		122,671
Mortgage-backed securities (1)	1,205,930		1,117,208		609,194		561,976
Total investment securities	$	1,424,969	$	1,318,072	$	760,163	$	684,647

Amortized Cost Fair Value
(In thousands)
Due in one year or less $ 6,556
$ 6,595
Due after one year through five years 121,518
122,740
Due after five years through ten years 248,291
248,603
Due after ten years 420,835
421,972
Investment securities with no stated maturities 45
150
Total $ 797,245
$ 800,060
(1) Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.

~~Table~~There were no holdings of ~~Contents~~

investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at March 31, 2023 and December 31, 2022.

(b) Unrealized Losses ~~and Other-Than-Temporary Impairments~~on Investment Securities Available for Sale

The following ~~table shows~~tables present the gross unrealized losses and fair value of the ~~Company's~~Company’s investment securities available for sale ~~that are~~for which an ACL on investment securities available for sale has not ~~deemed to be other-than-temporarily impaired,~~been recorded, aggregated by investment category and length of time ~~that~~ the individual securities have been in a continuous unrealized loss ~~positions as~~position at the dates indicated:


	March 31, 2023
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. government and agency securities	$	—	$	—	$	64,550	$	(3,964)	$	64,550	$	(3,964)
Municipal securities	5,677		(37)		92,518		(14,209)		98,195		(14,246)
Residential CMO and MBS(1)	142,665		(3,401)		291,047		(44,267)		433,712		(47,668)
Commercial CMO and MBS(1)	350,217		(7,332)		289,192		(33,374)		639,409		(40,706)

Table of ~~September 30, 2017~~Contents


	March 31, 2023
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Corporate obligations	3,817		(183)		—		—		3,817		(183)
Other asset-backed securities	9,248		(52)		10,145		(343)		19,393		(395)
Total	$	511,624	$	(11,005)	$	747,452	$	(96,157)	$	1,259,076	$	(107,162)

(1) U.S. government agency and ~~December 31, 2016~~:government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations.


	December 31, 2022
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. government and agency securities	$	51,900	$	(2,031)	$	11,959	$	(3,022)	$	63,859	$	(5,053)
Municipal securities	82,580		(5,585)		40,945		(12,648)		123,525		(18,233)
Residential CMO and MBS(1)	217,949		(14,770)		206,437		(40,317)		424,386		(55,087)
Commercial CMO and MBS(1)	473,580		(16,971)		181,692		(32,763)		655,272		(49,734)
Corporate obligations	3,834		(166)		—		—		3,834		(166)
Other asset-backed securities	16,489		(510)		721		(12)		17,210		(522)
Total	$	846,332	$	(40,033)	$	441,754	$	(88,762)	$	1,288,086	$	(128,795)

Less than 12 Months 12 Months or Longer Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
(In thousands)
September 30, 2017
U.S. Treasury and U.S. Government-sponsored agencies $ 6,484
$ (73 ) $ —
$ —
$ 6,484
$ (73 )
Municipal securities 24,415
(362 ) 23,629
(681 ) 48,044
(1,043 )
Mortgage-backed securities and collateralized mortgage obligations⁽¹⁾:

Residential 135,648
(1,111 ) 23,937
(535 ) 159,585
(1,646 )
Commercial 112,595
(1,478 ) 38,099
(731 ) 150,694
(2,209 )
Total $ 279,142
$ (3,024 ) $ 85,665
$ (1,947 ) $ 364,807
$ (4,971 )

December 31, 2016
Municipal securities $ 90,188
$ (2,476 ) $ —
$ —
$ 90,188
$ (2,476 )
Mortgage-backed securities and collateralized mortgage obligations⁽¹⁾:

Residential 181,562
(2,148 ) 10,854
(52 ) 192,416
(2,200 )
Commercial 157,055
(3,446 ) 12,597
(94 ) 169,652
(3,540 )
Collateralized loan obligations 2,976
(1 ) 2,969
(30 ) 5,945
(31 )
Corporate obligations 4,032
(9 ) —
—
4,032
(9 )
Other securities 6,998
(19 ) —
—
6,998
(19 )
Total $ 442,811
$ (8,099 ) $ 26,420
$ (176 ) $ 469,231
$ (8,275 )
(1) U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations.

⁽¹⁾ ~~Issued and guaranteed by U.S. Government-sponsored agencies.~~(c) ACL on Investment Securities

The Company ~~has~~ evaluated ~~these~~ investment securities available for sale as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022 and ~~has~~ determined that ~~the decline~~any declines in ~~their~~fair value ~~is temporary. The unrealized losses are primarily due~~were attributable to ~~increases~~changes in ~~market~~ interest rates relative to where these investments fall within the yield curve and ~~larger spreads in the market~~individual characteristics. Management monitors published credit ratings for ~~mortgage-related products. The fair value~~adverse changes for all rated investment securities and none of these securities ~~is expected to recover as the securities approach their maturity date and/or as the pricing spreads narrow on mortgage-related securities. None of the underlying issuers of the municipal securities~~ had ~~credit ratings that were~~a below investment grade ~~levels at September 30, 2017 or~~credit rating as of both March 31, 2023 and December 31, ~~2016. The~~2022. In addition, the Company ~~has~~does not intend to sell these securities nor does the ~~ability and intent~~Company consider it more likely than not that it will be required to ~~hold~~sell these securities before the ~~investments until~~ recovery of the ~~securities'~~ amortized cost basis, which may be ~~the~~upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of March 31, 2023 and December 31, 2022.

The Company also evaluated investment securities held to maturity ~~date~~for current expected credit losses as of ~~the securities.~~

~~For the three~~March 31, 2023 and ~~nine months ended September 30, 2017 and 2016, there~~December 31, 2022. There were no investment securities ~~determined~~held to ~~be other-than-temporarily impaired.~~maturity classified as nonaccrual or past due as of March 31, 2023 and December 31, 2022 and all were issued by the U.S. government and its agencies and either explicitly or implicitly guaranteed by the U.S. government, highly rated by major credit rating agencies and had a long history of no credit losses. 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 March 31, 2023 and December 31, 2022.

(d) Realized Gains and Losses

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


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Gross realized gains	$	36	$	—
Gross realized losses	(322)		—
Net realized loss	$	(286)	$	—

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~~(c)~~(e) Pledged Securities

The following table summarizes the amortized cost and fair value of investment securities ~~available for sale~~ that ~~are~~were pledged as collateral for the following obligations at ~~September 30, 2017~~the dates indicated:


	March 31, 2023				December 31, 2022
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Washington and Oregon state public deposits	$	214,331	$	203,452	$	156,784	$	137,931
Federal Reserve Bank credit facility	656,858		588,576		60,660		49,506
Securities sold under agreement to repurchase	49,795		45,832		63,685		55,836
Other securities pledged	54,341		48,846		54,910		48,358
Total	$	975,325	$	886,706	$	336,039	$	291,631

(f) Accrued Interest Receivable

Accrued interest receivable excluded from the amortized cost of investment securities available for sale totaled $4.3 million and $4.8 million at March 31, 2023 and December 31, ~~2016~~:2022, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $2.3 million and $2.4 million at March 31, 2023 and December 31, 2022, respectively.

No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities during three months ended March 31, 2023 and 2022.

(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. Class B common stock. These shares had a carrying value of zero and were restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. During the three months ended March 31, 2023, the Bank sold all shares of Visa Inc. Class B common stock and recognized a $1.6 million gain which is included in other income.

(3)Loans Receivable

September 30, 2017 December 31, 2016

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value
(In thousands)
Washington and Oregon state to secure public deposits $ 40,997
$ 40,772
$ 214,834
$ 215,247
Repurchase agreements 12,620
12,724
29,481
29,294
Other securities pledged 201,783
203,482
3,557
3,546
Total $ 255,400
$ 256,978
$ 247,872
$ 248,087


~~(3)~~	~~Loans Receivable~~

The ~~Company~~Bank originates loans in the ordinary course of business and has also acquired loans through ~~FDIC-assisted~~mergers and ~~open bank transactions. Disclosures related to~~acquisitions. Accrued interest receivable was excluded from disclosures presenting the ~~Company's recorded investment in~~Bank's amortized cost of loans receivable ~~generally exclude accrued interest receivable~~as it was deemed insignificant. In addition to originating loans, the Bank may also purchase loans through pool purchases, participation purchases and ~~net deferred costs because they are insignificant.~~

Loans acquired in a business combination are further classified as “purchased” loans. Loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are accounted for under FASB ASC 310-30, ~~Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as "PCI" loans. Loans purchased that are not accounted for under FASB ASC 310-30 are accounted for under FASB ASC 310-20,~~ ~~Receivables—Nonrefundable Fees and Other Costs,~~ ~~and are referred to as "non-PCI" loans.~~syndicated loan purchases.

(a) Loan Origination/Risk Management

The ~~Company~~Bank categorizes the individual loans in ~~one of the four segments of~~ the total loan ~~portfolio:~~portfolio into four segments: commercial ~~business, one-to-four family~~business; residential real estate; real estate construction and land ~~development~~development; and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the 2022 Annual Form 10-K.

The ~~Company~~Bank has certain lending policies and ~~procedures~~guidelines in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and ~~procedures~~guidelines on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and ~~potential problem~~criticized loans. The ~~Company~~Bank also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit ~~personnel, as well as the Company’s policies and procedures.~~personnel.

~~A discussion of the risk characteristics of each loan portfolio segment is as follows:~~

~~Commercial Business~~:

~~There are three significant classes~~The amortized cost of loans in the commercial business portfolio segment: commercial and industrial, owner-occupied commercial real estate and non-owner occupied commercial real estate. The owner and non-owner occupied commercial real estate are both considered commercial real estate loans. As the commercial and industrial loans carry different risk characteristics than the commercial real estate loans, they are discussed separately below.

~~Commercial and industrial.~~ ~~Commercial and industrial loans are primarily made based on the identified cash flows~~receivable, net of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may include a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial and industrial loans carry more risk than other loans because the borrowers’ cash flow is less predictable, and in the event of a default, the amount of loss is potentially greater and more difficult to quantify because the value of the collateral securing these loans may fluctuate, may be uncollectible, or may be obsolete or of limited use, among other things.

~~Table of Contents~~

~~Commercial real estate.~~ The Company originates commercial real estate loans primarily within its primary market areas. These loans are subject to underwriting standards and processes similar to commercial and industrial loans in that these loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate properties. Commercial real estate lending typically involves higher loan principal amounts and paymentsACL on loans, and repayment is dependent on successful operation and management of the properties. The value of the real estate securing these loans can be adversely affected by conditions in the real estate market or the economy. There is little difference in risk between owner-occupied commercial real estate loans and non-owner occupied commercial real estate loans.

~~One-to-Four Family Residential~~:

The majority of the Company’s one-to-four family residential loans are secured by single-family residences located in its primary market areas. The Company’s underwriting standards require that single-family portfolio loans generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms of maturity typically range from 15 to 30 years. The Company sells most of its single-family loans in the secondary market and retains a smaller portion in its loan portfolio.

~~Real Estate Construction and Land Development~~:

The Company originates construction loans for one-to-four family residential and for five or more family residential and commercial properties. The one-to-four family residential construction loans generally include construction of custom homes whereby the home buyer is the borrower. The Company also provides financing to builders for the construction of pre-sold homes and, in selected cases, to builders for the construction of speculative residential property. Substantially all construction loans are short-term in nature and priced with variable rates of interest. Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion. Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Company’s estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness. If the Company’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being dependent upon successful completion of the construction project, interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.

~~Consumer~~:

The Company originates consumer loans and lines of credit that are both secured and unsecured. The underwriting process for these loans ensures a qualifying primary and secondary source of repayment. Underwriting standards for home equity loans are significantly influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of ~~80%~~, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. The majority of consumer loans are for relatively small amounts disbursed among many individual borrowers which reduces the credit risk for this type of loan. To further reduce the risk, trend reports are reviewed by management on a regular basis.

The Company also originates indirect consumer loans. These loans are for new and used automobile and recreational vehicles that are originated indirectly by selected dealers located in the Company's market areas. The Company has limited its purchase of indirect loans primarily to dealerships that are established and well-known in their market areas and to applicants that are not classified as sub-prime.

~~Table of Contents~~

~~Loans receivable at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~ consisted of the following portfolio segments and ~~classes:~~classes at the dates indicated:


	March 31, 2023		December 31, 2022
	(In thousands)
Commercial business:
Commercial and industrial	$	684,998	$	692,100
SBA PPP	900		1,468
Owner-occupied CRE	949,064		937,040

Table of Contents

September 30, 2017 December 31, 2016
(In thousands)
Commercial business:
Commercial and industrial $ 665,582
$ 637,773
Owner-occupied commercial real estate 602,238
558,035
Non-owner occupied commercial real estate 930,188
880,880
Total commercial business 2,198,008
2,076,688
One-to-four family residential 81,422
77,391
Real estate construction and land development:
One-to-four family residential 51,451
50,414
Five or more family residential and commercial properties 122,981
108,764
Total real estate construction and land development 174,432
159,178
Consumer 340,643
325,140
Gross loans receivable 2,794,505
2,638,397
Net deferred loan costs 3,008
2,352
Loans receivable, net 2,797,513
2,640,749
Allowance for loan losses (31,400 ) (31,083 )
Total loans receivable, net $ 2,766,113
$ 2,609,666


	March 31, 2023		December 31, 2022
	(In thousands)
Non-owner occupied CRE	1,601,789		1,586,632
Total commercial business	3,236,751		3,217,240
Residential real estate	363,777		343,631
Real estate construction and land development:
Residential	72,926		80,074
Commercial and multifamily	270,547		214,038
Total real estate construction and land development	343,473		294,112
Consumer	183,471		195,875
Loans receivable	4,127,472		4,050,858
Allowance for credit losses on loans	(44,469)		(42,986)
Loans receivable, net	$	4,083,003	$	4,007,872

Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans	$	(2,249)	$	(2,501)
Unamortized net deferred fee	$	(10,355)	$	(10,016)

(b) Concentrations of Credit

Most of the ~~Company’s~~Bank’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County, Washington to ~~Clark~~Lane County, ~~in Washington State and Multnomah County in~~ Oregon, as well as ~~other contiguous markets. The majority of~~Yakima County in Washington and Ada County in Idaho. Additionally, the ~~Company’s~~Bank's loan portfolio ~~consists of (in order of balances at September 30, 2017) non-owner occupied~~is concentrated in commercial ~~real estate,~~business loans, which include commercial and industrial, SBA PPP, owner-occupied and ~~owner-occupied~~nonowner-occupied CRE, and commercial and multifamily real ~~estate. As~~estate construction and land development loans. Commercial business loans, excluding SBA PPP loans, are generally considered as having a more inherent risk of ~~September 30, 2017~~default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and ~~December 31, 2016, there were no concentrations of~~consumer loans, ~~related to any single industry in excess of 10% of the Company’s total loans.~~implying higher potential losses on an individual loan basis.

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

The ~~Company~~Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. ~~A description~~Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, ~~is as follows:~~

~~Grades 1~~including qualitative information on how the risk grades relate to 5: ~~These grades~~the risk of loss, are considered “pass grade” and include loans with negligible to above average but acceptable risk. These borrowers generally have strong to acceptable capital levels and consistent earnings and debt service capacity. Loans with the higher grades within the “pass” category may include borrowers who are experiencing unusual operating difficulties, but have acceptable payment performance to date. Increased monitoring of financial information and/or collateral may be appropriate. Loans with this grade show no immediate loss exposure.

~~Grade 6:~~ This grade includes "Watch" loans and is considered a “pass grade”. The grade is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipatedcontained in the ~~near term.~~

~~Grade 7:~~ This grade includes “Other Assets Especially Mentioned” (“OAEM”) loans in accordance with regulatory guidelines, and is intended to highlight loans with elevated risks. Loans with this grade show signs of deteriorating profits and capital, and the borrower might not be strong enough to sustain a major setback. The borrower is typically higher than normally leveraged, and outside support might be modest and likely illiquid. The loan is at risk of further decline unless active measures are taken to correct the situation.

~~Table of Contents~~

~~Grade 8:~~ This grade includes “Substandard” loans in accordance with regulatory guidelines, which the Company has determined have a high credit risk. These loans also have well-defined weaknesses which make payment default or principal exposure likely, but not yet certain. The borrower may have shown serious negative trends in financial ratios and performance. Such loans may be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. Loans with this grade can be placed on accrual or nonaccrual status based on the Company’s accrual policy.

~~Grade 9:~~ This grade includes “Doubtful” loans in accordance with regulatory guidelines, and the Company has determined these loans to have excessive credit risk. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance or have been partially charged-off for the amount considered uncollectible.

~~Grade 10:~~ This grade includes “Loss” loans in accordance with regulatory guidelines, and the Company has determined these loans have the highest risk of loss. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

2022 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. ~~Loan~~Changes to loan grades are ~~reviewed on~~considered at the time new information about the performance of a ~~quarterly basis, or more frequently if necessary, by~~loan becomes available, including the ~~credit department. The~~receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.

~~The loan~~Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The ~~OAEM~~SM loan grade is transitory in that the ~~Company~~Bank is waiting on additional information to determine the likelihood and extent of ~~the~~any potential loss. The likelihood of loss for ~~OAEM~~SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a ~~Substandard~~SS grade ~~are generally~~have further credit deterioration and include both accrual loans ~~for which the Company has individually analyzed for potential impairment.~~and nonaccrual loans. For Doubtful and Loss graded loans, the ~~Company~~Bank is almost certain of the losses and the outstanding principal balances are generally ~~charged-off~~charged off to the realizable value.

The following table presents the amortized cost of loans receivable by risk grade and origination year at the dates indicated. The Bank adopted the vintage disclosure requirements of ASU 2022-02 prospectively as described in Note 1 beginning in January 2023.

Table of Contents

Accordingly, the following vintage table reflects the gross charge-offs by loan class and year of origination for the date indicated:


	March 31, 2023
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2023		2022		2021		2020		2019		Prior
	(In thousands)
Commercial business:
Commercial and industrial
Pass	$	21,299	$	171,005	$	91,228	$	79,267	$	54,430	$	98,811	$	126,167	$	118	$	642,325
SM	—		200		206		434		4,567		5,415		17,784		—		28,606
SS	—		1,130		176		1,642		3,326		4,854		2,939		—		14,067

Total	21,299		172,335		91,610		81,343		62,323		109,080		146,890		118		684,998
SBA PPP
Pass	—		—		804		96		—		—		—		—		900




Owner-occupied CRE
Pass	27,989		134,625		167,906		90,118		155,172		332,083		—		—		907,893
SM	—		—		1,971		2,041		—		19,274		—		—		23,286
SS	—		—		—		667		—		17,218		—		—		17,885

Total	27,989		134,625		169,877		92,826		155,172		368,575		—		—		949,064
Non-owner occupied CRE
Pass	48,286		242,245		185,064		159,050		245,235		671,604		—		—		1,551,484
SM	—		—		8,304		—		584		27,788		—		—		36,676
SS	—		—		—		—		—		13,629		—		—		13,629

Total	48,286		242,245		193,368		159,050		245,819		713,021		—		—		1,601,789
Total commercial business
Pass	97,574		547,875		445,002		328,531		454,837		1,102,498		126,167		118		3,102,602
SM	—		200		10,481		2,475		5,151		52,477		17,784		—		88,568
SS	—		1,130		176		2,309		3,326		35,701		2,939		—		45,581

Total	97,574		549,205		455,659		333,315		463,314		1,190,676		146,890		118		3,236,751
Commercial business gross charge-offs
Current period	—		—		—		61		—		100		—		—		161
Residential real estate
Pass(1)	18,666		133,415		151,041		25,500		16,680		18,232		—		—		363,534

SS	—		—		—		74		—		169		—		—		243

Total	18,666		133,415		151,041		25,574		16,680		18,401		—		—		363,777
Residential real estate gross charge-offs:
Current period	—		—		—		—		—		—		—		—		—
Real estate construction and land development:
Residential
Pass	4,995		44,885		16,392		1,804		2,969		1,881		—		—		72,926




Commercial and multifamily
Pass	6,245		105,433		139,246		6,721		794		3,457		—		—		261,896
SM	—		—		—		2,577		5,687		—		—		—		8,264
SS	—		—		—		—		—		387		—		—		387

Total	6,245		105,433		139,246		9,298		6,481		3,844		—		—		270,547

Table of Contents


	March 31, 2023
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2023		2022		2021		2020		2019		Prior
Total real estate construction and land development
Pass	11,240		150,318		155,638		8,525		3,763		5,338		—		—		334,822
SM	—		—		—		2,577		5,687		—		—		—		8,264
SS	—		—		—		—		—		387		—		—		387

Total	11,240		150,318		155,638		11,102		9,450		5,725		—		—		343,473
Real estate construction and land development gross writeoffs:
Current period	—		—		—		—		—		—		—		—		—
Consumer
Pass	823		2,956		466		8,827		24,015		31,315		112,073		383		180,858

SS	—		—		11		191		515		1,328		561		7		2,613

Total	823		2,956		477		9,018		24,530		32,643		112,634		390		183,471
Consumer gross charge-offs:
Current period	—		—		—		8		39		35		71		—		153
Loans receivable
Pass	128,303		834,564		752,147		371,383		499,295		1,157,383		238,240		501		3,981,816
SM	—		200		10,481		5,052		10,838		52,477		17,784		—		96,832
SS	—		1,130		187		2,574		3,841		37,585		3,500		7		48,824

Total	$	128,303	$	835,894	$	762,815	$	379,009	$	513,974	$	1,247,445	$	259,524	$	508	$	4,127,472
Gross writeoffs:
Current period total	$	—	$	—	$	—	$	69	$	39	$	135	$	71	$	—	$	314

(1) Represents the loans receivable balance at March 31, 2023 which was converted from a revolving loan to an amortizing loan during the three months ended months ended March 31, 2023.


	December 31, 2022
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2022		2021		2020		2019		2018		Prior
	(In thousands)
Commercial business:
Commercial and industrial
Pass	$	168,818	$	93,302	$	82,437	$	61,160	$	33,957	$	74,181	$	146,795	$	172	$	660,822
SM	212		109		443		4,637		362		4,447		5,433		—		15,643
SS	773		188		1,710		3,465		559		5,098		3,674		168		15,635

Total	169,803		93,599		84,590		69,262		34,878		83,726		155,902		340		692,100
SBA PPP
Pass	—		1,351		117		—		—		—		—		—		1,468




Owner-occupied CRE
Pass	134,432		167,927		93,834		157,096		62,876		282,212		—		—		898,377
SM	—		1,744		—		—		2,540		16,664		—		247		21,195
SS	—		—		671		—		3,722		13,075		—		—		17,468

Total	134,432		169,671		94,505		157,096		69,138		311,951		—		247		937,040
Non-owner-occupied CRE
Pass	240,151		189,300		160,930		258,778		121,369		561,645		—		—		1,532,173
SM	—		8,349		—		4,172		—		12,190		—		—		24,711

Table of Contents


	December 31, 2022
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2022		2021		2020		2019		2018		Prior
	(In thousands)
SS	—		—		—		—		3,627		26,121		—		—		29,748

Total	240,151		197,649		160,930		262,950		124,996		599,956		—		—		1,586,632
Total commercial business
Pass	543,401		451,880		337,318		477,034		218,202		918,038		146,795		172		3,092,840
SM	212		10,202		443		8,809		2,902		33,301		5,433		247		61,549
SS	773		188		2,381		3,465		7,908		44,294		3,674		168		62,851

Total	544,386		462,270		340,142		489,308		229,012		995,633		155,902		587		3,217,240
Residential real estate
Pass	132,510		149,934		24,668		16,803		4,207		15,337		—		—		343,459

SS	—		—		—		—		—		172		—		—		172

Total	132,510		149,934		24,668		16,803		4,207		15,509		—		—		343,631
Real estate construction and land development:
Residential
Pass	45,521		26,675		2,891		3,061		871		1,055		—		—		80,074




Commercial and multifamily
Pass	71,168		123,626		6,272		1,084		2,562		995		—		—		205,707
SM	—		—		2,213		5,687		—		—		—		—		7,900
SS	—		—		—		37		—		394		—		—		431

Total	71,168		123,626		8,485		6,808		2,562		1,389		—		—		214,038
Total real estate construction and land development
Pass	116,689		150,301		9,163		4,145		3,433		2,050		—		—		285,781
SM	—		—		2,213		5,687		—		—		—		—		7,900
SS	—		—		—		37		—		394		—		—		431

Total	116,689		150,301		11,376		9,869		3,433		2,444		—		—		294,112
Consumer
Pass	3,379		509		9,848		27,370		15,563		19,855		116,605		435		193,564

SS	—		—		168		559		320		1,120		44		100		2,311

Total	3,379		509		10,016		27,929		15,883		20,975		116,649		535		195,875
Loans receivable
Pass	795,979		752,624		380,997		525,352		241,405		955,280		263,400		607		3,915,644
SM	212		10,202		2,656		14,496		2,902		33,301		5,433		247		69,449
SS	773		188		2,549		4,061		8,228		45,980		3,718		268		65,765

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

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

Table of Contents

(d) Nonaccrual Loans

The following tables present the ~~balance of the loans receivable by credit quality indicator as of~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~.

September 30, 2017
Pass OAEM Substandard Doubtful/Loss Total
(In thousands)
Commercial business:
Commercial and industrial $ 625,387
$ 11,067
$ 29,128
$ —
$ 665,582
Owner-occupied commercial real estate 576,313
8,305
17,620
—
602,238
Non-owner occupied commercial real estate 897,677
15,790
16,721
—
930,188
Total commercial business 2,099,377
35,162
63,469
—
2,198,008
One-to-four family residential 79,882
—
1,540
—
81,422
Real estate construction and land development:
One-to-four family residential 48,101
273
3,077
—
51,451
Five or more family residential and commercial properties 121,854
722
405
—
122,981
Total real estate construction and land development 169,955
995
3,482
—
174,432
Consumer 335,073
—
5,045
525
340,643
Gross loans receivable $ 2,684,287
$ 36,157
$ 73,536
$ 525
$ 2,794,505

December 31, 2016
Pass OAEM Substandard Doubtful/Loss Total
(In thousands)
Commercial business:
Commercial and industrial $ 601,273
$ 5,048
$ 31,452
$ —
$ 637,773
Owner-occupied commercial real estate 532,585
4,437
21,013
—
558,035
Non-owner occupied commercial real estate 841,383
14,573
24,924
—
880,880
Total commercial business 1,975,241
24,058
77,389
—
2,076,688
One-to-four family residential 76,020
—
1,371
—
77,391
Real estate construction and land development:
One-to-four family residential 44,752
500
5,162
—
50,414
Five or more family residential and commercial properties 105,723
1,150
1,891
—
108,764
Total real estate construction and land development 150,475
1,650
7,053
—
159,178
Consumer 320,140
—
5,000
—
325,140
Gross loans receivable $ 2,521,876
$ 25,708
$ 90,813
$ —
$ 2,638,397

Potential problem loans are loans classified as OAEM or worse that are currently accruing interest and are not considered impaired, but which management is monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem loans may include PCI loans as these loans continue to accrete loan discounts established at acquisition based on the guidance of FASB ASC 310-30. Potential problem loans as of ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~ ~~were $84.1 million and $87.8 million, respectively. The balance of potential problem loans guaranteed by a governmental agency, which guarantee reduces~~

~~Table of Contents~~

~~the Company's credit exposure, was $1.7 million and $1.1 million as of~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, respectively.~~

~~(d) Nonaccrual Loans~~

~~Nonaccrual loans, segregated by segments and classes of loans, were as follows as of~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~:

September 30, 2017 December 31, 2016
(In thousands)
Commercial business:
Commercial and industrial $ 4,056
$ 3,531
Owner-occupied commercial real estate 3,720
3,728
Non-owner occupied commercial real estate 1,907
1,321
Total commercial business 9,683
8,580
One-to-four family residential 84
94
Real estate construction and land development:
One-to-four family residential 869
2,008
Consumer 316
227
Nonaccrual loans $ 10,952
$ 10,909

~~The Company had $2.5 million and $2.8 million~~amortized cost of nonaccrual loans ~~guaranteed by governmental agencies at September 30, 2017~~for the dates indicated:


	March 31, 2023
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(In thousands)
Commercial business:
Commercial and industrial	$	3,964	$	641	$	4,605
Owner-occupied CRE	—		210		210








Total	$	3,964	$	851	$	4,815


	December 31, 2022
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(In thousands)
Commercial business:
Commercial and industrial	$	4,503	$	1,154	$	5,657
Owner-occupied CRE	—		212		212

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

Real estate construction and land development:

Commercial and multifamily	—		37		37


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

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


	Three Months Ended March 31, 2023				Three Months Ended March 31, 2022
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(In thousands)
Commercial business:
Commercial and industrial	$	(14)	$	28	$	(2)	$	139
Owner-occupied CRE	—		—		—		53
Non-owner occupied CRE	—		—		—		774
Total commercial business	(14)		28		(2)		966
Residential real estate	—		—		—		19




Consumer	—		—		—		68
Total	$	(14)	$	28	$	(2)	$	1,053

For the three months ended March 31, ~~2016, respectively.~~

~~PCI loans are not included~~2023 and 2022, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the ~~nonaccrual loan table~~tables above because these loans are accounted for under FASB ASC 310-30, which provides that accretable yield is calculated based on a loan's expected cash flow even if the loan is not performing under its contractual terms.due to payment in full or sale.

(e) Past due loans

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

The ~~balances~~amortized cost of past due loans ~~segregated by segments and classes of loans,~~ as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022 were as follows:


	March 31, 2023
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(In thousands)
Commercial business:
Commercial and industrial	$	1,984	$	4,855	$	6,839	$	678,159	$	684,998

September 30, 2017
30-89 Days
90 Days or
Greater

Total Past
Due
Current Total
(In thousands)
Commercial business:
Commercial and industrial $ 790
$ 1,014
$ 1,804
$ 663,778
$ 665,582
Owner-occupied commercial real estate 498
1,270
1,768
600,470
602,238
Non-owner occupied commercial real estate —
2,085
2,085
928,103
930,188
Total commercial business 1,288
4,369
5,657
2,192,351
2,198,008
One-to-four family residential —
—
—
81,422
81,422
Real estate construction and land development:
One-to-four family residential 1,038
309
1,347
50,104
51,451
Five or more family residential and commercial properties 366
—
366
122,615
122,981
Total real estate construction and land development 1,404
309
1,713
172,719
174,432
Consumer 1,738
657
2,395
338,248
340,643
Gross loans receivable $ 4,430
$ 5,335
$ 9,765
$ 2,784,740
$ 2,794,505

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	March 31, 2023
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(In thousands)
SBA PPP	—		—		—		900		900
Owner-occupied CRE	840		635		1,475		947,589		949,064
Non-owner occupied CRE	—		—		—		1,601,789		1,601,789
Total commercial business	2,824		5,490		8,314		3,228,437		3,236,751
Residential real estate	2,115		—		2,115		361,662		363,777
Real estate construction and land development:
Residential	—		—		—		72,926		72,926
Commercial and multifamily	333		—		333		270,214		270,547
Total real estate construction and land development	333		—		333		343,140		343,473
Consumer	782		515		1,297		182,174		183,471
Total	$	6,054	$	6,005	$	12,059	$	4,115,413	$	4,127,472


	December 31, 2022
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(In thousands)
Commercial business:
Commercial and industrial	$	586	$	6,104	$	6,690	$	685,410	$	692,100
SBA PPP	236		—		236		1,232		1,468
Owner-occupied CRE	—		189		189		936,851		937,040
Non-owner occupied CRE	—		—		—		1,586,632		1,586,632
Total commercial business	822		6,293		7,115		3,210,125		3,217,240
Residential real estate	3,066		—		3,066		340,565		343,631
Real estate construction and land development:
Residential	—		—		—		80,074		80,074
Commercial and multifamily	—		—		—		214,038		214,038
Total real estate construction and land development	—		—		—		294,112		294,112
Consumer	1,561		—		1,561		194,314		195,875
Total	$	5,449	$	6,293	$	11,742	$	4,039,116	$	4,050,858

December 31, 2016
30-89 Days
90 Days or
Greater

Total Past
Due
Current Total
(In thousands)
Commercial business:
Commercial and industrial $ 2,687
$ 1,733
$ 4,420
$ 633,353
$ 637,773
Owner-occupied commercial real estate 1,807
2,915
4,722
553,313
558,035
Non-owner occupied commercial real estate 733
—
733
880,147
880,880
Total commercial business 5,227
4,648
9,875
2,066,813
2,076,688
One-to-four family residential 523
—
523
76,868
77,391
Real estate construction and land development:
One-to-four family residential 90
2,008
2,098
48,316
50,414
Five or more family residential and commercial properties —
377
377
108,387
108,764
Total real estate construction and land development 90
2,385
2,475
156,703
159,178
Consumer 2,292
105
2,397
322,743
325,140
Gross loans receivable $ 8,132
$ 7,138
$ 15,270
$ 2,623,127
$ 2,638,397

~~There were no loans~~Loans 90 days or more past due ~~that were~~and still accruing interest were $2.3 million and $1.6 million as of ~~September 30, 2017 or~~March 31, 2023 and December 31, ~~2016, excluding PCI loans.~~

2022, respectively.

(f) ~~Impaired~~Collateral-dependent Loans

The type of collateral securing loans

~~Impaired loans include nonaccrual loans~~ individually evaluated for credit losses and ~~performing troubled debt restructured ("TDR") loans. The balances~~for which the repayment was expected to be provided substantially through the operation or sale of ~~impaired loans~~the collateral as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~ ~~are set forth in~~2022 was as follows, with balances representing the ~~following tables.~~amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:


	March 31, 2023
	CRE		Farmland		Residential Real Estate		Equipment		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	499	$	1,977	$	664	$	468	$	3,608
Owner-occupied CRE	189		—		—		—		189








Total	$	688	$	1,977	$	664	$	468	$	3,797

September 30, 2017

Recorded
Investment With
No Specific
Valuation
Allowance

Recorded
Investment With
Specific
Valuation
Allowance

Total
Recorded
Investment

Unpaid
Contractual
Principal
Balance

Related
Specific
Valuation
Allowance
(In thousands)
Commercial business:
Commercial and industrial $ 3,131
$ 8,581
$ 11,712
$ 12,060
$ 1,254
Owner-occupied commercial real estate 1,082
4,676
5,758
6,068
767
Non-owner occupied commercial real estate 4,749
6,034
10,783
10,927
895
Total commercial business 8,962
19,291
28,253
29,055
2,916
One-to-four family residential —
304
304
311
96
Real estate construction and land development:
One-to-four family residential 1,347
—
1,347
2,305
—
Five or more family residential and commercial properties —
658
658
658
39
Total real estate construction and land development 1,347
658
2,005
2,963
39
Consumer 160
274
434
457
60
Total $ 10,469
$ 20,527
$ 30,996
$ 32,786
$ 3,111

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	December 31, 2022
	CRE		Farmland		Residential Real Estate		Equipment		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	1,239	$	1,977	$	929	$	—	$	4,145
Owner-occupied CRE	189		—		—		—		189








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

December 31, 2016

Recorded
Investment With
No Specific
Valuation
Allowance

Recorded
Investment With
Specific
Valuation
Allowance

Total
Recorded
Investment

Unpaid
Contractual
Principal
Balance

Related
Specific
Valuation
Allowance
(In thousands)
Commercial business:
Commercial and industrial $ 1,739
$ 10,636
$ 12,375
$ 13,249
$ 1,199
Owner-occupied commercial real estate 1,150
3,574
4,724
5,107
511
Non-owner occupied commercial real estate 4,905
6,413
11,318
11,386
797
Total commercial business 7,794
20,623
28,417
29,742
2,507
One-to-four family residential —
321
321
325
97
Real estate construction and land development:
One-to-four family residential 2,243
828
3,071
3,755
6
Five or more family residential and commercial properties —
1,079
1,079
1,079
60
Total real estate construction and land development 2,243
1,907
4,150
4,834
66
Consumer 48
262
310
325
64
Total $ 10,085
$ 23,113
$ 33,198
$ 35,226
$ 2,734

~~The Company had governmental guarantees of $3.9 million and $3.5 million related~~There have been no significant changes to the ~~impaired loan balances at~~ ~~September 30, 2017~~collateral securing loans individually evaluated for credit losses and ~~December 31, 2016, respectively.~~

~~The average recorded investment of impaired loans~~ for which repayment was expected to be provided substantially through the ~~three and nine months ended September 30, 2017 and 2016 are set forth in the following table.~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)
Commercial business:
Commercial and industrial $ 11,171
$ 9,625
$ 11,190
$ 9,750
Owner-occupied commercial real estate 5,289
4,553
5,049
4,560
Non-owner occupied commercial real estate 11,037
12,107
11,198
12,232
Total commercial business 27,497
26,285
27,437
26,542
One-to-four family residential 307
265
312
267
Real estate construction and land development:
One-to-four family residential 2,157
3,177
2,530
3,253
Five or more family residential and commercial properties 860
1,619
967
1,746
Total real estate construction and land development 3,017
4,796
3,497
4,999
Consumer 346
885
328
907
Total $ 31,167
$ 32,231
$ 31,574
$ 32,715

For the three and nine months ended September 30, 2017 and 2016, no interest income was recognized subsequent to a loan’s classification as nonaccrual. For the three and nine months ended September 30, 2017, the Bank recorded $366,000 and $1.0 million, respectively, of interest income related to performing TDR loans. For the

~~Table of Contents~~

~~three and nine months ended September 30, 2016, the Bank recorded $156,000 and $501,000, respectively, of interest income related to performing TDR loans.~~

~~(g) Troubled Debt Restructured Loans~~

~~A TDR loan is a restructuring in which the Bank, for economic~~operation or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDRs are considered impaired and are separately measured for impairment under FASB ASC 310-10-35, whether on accrual ("performing") or nonaccrual ("nonperforming") status. The Company has more stringent definitions of concessions and impairment measures for PCI loans as these loans have known credit deterioration and are generally accreting income at a lower discounted rate as compared to the contractual note rate based on the guidance of FASB ASC 310-30.

~~The majority~~sale of the Bank’s TDR loans are a result of granting extensions of maturity on troubled credits which have already been adversely classified. The Bank grants such extensions to reassess the borrower’s financial status and to develop a plan for repayment. The second most prevalent concessions are certain modifications with extensions that also include interest rate reductions. Certain TDRs were additionally re-amortized over a longer period of time. These modifications would all be considered a concession for a borrower that could not obtain similar financing terms from another source other than from the Bank.

The financial effects of each modification will vary based on the specific restructure. For the majority of the Bank’s TDR loans, the loans were interest-only with a balloon payment at maturity. If the interest rate is not adjusted and the modified terms are consistent with other similar credits being offered, the Bank may not experience any loss associated with the restructure. If, however, the restructure involves forbearance agreements or interest rate modifications, the Bank may not collect all the principal and interest based on the original contractual terms. The Bank estimates the necessary allowance for loan losses on TDRs using the same guidance as used for other impaired loans.

~~The recorded investment balance and related allowance for loan losses of performing and nonaccrual TDR loans as of~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~ ~~were as follows:~~

September 30, 2017 December 31, 2016

Performing
TDRs

Nonaccrual
TDRs

Performing
TDRs
Nonaccrual
TDRs
(In thousands)
TDR loans $ 20,044
$ 5,903
$ 22,288
$ 6,900
Allowance for loan losses on TDR loans 2,136
555
1,965
437

~~The unfunded commitment to borrowers related to TDRs was $160,000 and $249,000 at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, respectively.~~

~~Table of Contents~~

~~Loans that were modified as TDRs during the three and nine months ended September 30, 2017 and 2016 are set forth in the following tables:~~

Three Months Ended September 30,
2017 2016

Number of
Contracts
(1)
Outstanding
Principal Balance
(1)(2)
Number of
Contracts
(1)

Outstanding
Principal Balance
(1)(2)
(Dollars in thousands)
Commercial business:
Commercial and industrial 4
$ 1,353
8
$ 2,324
Owner-occupied commercial real estate 2
1,299
2
576
Non-owner occupied commercial real estate 1
655
1
818
Total commercial business 7
3,307
11
3,718
Real estate construction and land development:
One-to-four family residential —
—
5
2,274
Five or more family residential and commercial properties —
—
1
1,606
Total real estate construction and land development —
—
6
3,880
Consumer 4
52
2
26
Total TDR loans 11
$ 3,359
19
$ 7,624

Nine Months Ended September 30,
2017 2016

Number of
Contracts
(1)
Outstanding
Principal Balance
(1)(2)
Number of
Contracts
(1)

Outstanding
Principal Balance
(1)(2)
(Dollars in thousands)
Commercial business:
Commercial and industrial 13
$ 5,564
15
$ 2,915
Owner-occupied commercial real estate 3
1,351
2
576
Non-owner occupied commercial real estate 2
1,596
1
818
Total commercial business 18
8,511
18
4,309
Real estate construction and land development:
One-to-four family residential 2
1,038
5
2,274
Five or more family residential and commercial properties —
—
1
1,606
Total real estate construction and land development 2
1,038
6
3,880
Consumer 5
60
6
70
Total TDR loans 25
$ 9,609
30
$ 8,259


~~(1)~~	Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the three and nine months ended September 30, 2017 and 2016.


~~(2)~~	Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification).

~~Of the 11 loans modified~~collateral during the three months ended ~~September 30, 2017, seven~~March 31, 2023, except changes due to additions or removals of loans ~~with~~in this classification.

(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 TDRs while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a ~~total outstanding~~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 ~~balance~~or interest forgiveness, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of ~~$2.1 million had no prior modifications. Of the 25~~collateral.

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


	Three Months Ended March 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	$	286	$	—	$	286	0.04	%

Non-owner occupied CRE	2,749		—		2,749		0.17
Total commercial business	3,035		—		3,035		0.09





Consumer	—		25		25		0.01
Total	$	3,035	$	25	$	3,060	0.07	%

~~Table~~The following table presents the financial effect of ~~Contents~~the loan modifications presented in the preceding table during the the period indicated:


	Three Months Ended March 31, 2023
	Weighted Average % of Interest Rate Reductions		Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial	—	%	0.44

Non-owner occupied CRE	—		1.00
Total commercial business	—		0.95





Consumer	1.00		2.12
Total	1.00	%	0.96

There were no modified loans past due or on nonaccrual as of March 31, 2023.

~~ended September 30, 2017, 15~~There were no modified loans ~~with a total outstanding principal balance of $5.0 million had no prior modifications. Of the 19 loans modified~~made during the three months ended ~~September 30, 2016, eight~~March 31, 2023, that subsequently defaulted.

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(h) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled $11.7 million and $11.3 million at March 31, 2023 and December 31, 2022, respectively, and is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.

(i) Foreclosure proceedings in process

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

(4)Allowance for Credit Losses on Loans

The Company's methodology for determining the ACL on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. For a description of the Company's ACL policy, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2022 Annual Form 10-K.

GAAP requires the Company to develop reasonable and supportable forecasts of future conditions, and estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Company and the ultimate collectability of future cash flows over the life of a loan. The Company uses macroeconomic scenarios from an independent third party. These scenarios are based on past events, current conditions, and the likelihood of future events occurring. The Company’s ACL model at March 31, 2023 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, higher energy prices, and general uncertainty concerning future economic conditions, and the potential for recessionary conditions.

The Company recognizes that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses. The Company, therefore, considers the need for qualitative adjustments to the ACL on a quarterly basis. 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 limitations identified through back-testing, and other limitations associated with factors such as 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 March 31, 2023, qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a ~~total outstanding principal balance~~higher-risk profile where management believes the quantitative component of ~~$1.4 million had no prior modifications. Of~~ the ~~30 loans modified during~~Company’s ACL model may not have fully captured the ~~nine~~associated impact to the ACL. In addition, qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.

During the three months ended ~~September 30, 2016, 15~~March 31, 2023, the ACL on loans ~~with~~increased$1.5 million, or 3.4%, due primarily to a ~~total outstanding principal balance~~provision for credit losses on loans of $1.7 million ~~had no prior modifications.~~ driven by growth in loans receivable and changes in loan mix primarily due to the increase in commercial and multifamily construction loans.

The ~~remaining loans included~~following table presents a summary of the changes in the ~~table above~~ACL for the ~~three and nine months ended September 30, 2017 and 2016 were previously reported as TDRs.~~ periods indicated:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Beginning balance	$	42,986	$	42,361
Charge-offs	(314)		(355)
Recoveries of loans previously charged-off	84		849
Provision for (reversal of) credit losses	1,713		(2,522)
Ending balance	$	44,469	$	40,333

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The ~~Bank typically grants shorter extension periods to continually monitor these TDRs despite~~following tables detail the fact that the extended date might not be the date the Bank expects sufficient cash flow from these borrowers. The Company does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted. The potential losses related to these loans would have been consideredactivity in the ~~period~~ACL on loans by segment and class for the loan was first reported as a TDR and are adjusted, as necessary, in the current period based on more recent information. The related specific valuation allowance at September 30, 2017 was $1.1 million for loans that were modified as TDRs during the nine months ended September 30, 2017.periods indicated:

There was one commercial and industrial loan totaling $234,000 at September 30, 2017 that was modified during the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2017 because the borrower was more than 90 days delinquent on their scheduled loan payments. There were no loans that were modified during the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2016.


	Three Months Ended March 31, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	13,962	$	(161)	$	51	$	(286)	$	13,566
Owner-occupied CRE	7,480		—		—		45		7,525
Non-owner occupied CRE	9,276		—		—		(430)		8,846
Total commercial business	30,718		(161)		51		(671)		29,937
Residential real estate	2,872		—		—		30		2,902
Real estate construction and land development:
Residential	1,654		—		—		(112)		1,542
Commercial and multifamily	5,409		—		—		2,034		7,443
Total real estate construction and land development	7,063		—		—		1,922		8,985
Consumer	2,333		(153)		33		432		2,645
Total	$	42,986	$	(314)	$	84	$	1,713	$	44,469


	Three Months Ended March 31, 2022
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	17,777	$	(163)	$	272	$	(2,621)	$	15,265
Owner-occupied CRE	6,411		(36)		—		710		7,085
Non-owner occupied CRE	8,861		—		—		721		9,582
Total commercial business	33,049		(199)		272		(1,190)		31,932
Residential real estate	1,409		(30)		3		421		1,803
Real estate construction and land development:
Residential	1,304		—		8		(188)		1,124
Commercial and multifamily	3,972		—		—		(797)		3,175
Total real estate construction and land development	5,276		—		8		(985)		4,299
Consumer	2,627		(126)		566		(768)		2,299
Total	$	42,361	$	(355)	$	849	$	(2,522)	$	40,333

~~(h) Purchased Credit Impaired Loans~~

The Company acquired loans and designated them as PCI loans, which are accounted for under FASB ASC 310-30, in the Washington Banking Merger on May 1, 2014 and in previously completed acquisitions, including the FDIC-assisted acquisitions of Cowlitz Bank ("Cowlitz") and Pierce Commercial Bank ("Pierce") on July 30, 2010 and November 8, 2010, respectively, and the acquisitions of Northwest Commercial Bank ("NCB") on January 9, 2013 and Valley Community Bancshares, Inc. ("Valley") on July 15, 2013.

~~The following table reflects the outstanding principal balance and recorded investment of the PCI loans at September 30, 2017 and December 31, 2016:~~

September 30, 2017 December 31, 2016
Outstanding Principal Recorded Investment Outstanding Principal Recorded Investment
(In thousands)
Commercial business:
Commercial and industrial $ 9,220
$ 5,001
$ 13,067
$ 9,317
Owner-occupied commercial real estate 14,059
12,492
17,639
15,973
Non-owner occupied commercial real estate 15,026
13,058
25,037
23,360
Total commercial business 38,305
30,551
55,743
48,650
One-to-four family residential 4,426
3,983
5,120
4,905
Real estate construction and land development:
One-to-four family residential 2,928
1,749
2,958
2,123
Five or more family residential and commercial properties 2,392
2,284
2,614
2,488
Total real estate construction and land development 5,320
4,033
5,572
4,611
Consumer 3,998
5,129
5,296
6,282
Gross PCI loans $ 52,049
$ 43,696
$ 71,731
$ 64,448

~~Table of Contents~~

On the acquisition dates, the amount by which the undiscounted expected cash flows of the PCI loans exceeded the estimated fair value of the loan is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the PCI loans.

~~The following table summarizes the accretable yield on the PCI loans for the three and nine months ended September 30, 2017 and 2016.~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)
Balance at the beginning of the period $ 12,296
$ 15,359
$ 13,860
$ 17,592
Accretion (796 ) (1,178 ) (2,725 ) (3,900 )
Disposal and other (1,287 ) (491 ) (2,430 ) (2,921 )
Change in accretable yield 939
1,214
2,447
4,133
Balance at the end of the period $ 11,152
$ 14,904
$ 11,152
$ 14,904


~~(4)~~			~~Allowance for Loan Losses~~

The allowance for loan losses is maintained at a level deemed appropriate by management to provide for probable incurred credit losses in the loan portfolio. The following tables detail the activity in the allowance for loan losses disaggregated by segment and class for the three and nine months ended September 30, 2017:

~~Table of Contents~~

Balance at Beginning of Period Charge-offs Recoveries Provision for Loan Losses Balance at End of Period
(In thousands)
Three Months Ended September 30, 2017
Commercial business:
Commercial and industrial $ 10,651
$ (3 ) $ 4
$ (772 ) $ 9,880
Owner-occupied commercial real estate 4,154
(1,494 ) 4
1,397
4,061
Non-owner occupied commercial real estate 7,709
—
—
(415 ) 7,294
Total commercial business 22,514
(1,497 ) 8
210
21,235
One-to-four family residential 1,073
(15 ) —
(21 ) 1,037
Real estate construction and land development:
One-to-four family residential 821
(556 ) 191
337
793
Five or more family residential and commercial properties 1,666
—
—
(271 ) 1,395
Total real estate construction and land development 2,487
(556 ) 191
66
2,188
Consumer 5,710
(478 ) 112
453
5,797
Unallocated 967
—
—
176
1,143
Total $ 32,751
$ (2,546 ) $ 311
$ 884
$ 31,400

Nine Months Ended September 30, 2017
Commercial business:
Commercial and industrial $ 10,968
$ (361 ) $ 679
$ (1,406 ) $ 9,880
Owner-occupied commercial real estate 3,661
(1,579 ) 155
1,824
4,061
Non-owner occupied commercial real estate 7,753
—
—
(459 ) 7,294
Total commercial business 22,382
(1,940 ) 834
(41 ) 21,235
One-to-four family residential 1,015
(15 ) 1
36
1,037
Real estate construction and land development:
One-to-four family residential 797
(556 ) 201
351
793
Five or more family residential and commercial properties 1,359
—
—
36
1,395
Total real estate construction and land development 2,156
(556 ) 201
387
2,188
Consumer 5,024
(1,419 ) 329
1,863
5,797
Unallocated 506
—
—
637
1,143
Total $ 31,083
$ (3,930 ) $ 1,365
$ 2,882
$ 31,400

~~Table of Contents~~

~~The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of September 30, 2017.~~

Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment PCI Loans Total Allowance for Loan Losses
(In thousands)
Commercial business:
Commercial and industrial $ 1,254
$ 7,589
$ 1,037
$ 9,880
Owner-occupied commercial real estate 767
2,434
860
4,061
Non-owner occupied commercial real estate 895
5,389
1,010
7,294
Total commercial business 2,916
15,412
2,907
21,235
One-to-four family residential 96
740
201
1,037
Real estate construction and land development:
One-to-four family residential —
568
225
793
Five or more family residential and commercial properties 39
1,259
97
1,395
Total real estate construction and land development 39
1,827
322
2,188
Consumer 60
4,991
746
5,797
Unallocated —
1,143
—
1,143
Total $ 3,111
$ 24,113
$ 4,176
$ 31,400

~~The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of September 30, 2017:~~

Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment PCI Loans Total Gross Loans Receivable
(In thousands)
Commercial business:
Commercial and industrial $ 11,712
$ 648,869
$ 5,001
$ 665,582
Owner-occupied commercial real estate 5,758
583,988
12,492
602,238
Non-owner occupied commercial real estate 10,783
906,347
13,058
930,188
Total commercial business 28,253
2,139,204
30,551
2,198,008
One-to-four family residential 304
77,135
3,983
81,422
Real estate construction and land development:
One-to-four family residential 1,347
48,355
1,749
51,451
Five or more family residential and commercial properties 658
120,039
2,284
122,981
Total real estate construction and land development 2,005
168,394
4,033
174,432
Consumer 434
335,080
5,129
340,643
Total $ 30,996
$ 2,719,813
$ 43,696
$ 2,794,505

~~Table of Contents~~

~~The following tables detail activity in the allowance for loan losses disaggregated by segment and class for the three and nine months ended September 30, 2016.~~

Balance at Beginning of Period Charge-offs Recoveries Provision for Loan Losses Balance at End of Period
(In thousands)
Three Months Ended September 30, 2016
Commercial business:
Commercial and industrial $ 9,970
$ (240 ) $ 993
$ 182
$ 10,905
Owner-occupied commercial real estate 3,578
(88 ) —
222
3,712
Non-owner occupied commercial real estate 6,924
—
—
303
7,227
Total commercial business 20,472
(328 ) 993
707
21,844
One-to-four family residential 950
—
—
26
976
Real estate construction and land development:
One-to-four family residential 754
—
—
96
850
Five or more family residential and commercial properties 1,277
—
—
5
1,282
Total real estate construction and land development 2,031
—
—
101
2,132
Consumer 4,816
(572 ) 197
665
5,106
Unallocated 157
—
—
(4 ) 153
Total $ 28,426
$ (900 ) $ 1,190
$ 1,495
$ 30,211

Nine Months Ended September 30, 2016
Commercial business:
Commercial and industrial $ 9,972
$ (2,810 ) $ 1,352
$ 2,391
$ 10,905
Owner-occupied commercial real estate 4,370
(538 ) —
(120 ) 3,712
Non-owner occupied commercial real estate 7,722
(350 ) —
(145 ) 7,227
Total commercial business 22,064
(3,698 ) 1,352
2,126
21,844
One-to-four family residential 1,157
—
2
(183 ) 976
Real estate construction and land development:
One-to-four family residential 1,058
(100 ) 83
(191 ) 850
Five or more family residential and commercial properties 813
(54 ) —
523
1,282
Total real estate construction and land development 1,871
(154 ) 83
332
2,132
Consumer 4,309
(1,370 ) 496
1,671
5,106
Unallocated 345
—
—
(192 ) 153
Total $ 29,746
$ (5,222 ) $ 1,933
$ 3,754
$ 30,211

~~Table of Contents~~

~~The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of December 31, 2016.~~

Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment PCI Loans Total Allowance for Loan Losses
(In thousands)
Commercial business:
Commercial and industrial $ 1,199
$ 8,048
$ 1,721
$ 10,968
Owner-occupied commercial real estate 511
1,834
1,316
3,661
Non-owner occupied commercial real estate 797
5,142
1,814
7,753
Total commercial business 2,507
15,024
4,851
22,382
One-to-four family residential 97
643
275
1,015
Real estate construction and land development:
One-to-four family residential 6
538
253
797
Five or more family residential and commercial properties 60
1,168
131
1,359
Total real estate construction and land development 66
1,706
384
2,156
Consumer 64
3,912
1,048
5,024
Unallocated —
506
—
506
Total $ 2,734
$ 21,791
$ 6,558
$ 31,083

~~The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of December 31, 2016:~~

Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment PCI Loans Total Gross Loans Receivable
(In thousands)
Commercial business:
Commercial and industrial $ 12,375
$ 616,081
$ 9,317
$ 637,773
Owner-occupied commercial real estate 4,724
537,338
15,973
558,035
Non-owner occupied commercial real estate 11,318
846,202
23,360
880,880
Total commercial business 28,417
1,999,621
48,650
2,076,688
One-to-four family residential 321
72,165
4,905
77,391
Real estate construction and land development:
One-to-four family residential 3,071
45,220
2,123
50,414
Five or more family residential and commercial properties 1,079
105,197
2,488
108,764
Total real estate construction and land development 4,150
150,417
4,611
159,178
Consumer 310
318,548
6,282
325,140
Total $ 33,198

$ 2,540,751
$ 64,448
$ 2,638,397

~~Table of Contents~~

~~(5)~~

~~Other Real Estate Owned~~

~~Changes in other real estate owned during the three and nine months ended September 30, 2017 and 2016 were as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)
Balance at the beginning of the period $ 786
$ 1,560
$ 754
$ 2,019
Additions —
25
32
677
Proceeds from dispositions (374 ) (1,716 ) (374 ) (2,486 )
Gain on sales, net 111
131
111
173
Valuation adjustment —
—
—
(383 )
Balance at the end of the period $ 523
$ —
$ 523
$ —

At September 30, 2017, the carrying amount of other real estate owned that was the result of foreclosure and obtaining physical possession of residential real estate properties was $523,000. At September 30, 2017, the recorded investment of consumer mortgage loans secured by residential real estate properties (included in the one-to-four family residential loan class in Note (3) Loans Receivable) for which formal foreclosure proceedings were in process was $657,000.

~~(6)~~

~~Goodwill and Other Intangible Assets~~

(5)Goodwill and Other Intangible Assets

(a) Goodwill

The Company’s goodwill represents the excess of the purchase price over the fair value of net assets acquired in the Washington Banking Merger on May 1, 2014, and the acquisitions of Valley on July 15, 2013, 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 three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~

~~At September 30, 2017,~~2022. Additionally, management analyzes its goodwill on an annual basis on December 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the ~~Company’s step-one analysis~~extent the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2022 and concluded that the reporting unit’s fair value was greater than its carrying value and therefore no goodwill impairment charges were required, or recorded, for the three and nine months ended September 30, 2017. Similarly, no goodwill impairment charges were required, or recorded, for the three and nine months ended September 30, 2016. Even though there was no ~~goodwill impairment at~~ ~~September 30, 2017, adverse events may impact the recoverability of goodwill and could result in a future impairment charge which could have a material impact on the Company’s operating results.~~impairment.

(b) Other Intangible Assets

~~The~~Other intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets ~~represent~~during the ~~core deposit intangible ("CDI") acquired in business combinations. The useful life of the CDI related to the Washington Banking Merger, the acquisitions of Valley, NCB~~three months ended March 31, 2023 and ~~Cowlitz were estimated to be ten, ten, five and nine years, respectively.~~2022.

~~The following table presents the change in the other intangible assets for the periods indicated:~~

Basis⁽¹⁾
Fair Value at September 30, 2017
Total Level 1 Level 2 Level 3
Net Losses
Recorded in
Earnings
During
the Three Months Ended September 30, 2017

Net Losses
(Gains)
Recorded in
Earnings
During
the Nine Months Ended
September 30, 2017
(In thousands)
Impaired loans:
Commercial business:
Commercial and industrial $ 172
$ 163
$ —
$ —
$ 163
$ —
$ 7
Owner-occupied commercial real estate 182
179
—
—
179
—
8
Total commercial business 354
342
—
—
342
—
15
Total assets measured at fair value on a nonrecurring basis $ 354
$ 342
$ —
$ —
$ 342
$ —
$ 15


⁽¹⁾	~~Basis represents the unpaid principal balance of impaired loans.~~

Basis⁽¹⁾
Fair Value at December 31, 2016
Total Level 1 Level 2 Level 3
Net Losses
(Gains)
Recorded in
Earnings
During
the Three Months Ended September 30, 2016

Net Losses
(Gains)
Recorded in
Earnings
During
the Nine Months Ended September 30, 2016
(In thousands)
Impaired loans:
Commercial business:
Commercial and industrial $ 205
$ 200
$ —
$ —
$ 200
$ 24
$ 25
Owner-occupied commercial real estate 780
603
—
—
603
23
(2 )
Total commercial business 985
803
—
—
803
47
23
Real estate construction and land development:
One-to-four family residential 828
822
—
—
822
(13 ) (26 )
Total real estate construction and land development 828
822
—
—
822
(13 ) (26 )
Consumer 16
9
—
—
9
—
—
Total assets measured at fair value on a nonrecurring basis $ 1,829
$ 1,634
$ —
$ —
$ 1,634
$ 34
$ (3 )


⁽¹⁾	~~Basis represents the unpaid principal balance of impaired loans.~~

Table of Contents


			Fair Value at December 31, 2022
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Collateral-dependent loans:
Commercial business:

Owner-occupied CRE	613		182		—		—		182











Total assets measured at fair value on a nonrecurring basis	$	613	$	182	$	—	$	—	$	182

(1) Basis represents the outstanding principal balance of collateral-dependent loans.

The following table ~~presents~~represents the gains (losses) on collateral dependent loans and represents the amount of provision for (reversal of) credit losses on loans and/or charge-offs during the periods indicated:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	(100)	$	(12)










Net loss from nonrecurring fair value adjustments	$	(100)	$	(12)

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~.the dates indicated:

March 31, 2023

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs; Weighted
Average

(Dollars in thousands)

Collateral-dependent loans

119

Market approach

Adjustment for differences between the comparable sales

N/A(1)

September 30, 2017

Fair
Value

Valuation
Technique(s)
Unobservable Input(s)
Range of Inputs; Weighted
Average
(Dollars in thousands)
Impaired loans $ 342
Market approach Adjustment for differences between the comparable sales (23.8%) - 23.0%; (2.8%)
(1)Quantitative disclosures are not provided for collateral-dependent loans because there were no adjustments made to the appraisal or stated values during the current period.

December 31, 2022

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs; Weighted
Average

(Dollars in thousands)

Collateral-dependent loans

182

Market approach

Adjustment for differences between the comparable sales

N/A(1)

December 31, 2016

Fair
Value

Valuation
Technique(s)
Unobservable Input(s)
Range of Inputs; Weighted
Average
(Dollars in thousands)
Impaired loans $ 1,634
Market approach Adjustment for differences between the comparable sales (23.8%) - 63.9%; 20.4%

(1)Quantitative disclosures are not provided for collateral-dependent loans because there were no adjustments made to the appraisal or stated values during the current period.

(b) Fair Value of Financial Instruments

~~Because broadly~~Broadly traded markets do not exist for most of the Company’s financial ~~instruments,~~instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

~~Table of Contents~~

The following tables ~~below~~ present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at the dates ~~indicated.~~indicated:

September 30, 2017
Carrying Value
Fair Value
Fair Value Measurements Using:

Level 1
Level 2
Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents $ 111,258
$ 111,258
$ 111,258
$ —
$ —
Investment securities available for sale 800,060
800,060
150
799,910
—
Federal Home Loan Bank stock 9,343
N/A
N/A
N/A
N/A
Loans held for sale 5,368
5,553
—
5,553
—
Total loans receivable, net 2,766,113
2,772,338
—
—
2,772,338
Accrued interest receivable 12,295
12,295
3
3,770
8,522
Derivative assets - interest rate swaps 3,308
3,308
—

3,308
—
Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts 2,925,637
2,925,637
2,925,637
—
—
Certificate of deposit accounts 395,181
394,164
—
394,164
—
Federal Home Loan Bank advances 117,400
117,400
—
117,400
—
Securities sold under agreement to repurchase 28,668
28,668
28,668
—
—
Junior subordinated debentures 19,936
15,250
—
—
15,250
Accrued interest payable 148
148
42
73
33
Derivative liabilities - interest rate swaps 3,308
3,308
—
3,308
—

Table of Contents


	March 31, 2023
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	301,481	$	301,481	$	301,481	$	—	$	—
Investment securities available for sale	1,318,072		1,318,072		19,865		1,298,207		—
Investment securities held to maturity	760,163		684,647		—		684,647		—

Loans receivable, net	4,083,003		3,944,954		—		—		3,944,954
Accrued interest receivable	18,548		18,548		360		6,472		11,716
Derivative assets - interest rate swaps	24,498		24,498		—		24,498		—
Equity security	215		215		215		—		—
Financial Liabilities:
Non-maturity deposits	$	5,392,668	$	5,392,668	$	5,392,668	$	—	$	—
Certificates of deposit	396,354		400,142		—		400,142		—
Federal Home Loan Bank advances	383,100		383,100		—		383,100		—
Securities sold under agreement to repurchase	39,161		39,161		39,161		—		—
Junior subordinated debentures	21,546		18,750		—		—		18,750
Accrued interest payable	392		392		66		252		74
Derivative liabilities - interest rate swaps	24,498		24,498		—		24,498		—


	December 31, 2022
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	103,590	$	103,590	$	103,590	$	—	$	—
Investment securities available for sale	1,331,443		1,331,443		25,178		1,306,265		—
Investment securities held to maturity	766,396		673,434		—		673,434		—

Loans receivable, net	4,007,872		3,841,821		—		—		3,841,821
Accrued interest receivable	18,547		18,547		349		6,892		11,306
Derivative assets - interest rate swaps	30,107		30,107		—		30,107		—
Equity security	185		185		185		—		—
Financial Liabilities:
Non-maturity deposits	$	5,617,267	$	5,617,267	$	5,617,267	$	—	$	—
Certificates of deposit	307,573		308,325		—		308,325		—

Securities sold under agreement to repurchase	46,597		46,597		46,597		—		—
Junior subordinated debentures	21,473		20,000		—		—		20,000
Accrued interest payable	143		143		57		13		73
Derivative liabilities - interest rate swaps	30,107		30,107		—		30,107		—

December 31, 2016
Carrying Value Fair Value Fair Value Measurements Using:
Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents $ 103,745
$ 103,745
$ 103,745
$ —
$ —
Investment securities available for sale 794,645
794,645
123
794,522
—
Federal Home Loan Bank stock 7,564
N/A
N/A
N/A
N/A
Loans held for sale 11,662
11,988
—
11,988
—
Loans receivable, net of allowance for loan losses 2,609,666
2,675,811
—
—
2,675,811
Accrued interest receivable 10,925
10,925
3
3,472
7,450
Derivative assets - interest rate swaps 2,804
2,804
—
2,804
—
Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts $ 2,872,247
$ 2,872,247
$ 2,872,247
$ —
$ —
Certificate of deposit accounts 357,401
357,536
—
357,536
—
Federal Home Loan Bank advances 79,600
79,600
—
79,600
—
Securities sold under agreement to repurchase 22,104
22,104
22,104
—
—
Junior subordinated debentures 19,717
15,000
—
—
15,000
Accrued interest payable 215
215
44
142
29
Derivative liabilities - interest rate swaps 2,804
2,804
—
2,804
—
(9)Cash Restriction

The ~~methods~~Bank had no cash restrictions at March 31, 2023 and ~~assumptions, not previously presented, used to estimate fair value are described as follows:~~December 31, 2022.

~~Cash~~

(10)Commitments and ~~Cash Equivalents:~~Contingencies

~~The fair value~~In the ordinary course of ~~financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to carrying value (Level 1).~~

~~Federal Home Loan~~business, the Bank ~~Stock~~:

~~FHLB stock is not publicly traded; thus, it is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.~~

~~Loans Held for Sale~~:

~~The fair value of loans held for sale is estimated based upon binding contracts or quotes from third party investors for similar loans. (Level 2).~~

~~Loans Receivable~~:

Except for certain impaired loans discussed previously, fair value is based on discounted cash flows using current market rates applied to the estimated life (Level 3). While these methodologies are permitted under U.S. GAAP, they are not based on the exit price concept of the fair value required under FASB ASC 820-10, ~~Fair Value Measurements and Disclosures, and generally produce a higher value.~~

~~Accrued Interest Receivable/Payable~~:

The fair value of accrued interest receivable/payable balances approximates the carrying value. The fair value measurements are commensurate with the asset or liability from which the accrued interest is generated (Level 1, Level 2 and Level 3).

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~~Deposits~~:

For deposits with no contractual maturity, the fair value is assumed to equal the carrying value (Level 1). The fair value of certificate of deposit accounts is based on discounted cash flows using the difference between the deposit rate and the rates offered by the Company for deposits of similar remaining maturities (Level 2).

~~Federal Home Loan Bank advances~~:

~~The fair value of FHLB advances is estimated based on discounting the future cash flows using the market rate currently offered (Level 2).~~

~~Securities Sold Under Agreement to Repurchase~~:

Securities sold under agreement to repurchase are short-term in nature and they reprice on a daily basis. Fair value financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to carrying value (Level 1).

~~Junior Subordinated Debentures:~~

~~The fair value is estimated using discounted cash flow analysis based on current rates for similar~~may enter into various types of ~~debt, which many be unobservable, and considering recent trading activity of similar instruments in markets which can be inactive (Level 3).~~

~~Off-Balance Sheet Financial Instruments~~:

~~The majority of our~~transactions that include commitments to extend credit ~~standby~~that are not included in its unaudited Condensed Consolidated Financial Statements. The Bank applies the same

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credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The majority of the commitments presented below are variable rate. Loan commitments can be either revolving or non-revolving. The Bank’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.

The following table presents outstanding commitments to extend credit, including letters of credit, ~~and commitments to sell mortgage loans carry current market interest rates if converted to loans. As such, no premium or discount was ascribed to these commitments (Level 1). They are excluded from~~at the ~~preceding tables.~~dates indicated:


	March 31, 2023		December 31, 2022
	(In thousands)
Commercial business:
Commercial and industrial	$	537,442	$	548,438
Owner-occupied CRE	3,305		3,083
Non-owner occupied CRE	26,664		13,396
Total commercial business	567,411		564,917

Real estate construction and land development:
Residential	46,664		43,460
Commercial and multifamily	355,507		348,956
Total real estate construction and land development	402,171		392,416
Consumer	327,727		323,016
Total outstanding commitments	$	1,297,309	$	1,280,349


~~(15)~~	~~Commitments and Contingencies~~

~~In June 2016,~~The following table details the Company received preliminary findings from the Washington State Department of Revenue ("DOR") regarding its business and occupation ("B&O") tax audit on the B&O tax returns of Whidbey Island Bank for the years 2010-2014. The state B&O tax is a gross receipts tax and is calculated on the gross income from activities. It is measured on the value of products, gross proceeds of sale, or gross income of the business. A substantial portion of the preliminary findings related to the receipt of FDIC shared-loss payments from the FDIC to Washington Banking Company in connection with its acquisitions of City Bank in April 2010 and North County Bank in September 2010. In their preliminary findings, the DOR is considering those payments as taxable for B&O tax purposes. The total amount of this preliminary finding, along with calculated back interest, is approximately $1.6 million. Management is in discussions with the DOR as to whether these payments should be taxable for B&O tax purposes. Given the uncertainty of the outcome of these discussions, management's estimates of the Company's ultimate liability, if any, involve significant judgment and are based on currently available information and an assessment of the validity of facts and calculations assumed by the DOR. Management does not believe a material loss is probable at this time and there are significant factual and legal issues to be resolved. Management believes that it is reasonably possible that future changes to the Company's estimates of loss and the ultimate amount paid for resolution of this B&O audit could impact the Company's results of operations in future periods. Any such losses would be reported as a noninterest expenseactivity in the ~~Company's Consolidated Statement of Income.~~ACL on unfunded commitments during the periods indicated:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Balance, beginning of period	$	1,744	$	2,607
Provision for (reversal of) credit losses on unfunded commitments	112		(1,055)
Balance, end of period	$	1,856	$	1,552


~~(16)~~	~~Definitive Agreement~~

On July 26, 2017 the Company announced the execution of a definitive agreement with Puget Sound under which Heritage will acquire Puget Sound in an all-stock transaction valued at approximately $126.1 million based on the closing price of Heritage common stock of $27.15 on July 26, 2017. Puget Sound is a business bank headquartered in Bellevue, Washington with one branch location. Under the terms of the agreement, Puget Sound shareholders will receive 1.320 shares of Heritage common stock for each share of Puget Sound common stock, subject to potential adjustment. The value of the consideration will fluctuate until closing based on the value of Heritage's stock price and may be adjusted by a cap and collar in certain circumstances. The definitive agreement has been unanimously approved by the boards of directors of both Heritage and Puget Sound. The merger is subject to regulatory approvals, approval by Puget Sound shareholders and certain other customary closing conditions and is expected to close in the first quarter of 2018.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Table of Contents~~


~~ITEM 2.~~	~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three ~~and nine~~ months ended ~~September 30, 2017.~~March 31, 2023. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Forward-Looking Statements included herein and the December 31, ~~2016~~2022 audited Consolidated Financial Statements and the accompanying Notes included in our 2022 Annual ~~Report on~~ Form ~~10-K for the year ended December 31, 2016.~~10-K.

Overview

Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our local communities with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. ~~At September 30, 2017, we had total assets of $4.05 billion and total stockholders’ equity of $507.6 million.~~ The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.

Our business consists primarily of commercial lending and deposit relationships with small to medium sized businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and land development loans and consumer loans. We additionally originate for sale or for investment purposes ~~one-to-four family~~ residential real estate loans on ~~residential~~single family properties located primarily in our markets.

Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, comprised primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits. Management ~~strives to match~~manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected ~~significantly~~ by general and local economic conditions, particularly changes in market interest rates including most recently significant changes as a result of inflation, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes onin the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.

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Our net income is affected by many factors, including the provision for ~~loan losses.~~credit losses on loans. The provision for ~~loan~~credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. ~~The allowance for loan losses~~Management believes that the ACL on loans reflects the amount that ~~we believe~~ is appropriate to provide for ~~probable incurred~~current expected credit losses in our loan ~~portfolio.~~portfolio based on our methodology.

Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees, ~~gain on sale of loans (net)~~card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and ~~data processing.~~professional services. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and ~~consist~~consists primarily of lease ~~payments,~~expenses, depreciation charges, maintenance and ~~costs of~~ utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including the account processing ~~systems,~~system, electronic payments processing of products and services, ~~and~~ internet and mobile banking ~~channels.~~channels and software-as-a-service providers. Professional services consist primarily of third-party service providers such as auditors, consultants and lawyers.

Results of operations may also be significantly affected ~~significantly~~ by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory ~~authorities. Other~~authorities, including changes resulting from inflation and the governmental actions taken to address this issue. Net income ~~and other expenses are~~is also impacted by growth of operations through organic growth or acquisitions.

Recent Developments

While economic conditions have generally improved since the onset of the COVID-19 pandemic in early 2020, inflation has resulted in higher prices for food, energy, housing, and various supply chain inputs, among others. These inflationary pressures have persisted throughout 2022 and 2023, resulting in higher costs for consumers and businesses. To address the persistent levels of inflation, the Federal Open Market Committee (“FOMC”) has taken steps to tighten monetary policy through a cumulative 475 basis point increase to the federal funds rate from March 2022 through March 2023. The FOMC has stated that it remains committed to monetary policy measures that are designed to bring inflation down. The impact of these measures, including future actions taken by the FOMC, on the Company’s business are uncertain. While the recent increases in interest rates have generally resulted in higher levels of interest income for the Company, they may also reduce economic activity overall or result in recessionary conditions in future periods. Should these ongoing economic pressures persist, we anticipate it could have an impact on the following:

•Loan growth and interest income - If economic activity begins to wane, it may have an impact on our borrowers, the businesses they operate, and their financial condition. Our borrowers may have less demand for credit needed to invest in and expand their businesses, as well as less demand for real estate loans. Such factors would place pressure on the level of interest-earning assets, which may negatively impact our interest income.

•Credit quality - Should there be a decline in economic activity, the markets we serve could experience increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things. Such factors may result in weakened economic conditions, place strain on our borrowers, and ultimately impact the credit quality of our loan portfolio. We expect this could result in increases in the ~~number~~level of past due, nonaccrual, and classified loans, as well as higher net charge-offs. While economic conditions have generally been favorable thus far, notwithstanding higher levels of inflation, there can be no assurance favorable economic conditions will continue. As such, should we experience future deterioration in the credit quality of our loan portfolio, it may contribute to the need for additional provisions for credit losses.

•ACL - The Company is required to record credit losses on certain financial assets in accordance with the CECL model stipulated under ASC 326, which is highly dependent upon expectations of future economic conditions and requires management judgment. Should expectations of future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses.

•Impairment charges - If economic conditions deteriorate, it could adversely impact the Company’s operating results and the value of certain of our assets. As a result, the Company may be required to write-down the value of certain assets such as goodwill, intangible assets, or deferred tax assets when there is evidence to suggest their value has become impaired or will not be realizable at a future date.

•Accumulated other comprehensive income (loss) - Unrealized gains and losses on AFS investment securities are recognized in stockholders’ equity as accumulated other comprehensive income (loss). If economic conditions deteriorate, and/or if the interest rates continue to increase, the valuation of the Company’s AFS investment securities could be negatively impacted, which may lead to increases in other comprehensive loss, decreases to the Company’s stockholders’ equity.

•Deposits and deposit ~~accounts through acquisitions~~costs - Given the significant rate increases by the FOMC, it is likely that deposit costs will continue to increase and ~~core banking business growth.~~it may become more challenging for the Company to retain and attract deposit relationships.

•Liquidity - Consistent with our prudent, proactive approach to liquidity management, we may take certain actions to further enhance our liquidity, including but not limited to, increasing our FHLB borrowings, and increasing our brokered deposits.

~~Earnings Summary~~The Company continues to focus on serving its customers and communities, maintaining the well-being of its employees, and executing its strategic initiatives. The Company continues to monitor the economic environment and will make changes as appropriate.

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Results of Operations

Comparison of quarter ended ~~September 30, 2017~~March 31, 2023 to the comparable quarter in the prior year

Net ~~income was $10.6~~income increased $700,000, or 3.5%, to $20.5 million, or ~~$0.35~~$0.58 per diluted common share, for the three months ended ~~September 30, 2017~~March 31, 2023, compared to ~~$11.0~~$19.8 million, or ~~$0.37~~$0.56 per diluted common share, for the ~~three months ended September 30, 2016. The $415,000,~~same period in 2022. Net interest income increased $12.9 million, or ~~3.8% decrease in net income~~27.5%, to $59.8 million for the three months ended ~~September 30, 2017~~March 31, 2023, compared to $46.9 million for the ~~three months ended September 30, 2016 was~~same period in 2022 due primarily ~~the result of a $1.5 million, or 14.9% decrease in noninterest~~

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~~income and a $1.1 million, or 4.2%~~to an increase in ~~noninterest expense,~~interest earned on interest earning assets following increases in market interest rates. This increase was partially offset by a ~~$1.4~~$1.8 million ~~or 4.1%, increase in net interest income and a $611,000, or 40.9%, decrease in~~ provision for ~~loan losses.~~

~~Net interest income as a percentage of average interest earning assets (net interest margin) decreased 10 basis points to 3.85%~~credit losses for the three months ended ~~September 30, 2017~~March 31, 2023, compared to ~~3.95%~~a $3.6 million reversal of provision for credit losses for the three months ended March 31, 2022, and an increase in noninterest expense of $5.9 million for the three months ended March 31, 2023 compared to the same period in 2022. The Company’s efficiency ratio was 61.1% for the three months ended March 31, 2023 compared to 64.4% for the same period in ~~2016.~~2022.

Average Balances, Yields and Rates Paid

The ~~efficiency ratio consists of noninterest expense divided by the sum of~~following table provides relevant net interest income ~~before provision~~information for the periods indicated:


	Three Months Ended March 31,
	2023						2022						Change
	Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2)(3)	$	4,039,395	$	50,450	5.07	%	$	3,773,325	$	41,025	4.41	%	$	266,070	$	9,425	0.66	%
Taxable securities	2,007,339		14,657		2.96		1,271,557		6,003		1.91		735,782		8,654		1.05
Nontaxable securities (3)	82,893		586		2.87		146,409		860		2.38		(63,516)		(274)		0.49
Interest earning deposits	83,376		972		4.73		1,503,287		706		0.19		(1,419,911)		266		4.54
Total interest earning assets	6,213,003		66,665		4.35	%	6,694,578		48,594		2.94	%	(481,575)		18,071		1.41	%
Noninterest earning assets	848,956						740,209						108,747
Total assets	$	7,061,959					$	7,434,787					$	(372,828)
Interest Bearing Liabilities:
Certificates of Deposit	$	350,206	$	1,224	1.42	%	$	336,353	$	338	0.41	%	$	13,853	$	886	1.01	%
Savings accounts	601,166		142		0.10		646,684		87		0.05		(45,518)		55		0.05
Interest bearing demand and money market accounts	2,829,198		3,162		0.45		3,066,320		999		0.13		(237,122)		2,163		0.32
Total interest bearing deposits	3,780,570		4,528		0.49		4,049,357		1,424		0.14		(268,787)		3,104		0.35
Junior subordinated debentures	21,501		482		9.09		21,214		194		3.71		287		288		5.38
Securities sold under agreement to repurchase	43,202		47		0.44		50,017		32		0.26		(6,815)		15		0.18
FHLB advances and other borrowings	145,605		1,766		4.92		—		—		—		145,605		1,766		4.92
Total interest bearing liabilities	3,990,878		6,823		0.69	%	4,120,588		1,650		0.16	%	(129,710)		5,173		0.53	%
Noninterest bearing demand deposits	2,068,688						2,359,451						(290,763)
Other noninterest bearing liabilities	189,893						108,663						81,230
Stockholders’ equity	812,500						846,085						(33,585)
Total liabilities and stock-holders’ equity	$	7,061,959					$	7,434,787					$	(372,828)
Net interest income and spread			$	59,842	3.66	%			$	46,944	2.78	%			$	12,898	0.88	%
Net interest margin					3.91	%					2.84	%					1.07	%

(1) Average balances are calculated using daily balances.

(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan ~~losses plus noninterest income. The Company’s efficiency ratio was 64.4%~~fees of $752,000 and $3.5 million for the three months ended ~~September 30, 2017 compared to 61.7% for the three months ended September 30, 2016~~March 31, 2023 and ~~the change was attributable to the decrease in noninterest income~~2022, respectively.

(3) Yields on tax-exempt loans and ~~the increase in noninterest expense.~~securities have not been stated on a tax-equivalent basis.

~~Comparison~~

Table of ~~nine months ended September 30, 2017 to the comparable period in the prior year~~Contents

Net income was $31.8 million, or $1.06 per diluted common share, for the nine months ended September 30, 2017 compared to $29.0 million, or $0.97 per diluted common share, for the nine months ended September 30, 2016. The $2.7 million, or 9.5% increase in net income for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily the result of a $3.0 million, or 12.7%~~increase in noninterest income and a $2.9 million, or 2.9%, increase in net interest income, partially offset by a $3.3 million, or 4.2% increase in noninterest expense.~~

~~The net interest margin decreased 11 basis points to 3.89% for the nine months ended September 30, 2017 compared to 4.00% for the same period in 2016.~~

The Company’s efficiency ratio improved to 64.5% for the nine months ended September 30, 2017 from 64.8% for the nine months ended September 30, 2016. The improvement in the efficiency ratio for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily attributable to the increases in noninterest income and net interest income.

Net Interest Income and Margin Overview

One of the Company's key sources of earnings is net interest income. There are several factors that affect net interest income, including, but not limited to, the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, ~~and~~ other noninterest bearing liabilities and stockholders' equity; ~~the volume of noninterest earning assets;~~ market interest rate fluctuations; and asset quality.

Market rates impact the results of the Company's net interest income, including the significant increases in the federal funds target rate by the Federal Reserve in response to inflation during 2022 and 2023. The following table provides the federal funds target rate history and changes from each period since December 31, 2021:


Change Date	Rate (%)	Rate Change (%)
December 31, 2021	0.00% - 0.25%	N/A
March 17, 2022	0.25% - 0.50%	0.25	%
May 5, 2022	0.75% - 1.00%	0.50	%
June 16, 2022	1.50% - 1.75%	0.75	%
July 28, 2022	2.25% - 2.50%	0.75	%
September 22, 2022	3.00% - 3.25%	0.75	%
November 3, 2022	3.75% - 4.00%	0.75	%
December 15, 2022	4.25% - 4.50%	0.50	%
February 2, 2023	4.50% - 4.75%	0.25	%
March 23, 2023	4.75% - 5.00%	0.25	%

The following table provides the changes in net interest income for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and interest rates allocated proportionately to the absolute value of changes due to volume and changes due to interest rates:


	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total		% Change
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net	$	3,031	$	6,394	$	9,425	23.0	%
Taxable securities	4,449		4,205		8,654		144.2
Nontaxable securities	(425)		151		(274)		(31.9)
Interest earning deposits	(1,271)		1,537		266		37.7
Total interest income	$	5,784	$	12,287	$	18,071	37.2	%
Interest Bearing Liabilities:
Certificates of deposit	$	15	$	871	$	886	262.1	%
Savings accounts	(6)		61		55		63.2
Interest bearing demand and money market accounts	(83)		2,246		2,163		216.5
Total interest bearing deposits	(74)		3,178		3,104		218.0
Junior subordinated debentures	3		285		288		148.5
Securities sold under agreement to repurchase	(4)		19		15		46.9
FHLB advances and other borrowings	1,766		—		1,766		100.0
Total interest expense	$	1,691	$	3,482	$	5,173	313.5	%
Net interest income	$	4,093	$	8,805	$	12,898	27.5	%

Comparison of quarter ended ~~September 30, 2017~~March 31, 2023 to the comparable quarter in the prior year

Net interest income increased ~~$1.4~~$12.9 million, or ~~4.1%~~27.5% to $59.8 million due to an increase in total interest income offset partially by a decrease in total interest expense.

Total interest income increased $18.1 million, or 37.2%, to ~~$35.0~~$66.7 million for the three months ended ~~September 30, 2017~~March 31, 2023 compared to ~~$33.6~~$48.6 million for the three months ended March 31, 2022. The increase in total interest income was primarily due to an increase in yields earned on interest earning assets following increases in market interest rates, and secondarily due to an increase in average balances of loans and taxable securities, offset partially by a $3.1 million decrease in interest earned on loans receivable, net resulting from a decrease in interest and deferred SBA PPP loan fees recognized.

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


	Three Months Ended
	March 31, 2023		March 31, 2022

Loan yield (GAAP)	5.07	%	4.41	%
Exclude impact from SBA PPP loans	(0.01)		(0.21)
Exclude impact from incremental accretion on acquired loans	(0.02)		(0.06)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1)	5.04	%	4.14	%

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

There was no impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual during the three months ended March 31, 2023 compared to 11 basis points during the same period in 2022.

Total interest expense increased $5.2 million or 313.5% to $6.8 million during the three months ended March 31, 2023 compared $1.7 million for the same period in ~~2016. The following table provides relevant net~~2022 due primarily to increased costs of interest ~~income information for~~bearing deposits due to competitive rate pressures as well as the ~~dates indicated.~~addition of borrowing costs.

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Three Months Ended September 30,
2017 2016

Average
Balance

Interest
Earned/
Paid

Average
Yield/
Rate ⁽¹⁾

Average
Balance

Interest
Earned/
Paid

Average
Yield/
Rate ⁽¹⁾
(Dollars in thousands)
Interest Earning Assets:
Total loans receivable, net ^{(2) (3)}
$ 2,737,535
$ 32,595
4.72 % $ 2,526,150
$ 30,915
4.87 %
Taxable securities 562,256
3,117
2.20
588,749
2,888
1.95
Nontaxable securities ⁽³⁾
229,683
1,354
2.34
225,994
1,235
2.17
Other interest earning assets 72,643
258
1.41
42,934
76
0.70
Total interest earning assets 3,602,117
37,324
4.11 % 3,383,827
35,114
4.13 %
Noninterest earning assets 418,100
408,634

Total assets $ 4,020,217
$ 3,792,461

Interest Bearing Liabilities:
Certificates of deposit $ 394,345
$ 633
0.64 % $ 378,407
$ 468
0.49 %
Savings accounts 494,990
360
0.29
507,523
214
0.17
Interest bearing demand and money market accounts 1,499,335
635
0.17
1,480,220
587
0.16
Total interest bearing deposits 2,388,670
1,628
0.27
2,366,150
1,269
0.21
FHLB advances and other borrowings 111,293
428
1.53
5,618
8
0.57
Securities sold under agreement to repurchase 28,999
16
0.22
18,861
10
0.21
Junior subordinated debentures 19,897
261
5.20
19,602
221
4.49
Total interest bearing liabilities 2,548,859
2,333
0.36 % 2,410,231
1,508
0.25 %
Demand and other noninterest bearing deposits 916,074
844,468

Other noninterest bearing liabilities 50,022
44,378

Stockholders’ equity 505,262
493,384

Total liabilities and stockholders’ equity $ 4,020,217
$ 3,792,461

Net interest income
$ 34,991
$ 33,606

Net interest spread 3.75 % 3.88 %
Net interest margin 3.85 % 3.95 %
Average interest earning assets to average interest bearing liabilities 141.32 % 140.39 %


⁽¹⁾	~~Annualized~~


⁽²⁾	~~The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield.~~


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

~~Interest Income~~

~~Total~~Net interest ~~income~~margin increased ~~$2.2 million, or 6.3%,~~107 basis points to ~~$37.3 million~~3.91% for the three months ended ~~September 30, 2017~~March 31, 2023 compared to ~~$35.1 million~~2.84% for the same period in ~~2016. The balance of average~~2022.The increase in the net interest margin was due to a shift into higher yielding interest earning assets ~~increased $218.3 million, or 6.5%, to $3.60 billion for the three months ended September 30, 2017 from $3.38 billion for the three months ended September 30, 2016 and the~~as well as higher average ~~yield~~yields on ~~total~~all interest earning assets ~~decreased two basis points to 4.11% for the three months ended September 30, 2017 compared to 4.13% for the three months ended September 30, 2016.~~

~~Interest income from~~following increases in market interest ~~and fees on loans increased $1.7 million, or 5.4%, to $32.6 million for the three months ended September 30, 2017 from $30.9 million for the same period in 2016 primarily due to~~rates offset partially by an increase in average loans receivable of $211.4 million, or 8.4%, as a result of loan growth, offset partially by a 15 basis point decrease in the average loan yield to 4.72% for the three months ended September 30, 2017 from 4.87% for the three months ended September 30, 2016. The decrease in average loan yield was due primarily to a decrease in incremental accretion income on purchased loans and secondarily to a decrease in contractual note rates.

~~Table of Contents~~

~~The following table presents the average loan yield and effects of the incremental accretion on purchased loans for the three months ended September 30, 2017 and 2016:~~

Three Months Ended September 30,
2017 2016
(Dollars in thousands)
Average loan yield, excluding incremental accretion on purchased loans ⁽¹⁾
4.57 % 4.63 %
Impact on average loan yield from incremental accretion on purchased loans (1) 0.15 % 0.24 %
Average loan yield 4.72 % 4.87 %

Incremental accretion on purchased loans ⁽¹⁾
$ 1,036
$ 1,530

⁽¹⁾

As of the dates of the completion of each of the merger and acquisition transactions, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modified quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.

Incremental accretion income was $1.0 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively. The decrease in the incremental accretion was primarily a result of a continued decline in the purchased loan balances and a decrease in the prepayments of purchased loans during the three months ended September 30, 2017 compared to the same period in 2016. The incremental accretion is expected to continue to decrease as the balance of the purchased loans continues to decrease.

Total interest income increased primarily due to the increase in interest and fees on loans discussed above and secondarily due to a $348,000, or 8.4%, increase in interest income on investment securities to $4.5 million during the three months ended September 30, 2017 from $4.1 million for the three months ended September 30, 2016. The increase in income on investment securities was a result of an increase in average investment yields for the three months ended September 30, 2017 compared to the same period in 2016, offset partially by a decrease in the average balance of investment securities. Average yields on taxable securities increased 25 basis points to 2.20% for the three months ended September 30, 2017 from 1.95% for the same period in 2016. Average yields on nontaxable securities increased 17 basis points to 2.34% for the three months ended September 30, 2017 from 2.17% for the same period in 2016. The average balance of investment securities decreased $22.8 million, or 2.8%, to $791.9 million during the three months ended September 30, 2017 from $814.7 million during the three months ended September 30, 2016. The Company has actively managed its investment securities portfolio to mitigate declining trends in loan yields.

Average other interest earning assets increased $29.7 million, or 69.2%, to $72.6 million for the three months ended September 30, 2017 compared to $42.9 million for the three months ended September 30, 2016. The increase was due primarily to an increase in interest earning deposits, as the Bank held more funds in interest earning accounts at the Federal Reserve Bank of San Francisco compared to the same period in the prior year.

~~Interest Expense~~

~~Total interest expense increased $825,000, or 54.7%, to $2.3 million for the three months ended September 30, 2017 compared to $1.5 million for the same period in 2016. The average~~ cost of interest bearing liabilities increased 11 basis points to 0.36% for the three months ended September 30, 2017 from 0.25% for the three months ended September 30, 2016 as a result of increases in market rates. Total average interest bearing liabilities increased by $138.6 million, or 5.8%, to $2.55 billion for the three months ended September 30, 2017 from $2.41 billion for the three months ended September 30, 2016.

The average cost of interest bearing deposits increased six basis points to 0.27% for the three months ended September 30, 2017 from 0.21% for the same period in 2016 primarily as a result of increases in both the average balance and cost of certificates of deposit and an increase in the average cost of savings accounts.

Interest expense on certificates of deposit increased $165,000, or 35.3%, to $633,000 during the three months ended September 30, 2017 from $468,000 for the same period in 2016 due to increases in the average balance and the cost of the certificates of deposits accounts. The average balance of certificates of deposits increased $15.9 million, or 4.2%, to $394.3 million, for the three months ended September 30, 2017 from $378.4 million for the same period in 2016. The cost of certificates of deposits increased 15 basis points to 0.64% for the three months ended September 30, 2017 from 0.49% for the same period in 2016.

~~Table of Contents~~

Interest expense on savings accounts increased $146,000, or 68.2%, to $360,000 during the three months ended September 30, 2017 from $214,000 for the same period in 2016 due primarily to the 12 basis point increase of the cost of the savings accounts to 0.29% for the three months ended September 30, 2017 from 0.17% for the same period in 2016.

Interest expense on FHLB advances and other borrowings increased $420,000, or 52.5%, to $428,000 for the three months ended September 30, 2018 from $8,000 for the same period in 2016 due to a combination of an increase in both average balances and cost of funds. The average balance for FHLB advances and other borrowings increased $105.7 million, or 1,881.0%, to $111.3 million for the three months ended September 30, 2017 from $5.6 million for the same period in 2016, due primarily to fund loan growth. The average rate of the FHLB advances for the three months ended September 30, 2017 was 1.53%, an increase of 96 basis points from 0.57% for the same period in 2016, due primarily to continued increases in short-term borrowing rates over the last year.

The average rate of the junior subordinated debentures, including the effects of accretion of the discount established as of the date of the merger with Washington Banking Company, for the three months ended September 30, 2017 was 5.20%, an increase of 71 basis points from 4.49% for the same period in 2016. The rate increase on the debentures was due to an increase in the three-month LIBOR rate to 1.33% at September 30, 2017 from 0.85% on September 30, 2016.

~~Net Interest Margin~~

Net interest margin for the three months ended September 30, 2017 decreased ten basis points to 3.85% from 3.95% for the same period in 2016 primarily due to the decline in the incremental accretion on purchased loans, as discussed below. The net interest spread for the three months ended September 30, 2017 decreased 13 basis points to 3.75% from 3.88% for the same period in 2016. The decrease was primarily due to the above mentioned increases in the cost of funds of interest bearing liabilities.

Net interest margin is impacted by the incremental accretion on purchased loans. The following table presents the net interest margin and effects of the incremental accretion on purchased loans for the three months ended September 30, 2017 and 2016:

Three Months Ended September 30,
2017 2016
Net interest margin, excluding incremental accretion on purchased loans ⁽¹⁾
3.74 % 3.77 %
Impact on net interest margin from incremental accretion on purchased loans ⁽¹⁾
0.11
0.18
Net interest margin 3.85 % 3.95 %

⁽¹⁾

~~Comparison of nine months ended September 30, 2017 to the comparable period in the prior year~~

Net interest income increased $2.9 million, or 2.9%, to $102.3 million for the nine months ended September 30, 2017 compared to $99.5 million for the same period in 2016. The following table provides relevant net interest income information for the dates indicated.

~~Table of Contents~~

Nine Months Ended September 30,
2017 2016

Average
Balance

Interest
Earned/
Paid

Average
Yield/
Rate (1)

Average
Balance

Interest
Earned/
Paid
Average
Yield/
Rate (1)
(Dollars in thousands)
Interest Earning Assets:
Total loans receivable, net (2) (3) $ 2,676,153
$ 94,580
4.73 % $ 2,461,856
$ 91,595
4.97 %
Taxable securities 565,528
9,307
2.20
594,301
8,522
1.92
Nontaxable securities (3) 225,583
3,926
2.33
220,038
3,599
2.18
Other interest earning assets 51,049
461
1.21
47,829
225
0.63
Total interest earning assets 3,518,313
108,274
4.11 % 3,324,024
103,941
4.18 %
Noninterest earning assets 418,837
391,342

Total assets $ 3,937,150
$ 3,715,366

Interest Bearing Liabilities:
Certificates of deposit $ 369,724
$ 1,527
0.55 % $ 397,070
$ 1,496
0.50 %
Savings accounts 499,353
940
0.25
478,762
540
0.15
Interest bearing demand and money market accounts 1,489,149
1,834
0.16
1,457,399
1,729
0.16
Total interest bearing deposits 2,358,226
4,301
0.24
2,333,231
3,765
0.22
FHLB advances and other borrowings 106,556
870
1.09
11,608
47
0.54
Securities sold under agreement to repurchase 23,660
38
0.21
20,031
31
0.21
Junior subordinated debentures 19,823
748
5.05
19,527
647
4.43
Total interest bearing liabilities 2,508,265
5,957
0.32 % 2,384,397
4,490
0.25 %
Demand and other noninterest bearing deposits 885,467
811,043

Other noninterest bearing liabilities 47,283
35,266

Stockholders’ equity 496,135
484,660

Total liabilities and stockholders’ equity $ 3,937,150
$ 3,715,366

Net interest income $ 102,317
$ 99,451

Net interest spread 3.79 % 3.93 %
Net interest margin 3.89 % 4.00 %
Average interest earning assets to average interest bearing liabilities 140.27 % 139.41 %


⁽¹⁾	~~Annualized~~


⁽²⁾	~~The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield.~~


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

~~Interest Income~~

Total interest income increased $4.3 million, or 4.2%, to $108.3 million for the nine months ended September 30, 2017 compared to $103.9 million for the same period in 2016. The balance of average interest earning assets increased $194.3 million, or 5.8%, to $3.52 billion for the nine months ended September 30, 2017 from $3.32 billion for the nine months ended September 30, 2016 and the yield on total interest earning assets decreased seven basis points to 4.11% for the nine months ended September 30, 2017 compared to 4.18% for the nine months ended September 30, 2016.

Interest income from interest and fees on loans increased $3.0 million, or 3.3%, to $94.6 million for the nine months ended September 30, 2017 from $91.6 million for the same period in 2016 due primarily to an increase in average loans receivable, offset partially by a decrease in average loan yields. Average loans receivable increased $214.3 million, or 8.7%, to $2.68 billion for the nine months ended September 30, 2017 compared to $2.46 billion for the nine months ended September 30, 2016. Average loan yields decreased 24 basis points to 4.73% for the nine months ended September 30, 2017 from 4.97% for the nine months ended September 30, 2016 due mostly to a decrease in incremental accretion income.

~~Table of Contents~~

~~The following table presents the average loan yield and effects of the incremental accretion on purchased loans for the nine months ended September 30, 2017 and 2016:~~

Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Average loan yield, excluding incremental accretion on purchased loans ⁽¹⁾
4.55 % 4.66 %
Impact on average loan yield from incremental accretion on purchased loans (1) 0.18 % 0.31 %
Average loan yield 4.73 % 4.97 %

Incremental accretion on purchased loans ⁽¹⁾
$ 3,687
$ 5,669

⁽¹⁾

Incremental accretion income was $3.7 million and $5.7 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in the incremental accretion was primarily a result of a continued decline in the purchased loan balances and a decrease in the prepayments of purchased loans during the nine months ended September 30, 2017 compared to the same period in 2016. The incremental accretion is expected to continue to decrease as the balance of the purchased loans continues to decrease.

Total interest income increased primarily due to the increase in interest and fees on loans discussed above and secondarily due to a $1.1 million, or 9.2%, increase in interest income on investment securities to $13.2 million during the nine months ended September 30, 2017 from $12.1 million for the nine months ended September 30, 2016. The increase in interest income on investment securities was the result of an increase in average investment yields for the nine months ended September 30, 2017 compared to the same period in 2016, offset partially by a decrease in the average balance of investment securities. Average yields on taxable securities increased 28 basis points to 2.20% for the nine months ended September 30, 2017 from 1.92% for the same period in 2016. Average yields on nontaxable securities increased 15 basis points to 2.33% for the nine months ended September 30, 2017 from 2.18% for the same period in 2016. The average balance of investment securities decreased $23.2 million, or 2.9%, to $791.1 million during the nine months ended September 30, 2017 from $814.3 million during the nine months ended September 30, 2016. The Company has actively managed its investment securities portfolio to mitigate declining, but recently improving, loan yields.

Average other interest earning assets increased $3.2 million, or 6.7%, to $51.0 million for the nine months ended September 30, 2017 compared to $47.8 million for the nine months ended September 30, 2016. The increase was due primarily to an increase in interest earning deposits, as the Bank held more funds in interest earning accounts at the Federal Reserve Bank of San Francisco compared to the same period in 2016.

~~Interest Expense~~

Total interest expense increased $1.5 million, or 32.7%, to $6.0 million for the nine months ended September 30, 2017 compared to $4.5 million for the same period in 2016. The average cost of interest bearing liabilities increased seven basis points to 0.32% for the nine months ended September 30, 2017 from 0.25% for the nine months ended September 30, 2016. Total average interest bearing liabilities increased by $123.9 million, or 5.2%, to $2.51 billion for the nine months ended September 30, 2017 from $2.38 billion for the nine months ended September 30, 2016.

The average cost of interest bearing deposits increased two basis points to 0.24% for the nine months ended September 30, 2017 from 0.22% for the same period in 2016 due primarily to the changes in savings accounts.

Interest expense on savings accounts increased $400,000, or 74.1%, to $940,000 for the nine months ended September 30, 2017 from $540,000 for the same period in 2016 due to increases in both the average balance and cost of the savings accounts. The average balance of savings accounts increased $20.6 million, or 4.3%, to $499.4 million for the nine months ended September 30, 2017 from $478.8 million for the same period in 2016. The cost of savings accounts increased ten basis points to 0.25% for the nine months ended September 30, 2017 from 0.15% for the same period in 2016.

Interest expense of certificates of deposit accounts increased only $31,000, or 2.1%, to $1.5 million for the nine months ended September 30, 2017. The average balance of certificates of deposit decreased $27.3 million, or

~~Table of Contents~~

6.9%, to $369.7 million for the nine months ended September 30, 2017 compared to $397.1 million for the nine months ended September 30, 2016 while the cost of certificates of deposits increased to 0.55% for the nine months ended September 30, 2017 from 0.50% for the same period in 2016.

Interest expense on FHLB advances and other borrowings increased $823,000 to $870,000 for the nine months ended September 30, 2017 from $47,000 for the nine months ended September 30, 2016 due to a combination of an increase in average balances and an increase in the cost of funds. The average balance for FHLB advances and other borrowings increased $94.9 million to $106.6 million for the nine months ended September 30, 2017 from $11.6 million for the same period in 2016, due primarily to fund loan growth. The average rate of the FHLB advances and other borrowings for the nine months ended September 30, 2017 was 1.09%, an increase of 55 basis points from 0.54% for the same period in 2016.

The average rate of the junior subordinated debentures, including the effects of accretion of the discount established as of the date of the merger with Washington Banking Company, for the nine months ended September 30, 2017 was 5.05%, an increase of 62 basis points from 4.43% for the same period in 2016. The rate increase on the debentures was due to an increase in the three-month LIBOR rate to 1.33% at September 30, 2017 from 0.85% on September 30, 2016.

~~Net Interest Margin~~

Net interest margin for the nine months ended September 30, 2017 decreased 11 basis points to 3.89% from 4.00% for the same period in 2016 primarily due to the decline in the incremental accretion on purchased loans, as discussed below. The net interest spread for the nine months ended September 30, 2017 decreased 14 basis points to 3.79% from 3.93% for the same period in 2016. This decrease was primarily due to the above mentioned decrease in average yields on total interest earning assets and increase in the average cost of funds of total interest bearing liabilities.

Nine Months Ended September 30,
2017 2016
Net interest margin, excluding incremental accretion on purchased loans ⁽¹⁾
3.75 % 3.77 %
Impact on net interest margin from incremental accretion on purchased loans ⁽¹⁾
0.14
0.23
Net interest margin 3.89 % 4.00 %

⁽¹⁾

Provision for ~~Loan~~Credit Losses Overview

The ~~Bank has established a comprehensive methodology~~aggregate of the provision for ~~determining its allowance~~credit losses on loans and the provision for ~~loan~~credit losses on unfunded commitments is presented on the unaudited Condensed Consolidated Statements of Income as the provision for (reversal of) credit losses. The ~~allowance for loan losses~~ACL on unfunded commitments is increased by provisions for loan losses charged to expense, and is reduced by loans charged-off, net of loan recoveries or a recovery of previous provision. For additional information, see the section entitled "Analysis of Allowance for Loan Losses" below.

~~The provision for loan losses is dependent~~included on the ~~Bank’s ability to manage asset quality~~unaudited Condensed Consolidated Statements of Financial Condition within accrued expenses and control the level of net charge-offs through prudent underwriting standards. In addition, a decline in general economic conditions could increase future provisions for loan losses and have a material effect on the Company’s net income.other liabilities.

Comparison of quarter ended ~~September 30, 2017~~March 31, 2023 to the comparable quarter in the prior year

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


	Three Months Ended March 31,				Change
	2023		2022		$		%
	(Dollars in thousands)
Provision for (reversal of) credit losses on loans	$	1,713	$	(2,522)	$	4,235	167.9	%
Provision for (reversal of) credit losses on unfunded commitments	112		(1,055)		1,167		110.6
Provision for (reversal of) credit losses	$	1,825	$	(3,577)	$	5,402	151.0	%

The provision for ~~loan~~credit losses ~~decreased $611,000, or 40.9%~~on loans reflects the amount required to ~~$884,000~~maintain the allowance for credit losses on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The provision for credit losses on loans recognized during the three months ended ~~September 30, 2017 from $1.5 million~~March 31, 2023 was due primarily to an increase in loans receivable as well as a change in mix of loans. Future assessments of the expected credit losses will not only be impacted by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. The provision for credit losses on unfunded commitments increased due primarily to an increase in unfunded commitment balances.

The reversal of provision for credit losses recognized during the three months ended ~~September 30, 2016. The decrease~~March 31, 2022 was due primarily to a reduction of loans individually evaluated for losses and their related ACL as well as changes in the ~~provision for~~ loan mix and continued improvement in forecasted economic indicators used to calculate credit losses ~~for~~as compared to the three months ended September 30, 2017 from the same period in 2016 was primarily the result of a change in the composition of the loan portfolio, changes in certain environmental factors and improvements in certain historical loss factors. Based on a thorough review of the loan portfolio, the Bank determined that the provision forforecast at December 31, 2021.

Table of Contents

~~loan losses for the three months ended September 30, 2017 was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.~~

~~Comparison of nine months ended September 30, 2017 to the comparable period in the prior year~~

The provision for loan losses decreased $872,000, or 23.2% to $2.9 million for the nine months ended September 30, 2017 from $3.8 million for the nine months ended September 30, 2016. The decrease in the provision for loan losses for the nine months ended September 30, 2017 from the same period in 2016 was primarily the result of a change in the volume and mix of loans, changes in certain environmental factors and improvements in certain historical loss factors. Based on a thorough review of the loan portfolio, the Bank determined that the provision for loan losses for the nine months ended September 30, 2017 was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.

Noninterest Income Overview

Comparison of quarter ended ~~September 30, 2017~~March 31, 2023 to the comparable quarter in the prior year

~~Total noninterest income decreased $1.5 million, or 14.9%, to $8.4 million for the three months ended September 30, 2017 compared to $9.9 million for the same period in 2016.~~ The following table presents the change in the key components of noninterest income for the periods ~~noted.~~indicated:


	Three Months Ended March 31,				Change
	2023		2022		$		%
	(Dollars in thousands)
Service charges and other fees	$	2,624	$	2,474	$	150	6.1	%
Card revenue	2,000		2,263		(263)		(11.6)
Gain (loss) on sale of investment securities, net	(286)		—		(286)		100.0
Gain on sale of loans, net	49		241		(192)		(79.7)
Interest rate swap fees	53		279		(226)		(81.0)
Bank owned life insurance income	709		1,695		(986)		(58.2)
Gain on sale of other assets, net	2		204		(202)		(99.0)
Other income	3,107		1,382		1,725		124.8
Total noninterest income	$	8,258	$	8,538	$	(280)	(3.3)	%

Three Months Ended September 30,
2017 2016 Change Percentage Change
(Dollars in thousands)
Service charges and other fees $ 4,769
$ 3,630
$ 1,139
31.4 %
Gain on sale of investment securities, net 44
345
(301 ) (87.2 )
Gain on sale of loans, net 1,229
3,435
(2,206 ) (64.2 )
Interest rate swap fees 328
742
(414 ) (55.8 )
Other income 2,024
1,715
309
18.0
Total noninterest income $ 8,394
$ 9,867
$ (1,473 ) (14.9 )%

~~Gain on the sale of loans, net~~Noninterest income decreased ~~$2.2 million, or 64.2% to $1.2 million for~~during the three months ended ~~September 30, 2017~~March 31, 2023 compared to ~~$3.4 million~~ the same period in ~~2016,~~2022 due ~~primarily~~ to a ~~$2.1 million gain on sale of a previously classified purchased credit impaired loan recognized~~decline in ~~2016. The detail of~~card revenue, interest rate swap fees and gain on sale of loans ~~net is included~~as well as a decline in ~~the following schedule.~~

Three Months Ended September 30,
2017 2016 Change Percentage Change
(Dollars in thousands)
Mortgage loans $ 875
$ 1,087
$ (212 ) (19.5 )%
SBA loans 354
285
69
24.2
Other loans —
2,063
(2,063 ) (100.0 )
Total gain on sale of loans, net $ 1,229
$ 3,435
$ (2,206 ) (64.2 )%

~~Interest rate swap fees decreased $414,000, or 55.8% to $328,000 for the three months ended September 30, 2017 compared to $742,000 the same period in 2016,~~bank owned life insurance income due ~~primarily~~ to a ~~decrease in the number of swaps executed~~death benefit recognized during the three months ended ~~September 30, 2017 compared to~~March 31, 2022. These declines were offset partially by an increase in other income which included the ~~three months ended September 30, 2016.~~

~~The decrease in noninterest income was partially offset by~~gain on sale of Visa Inc. Class B common stock of $1.6 million and an increase in service charges and other fees of $1.1 million, or 31.4% to $4.8 million for the three months ended September 30, 2017 compared to $3.6 million for the same period in 2016, due primarily to a consumer deposit account consolidation process completed at the end of 2016 and a business deposit consolidation process completed during second quarter 2017 and the related changes in fee structures, as well as increases in deposit balances.fees.

~~Table of Contents~~

~~Comparison of nine months ended September 30, 2017 to the comparable period in the prior year~~

Total noninterest income increased $3.0 million, or 12.7%, to $26.4 million for the nine months ended September 30, 2017 compared to $23.4 million for the same period in 2016. The following table presents the change in the key components of noninterest income for the periods noted.

Nine Months Ended September 30,
2017 2016 Change Percentage Change
(Dollars in thousands)
Service charges and other fees $ 13,408
$ 10,462
$ 2,946
28.2 %
Gain on sale of investment securities, net 161
1,106
(945 ) (85.4 )
Gain on sale of loans, net 6,562
5,406
1,156
21.4
Interest rate swap fees 743
1,105
(362 ) (32.8 )
Other income 5,532
5,354
178
3.3
Total noninterest income $ 26,406
$ 23,433
$ 2,973
12.7 %

Service charges and other fees increased $2.9 million, or 28.2% to $13.4 million for the nine months ended September 30, 2017 compared to $10.5 million for the same period in 2016, due primarily to a consumer deposit account consolidation process completed at the end of 2016 and a business deposit consolidation process completed during second quarter 2017 and the related changes in fee structures, as well as increases in deposit balances.

Gain on sale of loans, net increased $1.2 million, or 21.4% to $6.6 million for the nine months ended September 30, 2017 compared to $5.4 million for the same period in 2016, due primarily to a $935,000 increase in sale of other loans. During each of the nine months ended September 30, 2017 and 2016, the Bank sold one loan previously classified as purchased credit impaired. In addition, gain on sale of SBA loans increased $272,000 due primarily to an increase in proceeds from sale of SBA loans of $7.8 million, or 90.9%, to $16.4 million for the nine months ended September 30, 2017 compared to $8.6 million for the same period in 2016. The detail of gain on sale of loans, net is included in the following schedule.

Nine Months Ended September 30,
2017 2016 Change Percentage Change
(Dollars in thousands)
Mortgage loans $ 2,515
$ 2,566
$ (51 ) (2.0 )%
SBA loans 1,049
777
272
35.0
Other loans 2,998
2,063
935
45.3
Total gain on sale of loans, net $ 6,562
$ 5,406
$ 1,156
21.4 %

The increase in noninterest income was partially offset by a decrease in gain on sale of investment securities, net of $945,000, or 85.4%, to $161,000 for the nine months ended September 30, 2017 from $1.1 million for the nine months ended September 30, 2016. The decrease was primarily the result of fewer sales as the Bank actively managed its investment portfolio. The proceeds from sale of investment securities was $21.9 million for the nine months ended September 30, 2017 compared to $94.4 million for the same period in 2016.

Noninterest Expense Overview

Comparison of quarter ended ~~September 30, 2017~~March 31, 2023 to the comparable quarter in the prior year

~~Noninterest expense increased $1.1 million, or 4.2%, to $28.0 million during the three months ended September 30, 2017 compared to $26.8 million for the three months ended September 30, 2016.~~ The following table presents changes in the key components of noninterest expense for the periods ~~noted.~~indicated:


	Three Months Ended March 31,				Change
	2023		2022		$		%
	(Dollars in thousands)
Compensation and employee benefits	$	25,536	$	21,252	$	4,284	20.2	%
Occupancy and equipment	4,892		4,331		561		13.0
Data processing	4,342		4,061		281		6.9
Marketing	402		266		136		51.1
Professional services	628		699		(71)		(10.2)
State/municipal business and use tax	1,008		796		212		26.6
Federal deposit insurance premium	850		600		250		41.7

Amortization of intangible assets	623		704		(81)		(11.5)
Other expense	3,324		3,011		313		10.4
Total noninterest expense	$	41,605	$	35,720	$	5,885	16.5	%

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Three Months Ended September 30,
2017 2016 Change Percentage Change
(Dollars in thousands)
Compensation and employee benefits $ 15,823
$ 15,633
$ 190
1.2 %
Occupancy and equipment 3,979
3,926
53
1.3
Data processing 2,090
1,943
147
7.6
Marketing 933
745
188
25.2
Professional services 1,453
830
623
75.1
State and local taxes 640
820
(180 ) (22.0 )
Federal deposit insurance premium 433
296
137
46.3
Other real estate owned, net (88 ) (142 ) 54
(38.0 )
Amortization of intangible assets 319
359
(40 ) (11.1 )
Other expense 2,373
2,408
(35 ) (1.5 )
Total noninterest expense $ 27,955
$ 26,818
$ 1,137
4.2 %

~~Professional services~~Noninterest expense increased ~~$623,000, or 75.1%, to $1.5 million~~ during the three months ended ~~September 30, 2017 from $830,000 during the three months ended September 30, 2016. The increase in the three months ended September 30, 2017~~March 31, 2023 compared to the same period in ~~2016 was~~2022 due primarily to an increase in compensation and employee benefits resulting from an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in 2022 and an increase in salaries and wages due to ~~legal costs incurred for our pending merger with Puget Sound as discussed in Note (16) Definitive Agreement~~upward market pressure. Occupancy and equipment expense increased due to the expansion into Eugene, Oregon and Boise, Idaho as well as ~~benefit-based consulting fees related to the consumer and business deposit account consolidation processes, which correspondingly generated~~ an increase in ~~service charges and other fees.~~

~~Compensation and employee benefits~~maintenance costs related to winter weather conditions. Data processing costs increased $190,000, or 1.2%, to $15.8 million during the three months ended September 30, 2017 from $15.6 million during the three months ended September 30, 2016. The increase in the three months ended September 30, 2017 compareddue primarily to the ~~same period in 2016 was primarily due to senior level staffing increases and standard salary increases.~~

~~The ratio~~expansion of noninterest expense to average assets (annualized) was 2.76% for the three months ended September 30, 2017 compared to 2.81% for the three months ended September 30, 2016. The decrease was primarily a result of an increase in assets and cost efficiencies gained through efforts by the Company to manage noninterest expenses.

~~Comparison of nine months ended September 30, 2017 to the comparable period in the prior year~~

Noninterest expense increased $3.3 million, or 4.2%, to $83.0 million during the nine months ended September 30, 2017 compared to $79.7 million for the nine months ended September 30, 2016. The following table presents changes in the key components of noninterest expense for the periods noted.

Nine Months Ended September 30,
2017 2016 Change Percentage Change
(Dollars in thousands)
Compensation and employee benefits $ 48,119
$ 45,652
$ 2,467
5.4 %
Occupancy and equipment 11,607
11,873
(266 ) (2.2 )
Data processing 6,007
5,564
443
8.0
Marketing 2,545
2,254
291
12.9
Professional services 3,515
2,508
1,007
40.2
State and local taxes 1,828
2,031
(203 ) (10.0 )
Federal deposit insurance premium 1,090
1,316
(226 ) (17.2 )
Other real estate owned, net (36 ) 330
(366 ) (110.9 )
Amortization of intangible assets 966
1,057
(91 ) (8.6 )
Other expense 7,346
7,079
267
3.8
Total noninterest expense $ 82,987
$ 79,664
$ 3,323
4.2 %

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Compensation and employee benefits increased $2.5 million, or 5.4%, to $48.1 million during the nine months ended September 30, 2017 from $45.7 million during the nine months ended September 30, 2016. The increase in the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to senior level staffing increases,digital services including the addition of the ~~new Portland, Oregon lending team members who started in May 2017, and standard salary increases.~~

~~Professional services~~ability to open accounts online. The federal deposit insurance premium increased $1.0 million, or 40.2%, to $3.5 million during the nine months ended September 30, 2017 from $2.5 million during the nine months ended September 30, 2016. The increase in the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to ~~due to benefit-based consulting fees related to the consumer deposit account consolidation process, which correspondingly generated~~ an increase in ~~service charges and other fees. Professional services also increased as a result~~assessment rates effective January 1, 2023.

Table of Trust-related expenses based on a renegotiated contract for 2017, which also increased other noninterest income, and legal costs incurred for our pending merger with Puget Sound as discussed in Note (16) Definitive Agreement.Contents

Data processing increased $443,000, or 8.0%, to $6.0 million during the nine months ended September 30, 2017 from $5.6 million during the nine months ended September 30, 2016 primarily due to higher transactional activity in the core operating system and internet banking as a result of the growth in loans and deposits..

Other real estate owned, net decreased $366,000 or 110.9%, to income of $36,000 during the nine months ended September 30, 2017 compared to expense of $330,000 during the nine months ended September 30, 2016. The income recorded during the nine months ended September 30, 2017 was due to gain on sale of properties of $111,000, offset by maintenance expense of $75,000. For the nine months ended September 30, 2016, the Bank recorded a valuation adjustment of $383,000 and maintenance expense of $120,000, which was offset by the gain on sale of properties of $173,000.

The ratio of noninterest expense to average assets (annualized) was 2.82% for the nine months ended September 30, 2017, compared to 2.86% for the nine months ended September 30, 2016. The decrease was primarily a result of an increase in assets and cost efficiencies gained through efforts by the Company to manage noninterest expenses.

Income Tax Expense Overview

Comparison of quarter ended ~~September 30, 2017~~March 31, 2023 to the comparable quarter in the prior year

The following table presents the income tax expense, related metrics and their changes for the periods indicated:


	Three Months Ended March 31,						Change
	2023			2022			$			%
	(Dollars in thousands)
Income before income taxes	$	24,670		$	23,339		$	1,331		5.7	%
Income tax expense	$	4,213		$	3,582		$	631		17.6	%
Effective income tax rate	17.1		%	15.3		%	1.8		%	11.8	%

Income tax expense decreased by $199,000, or 4.8%, to $3.9 million for the three months ended September 30, 2017 from $4.1 million for the three months ended September 30, 2016. The effective tax rate was 27.0% for the three months ended September 30, 2017 compared to 27.2% for the same period in 2016. The decrease in the effective tax rate during the three months ended September 30, 2017increased compared to the same period in ~~2016 was~~2022 primarily due ~~primarily~~ to ~~an increase~~higher estimated pre-tax income in tax benefits from low income housing tax credits, offset partially by the implementation of FASB ASU 2016-09 requiring the excess tax benefits on option exercises and restricted stock vesting to be recognized2023 than in ~~earnings prospectively starting on January 1, 2017.~~2022.

~~Comparison of nine months ended September 30, 2017 to the comparable period in the prior year~~

Income tax expense increased by $645,000, or 6.2%, to $11.1 million for the nine months ended September 30, 2017 from $10.4 million for the nine months ended September 30, 2016. The effective tax rate was 25.9% for the nine months ended September 30, 2017 compared to 26.5% for the same period in 2016. The decrease in the effective tax rate during the nine months ended September 30, 2017 compared to the same period in 2016 was due primarily to the implementation of FASB ASU 2016-09 requiring the excess tax benefits on option exercises and restricted stock vesting to be recognized in earnings prospectively starting on January 1, 2017.

Financial Condition Overview

Total assets increased $171.1 million, or 4.4%, to $4.05 billion as of September 30, 2017 compared to $3.88 billion as of December 31, 2016. Total loans receivable, net, increased $156.4 million, or 6.0%, to $2.77 billion at September 30, 2017 compared to $2.61 billion at December 31, 2016. Loans were mostly funded through an increase in deposits. Deposits increased by $91.2 million, or 2.8%, to $3.32 billion as of September 30, 2017 compared to $3.23 billion as of December 31, 2016. Total non-maturity deposits decreased to 88.1% of total deposits at September 30, 2017 from 88.9% at December 31, 2016 and certificates of deposits increased to 11.9% of total deposits at ~~September 30, 2017 from 11.1% at December 31, 2016.~~

Prepaid expenses and other assets increased $8.4 million, or 10.6%, to $87.7 million at September 30, 2017 from $79.4 million at December 31, 2016 primarily as a result of the Company's investment in two new low income housing tax credit partnerships totaling $14.3 million. These investments had corresponding obligations recorded in accrued expenses and other liabilities of $14.3 million at September 30, 2017. These obligations will decrease as

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projects in the partnerships are funded. During the nine months ended September 30, 2017 the Company made capital contributions related to other low income housing tax credit partnerships of $8.5 million, partially offsetting the increase in accrued expenses and other liabilities.

Federal Home Loan Bank advances increased $37.8 million, or 47.5%, to $117.4 million as of September 30, 2017 from $79.6 million as of December 31, 2016. The increase in advances was required as a supplement to deposits in order to fund loan growth.

Total stockholders’ equity increased $25.8 million, or 5.4%, to $507.6 million as of September 30, 2017 from $481.8 million at December 31, 2016. The increase during the nine months ended September 30, 2017 was due primarily to net income of $31.8 million and a $4.4 million improvement in accumulated other comprehensive income, net of tax, offset partially by cash dividends declared of $11.4 million. The Company’s equity position was 12.5% of total assets as of September 30, 2017 and 12.4% as of December 31, 2016.

The table below provides a comparison of the changes in the Company's financial condition ~~from December 31, 2016~~at the periods indicated:


	March 31, 2023		December 31, 2022		$ Change		% Change
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	301,481	$	103,590	$	197,891	191.0	%
Investment securities available for sale, at fair value, net	1,318,072		1,331,443		(13,371)		(1.0)
Investment securities held to maturity, at amortized cost, net	760,163		766,396		(6,233)		(0.8)

Loans receivable, net	4,083,003		4,007,872		75,131		1.9

Premises and equipment, net	80,094		76,930		3,164		4.1
Federal Home Loan Bank stock, at cost	23,697		8,916		14,781		165.8
Bank owned life insurance	122,767		122,059		708		0.6
Accrued interest receivable	18,548		18,547		1		—
Prepaid expenses and other assets	281,438		296,181		(14,743)		(5.0)
Other intangible assets, net	6,604		7,227		(623)		(8.6)
Goodwill	240,939		240,939		—		—
Total assets	$	7,236,806	$	6,980,100	$	256,706	3.7	%

Liabilities and Stockholders' Equity
Deposits	$	5,771,787	$	5,907,420	$	(135,633)	(2.3)	%
Deposits held for sale	17,235		17,420		(185)		(1.1)
Total deposits	5,789,022		5,924,840		(135,818)		(2.3)
Federal Home Loan Bank advances	383,100		—		383,100		100.0
Junior subordinated debentures	21,546		21,473		73		0.3
Securities sold under agreement to repurchase	39,161		46,597		(7,436)		(16.0)
Accrued expenses and other liabilities	177,895		189,297		(11,402)		(6.0)
Total liabilities	6,410,724		6,182,207		228,517		3.7
Common stock	550,869		552,397		(1,528)		(0.3)
Retained earnings	358,010		345,346		12,664		3.7
Accumulated other comprehensive (loss) income, net	(82,797)		(99,850)		17,053		17.1
Total stockholders' equity	826,082		797,893		28,189		3.5
Total liabilities and stockholders' equity	$	7,236,806	$	6,980,100	$	256,706	3.7	%

Total assets increased due primarily to ~~September 30, 2017.~~

September 30, 2017 December 31, 2016 Change Percent Change
(Dollars in thousands)
Assets
Cash and cash equivalents $ 111,258
$ 103,745
$ 7,513
7.2 %
Investment securities 800,060
794,645
5,415
0.7
Loans held for sale 5,368
11,662
(6,294 ) (54.0 )
Total loans receivable, net 2,766,113
2,609,666
156,447
6.0
Other real estate owned 523
754
(231 ) (30.6 )
Premises and equipment, net 60,457
63,911
(3,454 ) (5.4 )
Federal Home Loan Bank stock, at cost 9,343
7,564
1,779
23.5
Bank owned life insurance 71,474
70,355
1,119
1.6
Accrued interest receivable 12,295
10,925
1,370
12.5
Prepaid expenses and other assets 87,728
79,351
8,377
10.6
Other intangible assets, net 6,408
7,374
(966 ) (13.1 )
Goodwill 119,029
119,029
—
—
Total assets $ 4,050,056
$ 3,878,981
$ 171,075
4.4 %

Liabilities
Deposits $ 3,320,818
$ 3,229,648
$ 91,170
2.8
Federal Home Loan Bank advances 117,400
79,600
37,800
47.5
Junior subordinated debentures 19,936
19,717
219
1.1
Securities sold under agreement to repurchase 28,668
22,104
6,564
29.7
Accrued expenses and other liabilities 55,626
46,149
9,477
20.5
Total liabilities 3,542,448
3,397,218
145,230
4.3
Stockholders' equity

Common stock 360,113
359,060
1,053
0.3
Retained earnings 145,677
125,309
20,368
16.3
Accumulated other comprehensive income (loss), net 1,818
(2,606 ) 4,424
169.8
Total stockholders' equity 507,608
481,763
25,845
5.4
Total liabilities and stockholders' equity $ 4,050,056
$ 3,878,981
$ 171,075
4.4 %

~~Table of Contents~~

~~Lending Activities~~

~~As indicated in the table below, loans receivable, net was $2.80 billion at September 30, 2017,~~ an increase ~~of $156.8 million, or 5.9%, from $2.64 billion at December 31, 2016. The~~in cash and cash equivalents and an increase in loans receivable, ~~for the nine months ended September 30, 2017 was primarily~~net due to ~~increases~~loan growth. Total liabilities and stockholders' equity increased due primarily to an increase in ~~commercial business loans of $121.3 million, consumer loans of $15.5 million and real estate construction and land development loans of $15.3 million.~~borrowings offset partially by a decrease in deposits.

September 30, 2017 December 31, 2016
Balance % of Total Balance % of Total
(Dollars in thousands)
Commercial business:
Commercial and industrial $ 665,582
23.8 % $ 637,773
24.2 %
Owner-occupied commercial real estate 602,238
21.5
558,035
21.1
Non-owner occupied commercial real estate 930,188
33.3
880,880
33.4
Total commercial business 2,198,008
78.6
2,076,688
78.7
One-to-four family residential 81,422
2.9
77,391
2.9
Real estate construction and land development:
One-to-four family residential 51,451
1.8
50,414
1.9
Five or more family residential and commercial properties 122,981
4.4
108,764
4.1
Total real estate construction and land development 174,432
6.2
159,178
6.0
Consumer 340,643
12.2
325,140
12.3
Gross loans receivable 2,794,505
99.9
2,638,397
99.9
Deferred loan costs, net 3,008
0.1
2,352
0.1
Loans receivable, net $ 2,797,513
100.0 % $ 2,640,749
100.0 %

Table of Contents

Investment Activities Overview

~~Nonperforming Assets~~Our investment policy is established by the Company's Board of Directors and ~~Credit Quality Metrics~~

~~The following table describes our nonperforming assets and other credit quality metrics at~~monitored by the ~~dates indicated:~~

September 30, 2017 December 31, 2016
(Dollars in thousands)
Nonaccrual loans:
Commercial business $ 9,683
$ 8,580
One-to-four family residential 84
94
Real estate construction and land development 869
2,008
Consumer 316
227
Total nonaccrual loans (1)(2) 10,952
10,909
Other real estate owned 523
754
Total nonperforming assets $ 11,475
$ 11,663

Allowance for loan losses $ 31,400
$ 31,083
Allowance for loan losses to loans receivable, net 1.12 % 1.18 %
Allowance for loan losses to nonperforming loans 286.71 % 284.93 %
Nonperforming loans to loans receivable, net 0.39 % 0.41 %
Nonperforming assets to total assets 0.28 % 0.30 %

Performing TDR loans:
Commercial business $ 18,571
$ 19,837
One-to-four family residential 219
227
Real estate construction and land development 1,136
2,141
Consumer 118
83
Total performing TDR loans (3) $ 20,044
$ 22,288
Accruing loans past due 90 days or more (4) $ —
$ —
Potential problem loans (5) 84,089
87,762


⁽¹⁾	~~At September 30, 2017 and December 31, 2016, $5.9 million and $6.9 million of nonperforming loans, respectively, were considered TDR loans.~~


⁽²⁾	~~At September 30, 2017 and December 31, 2016, $2.5 million and $2.8 million of nonperforming loans, respectively, were guaranteed by government agencies.~~


⁽³⁾	~~At September 30, 2017 and December 31, 2016, $1.4 million and $682,000 of performing TDR loans, respectively, were guaranteed by government agencies.~~


⁽⁴⁾	~~There were no accruing loans past due 90 days or more that were guaranteed by government agencies at September 30, 2017 or December 31, 2016.~~


⁽⁵⁾	~~At September 30, 2017 and December 31, 2016, $1.7 million and $1.1 million of potential problem loans, respectively, were guaranteed by government agencies.~~

Nonperforming assets were $11.5 million, or 0.28% of total assets and $11.7 million, or 0.30% of total assets as of September 30, 2017 and December 31, 2016, respectively. The balance of nonaccrual loans increased $43,000, or 0.4%, to $11.0 million ($2.5 million guaranteed by governmental agencies) at September 30, 2017 from $10.9 million ($2.8 million guaranteed by governmental agencies) at December 31, 2016. For the nine months ended September 30, 2017, the increase in nonaccrual loans was primarily due to additions to nonaccrual loans of $5.1 million, offset partially by net principal reductions of $4.3 million and charge-offs of $750,000. The other real estate owned balance decreased to $523,000 at September 30, 2017 from $754,000 at December 31, 2016 primarily as a resultRisk Committee of the ~~sale~~Board of ~~two properties.~~

~~Performing TDR loans were $20.0 million~~Directors. It is designed primarily to provide and ~~$22.3 million as~~maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements the Company's lending activities. The policy permits investment in various types of ~~September 30, 2017~~liquid assets permissible under applicable regulations. Investments in non-investment grade bonds and December 31, 2016, respectively. The $2.2 million, or 10.1%, decrease in performing TDR loans for the nine months ended September 30, 2017 was primarily the result of net principal payments of $8.3 million and loans transferred to nonaccrual of $1.1 million, partially offset by troubled loans restructured during the period of $7.1 million. At September 30, 2017 and

~~Table of Contents~~

~~December 31, 2016, the Company had an allowance for loan losses on the performing TDR loans of $2.1 million and $2.0 million, respectively.~~

Potential problem loans as of September 30, 2017 and December 31, 2016 were $84.1 million and $87.8 million, respectively. Potential problem loans are those loans that are currently accruing interest andstripped mortgage-backed securities are not ~~considered impaired, but which we are monitoring because~~permitted under the financial information of the borrower causes concerns as to their ability to meet their loan repayment terms. Loans that are past due 90 days or more and still accruing interest are both well secured and in the process of collection. The $3.7 million, or 4.2%, decrease in potential problem loans was primarily the result of net principal payments of $18.9 million, loans transferred to held for sale of $5.8 million, loans transferred to nonaccrual status of $4.6 million and loan grade improvements of $4.4 million, partially offset by the addition of loans graded as potential problem loans of $31.4 million during the nine months ended September 30, 2017.

~~Analysis of Allowance for Loan Losses~~

Management maintains an allowance for loan losses (“ALL”) to provide for estimated probable incurred losses in the loan portfolio at the balance sheet date. The adequacy of the ALL is monitored through our ongoing quarterly loan quality assessments.

~~We assess the estimated credit losses inherent in our loan portfolio by considering a number of elements including:~~

•~~Historical loss experience in the loan portfolio;~~

•~~Impact of environmental factors, including:~~


▪	~~Levels of and trends in delinquencies and classified and impaired loans;~~


▪	~~Levels of and trends in charge-offs and recoveries;~~


▪	~~Trends in volume and terms of loans;~~


▪	~~Effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices;~~


▪	~~Experience, ability and depth of lending management and other relevant staff;~~


▪	~~National and local economic trends and conditions;~~


▪	~~Other external factors such as competition, legal and regulatory;~~


▪	~~Effects of changes in credit concentrations; and~~


▪	~~Other factors~~

We calculate an appropriate ALL for loans in our loan portfolio, except PCI loans, by applying historical loss factors for homogeneous classes of the portfolio, adjusted for changes to the above-noted environmental factors. We may record specific provisions for impaired loans, including loans on nonaccrual status and TDRs, after a careful analysis of each loan’s credit and collateral factors. Our analysis of an appropriate ALL combines the provisions made for our non-impaired loans and the specific provisions made for each impaired loan.

The allowance for loan losses on loans designated as non-PCI loans is similar to the methodology described above except that for non-PCI loans, the remaining unaccreted discounts resulting from the fair value adjustments recorded at the time the loans were purchased are additionally factored into the allowance methodology.

For the PCI loans, the acquisition date fair value incorporated our estimate of future expected cash flows until the ultimate resolution of these credits. To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the PCI loan portfolio will be recognized immediately into earnings. To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the previously recognized provision for that loan or pool of loans, if any, and then prospectively recognized in interest income as a yield adjustment.

While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. A decline in national and local economic conditions, or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of their routine examination process, which may result in the establishment of additional allowance for loan losses based upon their judgment of information available to them at the time of their examination.

~~Table of Contents~~

policy.

The following table provides information regarding ~~changes in~~ our ~~allowance for loan losses as of~~investment securities at the dates indicated:


	March 31, 2023				December 31, 2022				Change
	Balance		% of Total		Balance		% of Total		$		%
	(Dollars in thousands)
Investment securities available for sale, at fair value:
U.S. government and agency securities	$	64,550	3.1	%	$	63,859	3.0	%	$	691	1.1	%
Municipal securities	132,497		6.4		153,026		7.3		(20,529)		(13.4)
Residential CMO and MBS(1)	433,712		20.9		424,386		20.2		9,326		2.2
Commercial CMO and MBS(1)	663,497		31.8		664,421		31.8		(924)		(0.1)
Corporate obligations	3,817		0.2		3,834		0.2		(17)		(0.4)
Other asset-backed securities	19,999		1.0		21,917		1.0		(1,918)		(8.8)
Total	$	1,318,072	63.4	%	$	1,331,443	63.5	%	$	(13,371)	(1.0)	%

Investment securities held to maturity, at amortized cost:
U.S. government and agency securities	$	150,969	7.3	%	$	150,936	7.2	%	$	33	—	%

Residential CMO and MBS(1)	285,337		13.7		290,318		13.8		(4,981)		(1.7)
Commercial CMO and MBS(1)	323,857		15.6		325,142		15.5		(1,285)		(0.4)


Total	$	760,163	36.6	%	$	766,396	36.5	%	$	(6,233)	(0.8)	%

Total investment securities	$	2,078,235	100.0	%	$	2,097,839	100.0	%	$	(19,604)	(0.9)	%

(1) U.S. government agency and ~~for the three~~government-sponsored enterprise mortgage-backed securities and ~~nine months ended September 30, 2017 and 2016:~~collateralized mortgage obligations.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Dollars in thousands)
Loans receivable, net at the end of the period $ 2,797,513
$ 2,578,977
$ 2,797,513
$ 2,578,977
Average loans receivable during the period 2,737,535
2,526,150
2,676,153
2,461,856

Allowance for loan losses on loans at the beginning of the period $ 32,751
$ 28,426
$ 31,083
$ 29,746
Provision for loan losses 884
1,495
2,882
3,754
Charge-offs:
Commercial business (1,497 ) (328 ) (1,940 ) (3,698 )
One-to-four family residential (15 ) —
(15 ) —
Real estate construction and land development (556 ) —
(556 ) (154 )
Consumer (478 ) (572 ) (1,419 ) (1,370 )
Total charge-offs (2,546 ) (900 ) (3,930 ) (5,222 )
Recoveries:
Commercial business 8
993
834
1,352
One-to-four family residential —
—
1
2
Real estate construction and land development 191
—
201
83
Consumer 112
197
329
496
Total recoveries 311
1,190
1,365
1,933
Net (charge-offs) recoveries (2,235 ) 290
(2,565 ) (3,289 )
Allowance for loan losses at the end of the period $ 31,400
$ 30,211
$ 31,400
$ 30,211

Allowance for loan losses to loans receivable, net 1.12 % 1.17 % 1.12 % 1.17 %
Net charge-offs (recoveries) on loans to average loans, annualized 0.32 % (0.05 )% 0.13 % 0.18 %

~~The allowance for loan losses increased~~Total investment securities decreased $19.6 million, or 0.9%, to ~~$31.4 million~~$2.08 billion at ~~September 30, 2017~~March 31, 2023 from ~~$31.1 million~~$2.10 billion at December 31, ~~2016. The increase was the result~~2022 due primarily to maturities and prepayments of ~~provision for loan losses~~$32.9 million and sales of ~~$2.9~~$22.7 million, partially offset by purchases of $15.0 million. In addition, net ~~charge-offs~~unrealized and unrecognized losses on investment securities declined by $39.1 million due primarily to improvement in fair market values of ~~$2.6~~investment securities available for sale and held to maturity since December 31, 2022.

Loan Portfolio Overview

Changes by loan type

The Company originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases. The following table provides information about our loan portfolio by type of loan at the dates indicated:


	March 31, 2023				December 31, 2022				Change
	Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		$		%
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	684,998	16.6	%	$	692,100	17.1	%	$	(7,102)	(1.0)	%
SBA PPP	900		—		1,468		—		(568)		(38.7)
Owner-occupied CRE	949,064		23.0		937,040		23.1		12,024		1.3
Non-owner occupied CRE	1,601,789		38.8		1,586,632		39.2		15,157		1.0
Total commercial business	3,236,751		78.4		3,217,240		79.4		19,511		0.6
Residential real estate	363,777		8.8		343,631		8.5		20,146		5.9

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	March 31, 2023				December 31, 2022				Change
	Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		$		%
	(Dollars in thousands)
Real estate construction and land development:
Residential	72,926		1.8		80,074		2.0		(7,148)		(8.9)
Commercial and multifamily	270,547		6.6		214,038		5.3		56,509		26.4
Total real estate construction and land development	343,473		8.4		294,112		7.3		49,361		16.8
Consumer	183,471		4.4		195,875		4.8		(12,404)		(6.3)
Total	$	4,127,472	100.0	%	$	4,050,858	100.0	%	$	76,614	1.9	%

Loans receivable increased $76.6 million, ~~recorded~~or 1.9% (7.7% annualized), at March 31, 2023. New loans funded in the during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023 and during the three months ended December 31, 2022 were $138.1 million and $203.1 million, respectively. The fourth quarter of 2022 included purchased residential real estate loans of $40.5 million. Loan repayments decreased during the three months ended March 31, 2023 to $60.8 million, compared to $147.0 million during the three months ended December 31, 2022, exclusive of SBA PPP loan repayments, net deferred fees, and net acquired discounts. The largest increase in the loan portfolio occurred in the commercial and multifamily construction loans, which ~~included PCI~~increased by $56.5 million or 26.4% due to new loan ~~pool charge-offs~~originations and advances on outstanding loans during the three months ended March 31, 2023. Total new commitments for commercial and multifamily construction loans were $76.3 million during the three months ended March 31, 2023.

Total owner-occupied CRE loans and non-owner occupied CRE loans were $2.5 billion at March 31, 2023. Office loans were the largest segment of ~~$1.7~~owner-occupied and non-owner occupied CRE loans at $582.5 million or 22.8%. The average loan balance was $1.1 million. Of this total, $277.7 million or 47.7% were owner-occupied CRE properties. Owner-occupied CRE loans have a lower risk profile as there is less tenant rollover risk and generally have guarantees from the company occupying the space as well as the owners of the company.

Loans classified as nonaccrual and performing modified loans and nonperforming assets

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


	March 31, 2023			December 31, 2022			Change			% Change
	(Dollars in thousands)
Nonaccrual loans: (1)
Commercial business	$	4,815		$	5,869		$	(1,054)		(18.0)	%

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

Total nonaccrual loans	4,815			5,906			(1,091)			(18.5)
Other real estate owned	—			—			—			n/a
Total nonperforming assets	$	4,815		$	5,906		$	(1,091)		(18.5)	%

Accruing loans past due 90 days or more	$	2,344		$	1,615		$	729		45.1	%

Credit quality ratios:
Nonaccrual loans to loans receivable	0.12		%	0.15		%	(0.03)		%	(20.0)	%
Nonaccrual loans to total assets	0.07			0.08			(0.01)			(12.5)

Modified loans: (2)
Commercial business	$	3,035


Consumer	25
Total performing modified loans	$	3,060

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

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

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The following table provides the changes in nonaccrual loans during the three months ended March 31, 2023:




	(In thousands)
Balance, beginning of period	$	5,906
Additions	468
Net principal payments, sales and transfers to accruing status	(909)
Payoffs	(650)
Charge-offs	—

Balance, end of period	$	4,815

Nonaccrual loans decreased $1.1 million, or 18.5%, due primarily to ongoing collection efforts.

Allowance for Credit Losses on Loans Overview

The following table provides information regarding our ACL on loans for the periods indicated:


	At or For the Three Months Ended March 31,						Change
	2023			2022			$			%
	(Dollars in thousands)
ACL on loans at the end of period	$	44,469		$	40,333		$	4,136		10.3	%

Credit quality ratios:
ACL on loans to loans receivable	1.08		%	1.06		%	0.02			1.9
ACL on loans to nonaccrual loans	923.55			244.04			679.51			278.4

Net (charge-offs) recoveries	$	(230)		$	494		$	(724)		(146.6)
Average loans receivable, net during the period (1)	4,039,395			3,773,325			266,070			7.1
Net charge-offs (recoveries) on loans to average loans receivable, net(2)	0.02		%	(0.05)		%	0.07		%	140.0	%

(1) Average loan ~~losses~~ receivable, net includes loans held for sale.

(2) Annualized.

The ACL on loans increased during the three months endedMarch 31, 2023due primarily toan increase in loans receivable, net ~~decreased to 1.12%~~as well as a change in mix of loans.

The following table presents the ACL on loans by loan portfolio segment at ~~September 30, 2017 from 1.18%~~the indicated dates:


	March 31, 2023						December 31, 2022
	ACL on Loans		ACL as a % of Loans in Loan Category		% of Loans in Loan Category to Total Loans		ACL on Loans		ACL as a % of Loans in Loan Category		% of Loans in Loan Category to Total Loans
	(Dollars in thousands)
Commercial business	$	29,937	0.92	%	78.4	%	$	30,718	0.95	%	79.4	%
Residential real estate	2,902		0.80	%	8.8		2,872		0.84		8.5
Real estate construction and land development	8,985		2.62	%	8.4		7,063		2.40		7.3
Consumer	2,645		1.44	%	4.4		2,333		1.19		4.8
Total ACL on loans	$	44,469	1.08	%	100.0	%	$	42,986	1.06	%	100.0	%

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Deposits Overview

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


	March 31, 2023				December 31, 2022				Change
	Balance (1)		% of Total Deposits		Balance		% of Total Deposits		$		%
	(Dollars in thousands)
Noninterest demand deposits	$	1,982,909	34.3	%	$	2,099,464	35.5	%	$	(116,555)	(5.6)	%
Interest bearing demand deposits	1,675,393		28.9		1,830,727		30.9		(155,334)		(8.5)
Money market accounts	1,155,559		20.0		1,063,243		17.9		92,316		8.7
Savings accounts	578,807		10.0		623,833		10.5		(45,026)		(7.2)
Total non-maturity deposits	5,392,668		93.2		5,617,267		94.8		(224,599)		(4.0)
Certificates of deposit	396,354		6.8		307,573		5.2		88,781		28.9
Total deposits	$	5,789,022	100.0	%	$	5,924,840	100.0	%	$	(135,818)	(2.3)	%

(1) Deposit balances include deposits held for sale of $17.2 million and $17.4 million at March 31, 2023 and December 31, ~~2016.~~2022, respectively.

Total deposits decreased $135.8 million, or 2.3%, at March 31, 2023 from December 31, 2022. The decrease was due to competitive pricing pressures and customers moving excess funds to alternative higher yielding investments as well as general declines in individual customer balances. Money market accounts increased due to an increase in public deposits. Certificate of deposit balances increased mostly due to the addition of $52 million in brokered deposits.

The ~~ratio~~Bank entered into a purchase and sale agreement with a third party to sell and transfer certain assets, deposits and other liabilities of ~~net charge-offs (recoveries) on loans to average loans, annualized deteriorated to net charge-off of 0.32% for~~its branch in Ellensburg during the three months ended September 30, ~~2017 compared~~2022. As a result of entering into this purchase and sale agreement, approximately $17.2 million and $17.4 million in deposits were classified as held for sale as of March 31, 2023 and December 31, 2022, respectively. The sale is expected to ~~net recoveries of 0.05% for~~be completed during the three months ended ~~September~~June 30, ~~2016,~~2023; however, the completion of this sale depends on many factors including regulatory approval.

Federal Home Loan Bank Advances and Other Borrowings

The Federal Home Loan Bank (FHLB) functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB’s assessment of the institution’s creditworthiness. At March 31, 2023, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.2 billion with $383.1 million in advances outstanding. All FHLB borrowings at March 31, 2023 were overnight advances. At December 31, 2022, the Bank had no FHLB advances outstanding. 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.

The Bank maintains a credit facility with the Federal Reserve Bank through both the Discount Window and Bank Term Funding Program with available borrowing capacity of $640.6 million as of March 31, 2023. There were no borrowings outstanding as of March 31, 2023 and December 31, 2022. Any advances on the credit facility would be secured by either investment securities or certain types of the Bank's loans receivable.

The Company utilizes securities sold under agreement to repurchase with one day maturities as a supplement to funding sources. Securities sold under agreement to repurchase are secured by pledged investment securities. Under the securities sold under agreement to repurchase, the Company is required to maintain an aggregate market value of securities pledged greater than the balance of the securities sold under agreement to repurchase. At March 31, 2023 and December 31, 2022, we had repurchase agreements of $39.2 million and $46.6 million, respectively.

In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and junior subordinated debentures as part of the acquisition of Washington Banking Company. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital at March 31, 2023. The junior subordinated debentures outstanding as of March 31, 2023 and December 31, 2022 were $21.5 million, net of unaccreted discount.

The Bank maintains available unsecured federal funds lines with five correspondent banks totaling $215.0 million, with no outstanding borrowings at March 31, 2023.

Stockholders' Equity Overview

The Company’s stockholders' equity to assets ratio was 11.4% at both March 31, 2023 and December 31, 2022. Total stockholders' equity increased $28.2 million, or 3.5%, to $826.1 million at March 31, 2023 from $797.9 million at December 31, 2022. The increase was due primarily ~~due~~ to ~~PCI loan pool charge-offs~~$20.5 million in net income recognized and a decrease of ~~$1.5~~$17.1 million in accumulated other comprehensive loss as a result of improved fair market values of available for sale investment securities, offset partially by

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$7.8 million in cash dividends declared and $2.6 million for the repurchase of the Company's common stock during the three months ended ~~September 30, 2017.~~ March 31, 2023.

The ~~ratio~~Company has historically paid cash dividends to its common shareholders. Payments of ~~net charge-offs (recoveries)~~future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on ~~loans~~our ability to ~~average loans, annualized improved~~pay dividends and other relevant factors. 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. On April 19, 2023, the Company’s board of directors declared a regular quarterly dividend of $0.22 per common share payable on May 18, 2023 to shareholders of record on May 4, 2023.

Regulatory Requirements Overview

The Company is a ~~net charge-off of 0.13% for~~bank holding company under the ~~nine months ended September 30, 2017 from 0.18% for the nine months ended September 30, 2016. The improvement~~supervision of the ~~ratio was due primarily~~Federal Reserve Bank. Bank holding companies are subject to ~~fewer net charge-offs recorded during~~capital adequacy requirements of the ~~nine months ended September 30, 2017 compared~~Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank is a federally insured institution and thereby is subject to the ~~same period in 2016 in addition~~capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to ~~growth in~~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 ~~loan portfolio.~~unaudited Condensed Consolidated Financial Statements. 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 March 31, 2023, the Company and the Bank met all capital adequacy requirements to which they are subject.

~~Nonperforming loans were $11.0 million and $10.9 million at September 30, 2017~~As of March 31, 2023 and December 31, ~~2016, respectively,~~2022, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or ~~0.39%~~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 ~~0.41% of loans receivable, net, respectively. The allowance for loan losses to nonperforming loans was 286.71%~~the Bank at ~~September 30, 2017 and 284.93% at December 31, 2016.~~ the periods indicated:


	Company				Bank
	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
Common equity Tier 1 capital ratio	12.9	%	12.8	%	13.0	%	12.9	%
Leverage ratio	9.9		9.7		9.7		9.4
Tier 1 capital ratio	13.3		13.2		13.0		12.9
Total capital ratio	14.1		14.0		13.9		13.7
Capital conservation buffer	6.1		6.0		5.9		5.7

As of September 30, 2017, the Bank identified $31.0 million of impaired loans, of which $10.5 million had no specific valuation allowance as their estimated collateral value or discounted estimated cash flow was equal to or exceeds their carrying value. The remaining $20.5 million of impaired loans at September 30, 2017 had related specific valuation allowances totaling $3.1 million. Impaired loans totaled $33.2 million at Decemberboth March 31, ~~2016, of which $10.1 million had no specific valuation allowance and $23.1 million had $2.7 million of specific valuation allowance.~~

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Based on the established comprehensive methodology, management deemed the allowance for loan losses of $31.4 million at September 30, 2017 appropriate to provide for probable incurred credit losses based on an evaluation of known and inherent risks in the loan portfolio at that date. This compares to an allowance for loan losses at December 31, 2016 of $31.1 million. At the applicable acquisition or merger dates, no allowance for loan losses was established on purchased loans as the loans were accounted for at their fair value and a discount was established for the loans. At September 30, 20172023 and December 31, ~~2016,~~2022, the ~~remaining fair value discount~~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 ~~these purchased loans was $11.7 million and $13.5 million, respectively.~~

~~The following table outlines the allowance for loan losses and related loan balances at September 30, 2017 and~~two years until December 31, ~~2016:~~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.

Liquidity and Capital Resources

September 30, 2017 December 31, 2016
(Dollars in thousands)
General Valuation Allowance:
Allowance for loan losses $ 24,113
$ 21,791
Gross loans, excluding PCI and impaired loans $ 2,719,813
$ 2,540,751
Percentage 0.89 % 0.86 %

PCI Allowance:
Allowance for loan losses $ 4,176
$ 6,558
Gross PCI loans $ 43,696
$ 64,448
Percentage 9.56 % 10.18 %

Specific Valuation Allowance:
Allowance for loan losses $ 3,111
$ 2,734
Gross impaired loans $ 30,996
$ 33,198
Percentage 10.04 % 8.24 %

Total Allowance for Loan Losses:
Allowance for loan losses $ 31,400
$ 31,083
Gross loans receivable $ 2,794,505
$ 2,638,397
Percentage 1.12 % 1.18 %

~~While~~We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the ~~Bank believes it~~availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has ~~established its existing allowances for loan losses~~been to acquire non-maturity deposits from our retail accounts, acquire noninterest bearing demand deposits from our commercial customers and use our borrowing availability to fund growth in ~~accordance with U.S. GAAP, there can be no assurance that bank regulators,~~assets. Our liquidity policy permits the purchase of brokered deposits in ~~reviewing the Bank’s loan portfolio, will~~an amount not ~~request the Bank~~ to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is appropriate or that increased provisions will not be necessary should the credit qualityexceed 15% of the ~~loans deteriorate. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.~~

Based on management’s assessment of loan quality and current economic conditions, the Company believes that its allowance for loan losses was appropriate to absorb the probable incurred losses and inherent risks of loss in the loan portfolio at September 30, 2017.

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~~Deposits and Other Borrowings~~

~~As indicated in the table below,~~Bank's total deposits ~~were $3.32 billion at September 30, 2017, an increase~~as a secondary source for funding.

At March 31, 2023, we had $52.3 million in brokered deposits, which constituted 0.90% of ~~$91.2 million, or 2.8%, from $3.23 billion at December 31, 2016.~~

September 30, 2017 December 31, 2016
Balance % of Total Balance % of Total
(Dollars in thousands)
Noninterest bearing demand deposits $ 916,265
27.6 % $ 882,091
27.3 %
Interest bearing demand deposits 1,031,449
31.0
963,821
29.8
Money market accounts 480,899
14.5
523,875
16.2
Savings accounts 497,024
15.0
502,460
15.6
Total non-maturity deposits 2,925,637
88.1
2,872,247
88.9
Certificates of deposit 395,181
11.9
357,401
11.1
Total deposits $ 3,320,818
100.0 % $ 3,229,648
100.0 %

Non-maturity deposits (total deposits less certificates of deposit) increased $53.4 million, or 1.9%, to $2.93 billion at September 30, 2017 from $2.87 billion at December 31, 2016. Certificate of deposit accounts increased $37.8 million, or 10.6%, to $395.2 million at September 30, 2017 from $357.4 million at December 31, 2016 due primarily to the addition of $44.1 million of brokered certificates of deposit, which were used to supplement deposit growth in the funding of loan growth. Based on the change in the mix and volume of deposits, the percentage of certificates of deposit to total ~~deposits increased to 11.9% at September 30, 2017 from 11.1% at December 31, 2016.~~

deposits. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. The Bank is utilizing securities sold under agreement to repurchase as a supplement to its funding sources. Our repurchase agreements are secured by available for sale investment securities. At September 30, 2017, the Bank had securities sold under agreement to repurchase of $28.7 million, an increase of $6.6 million, or 29.7%, from $22.1 million at December 31, 2016. The increase was the result of customer activity during the period.

The Company also has junior subordinated debentures with a par value of $25.0 million which pay quarterly interest based on three-month LIBOR plus 1.56%. The debentures mature in 2037. The balance of the junior subordinated debentures was $19.9 million at September 30, 2017, which reflects the fair value of the debentures established during the Washington Banking Merger, adjusted for the accretion of discount from purchase accounting fair value adjustment.

At September 30, 2017, the Bank maintained credit facilities with the FHLB of Des Moines for $662.4 million and credit facilities with the Federal Reserve Bank of San Francisco for $50.6 million. The Company had FHLB advances outstanding of $117.4 million and $79.6 million at September 30, 2017 and December 31, 2016, respectively. The average cost of the FHLB advances during the nine months ended September 30, 2017 was1.09%. The Bank also maintains lines of credit with four correspondent banks to purchase federal funds totaling $90.0 million as of September 30, 2017. There were no federal funds purchased as of September 30, 2017 or December 31, 2016.

We are required to maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, satisfy other financial commitments and fund operations. We generally maintain sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, 2017, cash and cash equivalents totaled $111.3 million, or 2.7% of total assets. The fair value of investment securities available for sale totaled $800.1 million at September 30, 2017 of which $257.0 million were pledged to secure public deposits or borrowing arrangements. The fair value of investment securities available for sale that were not pledged totaled $543.1 million, or 13.4%, of total assets at September 30, 2017. The fair value of investment securities available for sale with maturities of one year or less were $6.6 million, or 0.2%, of total assets at September 30, 2017.

~~Liquidity and Cash Flows~~

Our primary sources of funds are customer and local government deposits, loan principal and interest payments, loan sales and interest earned on and proceeds from sales and maturities of investment securities. These funds, together with retained earnings, equity and other borrowed funds, are used to make loans, acquire investment

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~~securities and other assets, and fund continuing operations.~~ While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and ~~competition.~~competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.

~~Heritage Bank:~~

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The ~~principal objective~~following table summarizes the Company's available liquidity as of the Bank’s liquidity management program is to maintain the ability to meet day-to-day cash flow requirements of its customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayment and maturities of loans, the Bank can utilize established credit facilities and lines with correspondent banks or sale of investment securities.date indicated:

~~Heritage Financial Corporation:~~ The Company is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all of the Company’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. However, management believes that such restrictions will not have an adverse impact on the ability of the Company to meets its ongoing cash obligations. At September 30, 2017, the Company (on an unconsolidated basis) had cash and cash equivalents and investment


	March 31, 2023
	Total Available		Amount Used		Net Availability
	(Dollars in thousands)
Internal Sources
Cash and cash equivalents	$	301,481	$	—	$	301,481
Unencumbered investment securities available for sale(1)	1,116,013		—		1,116,013
External Sources					—
Federal Home Loan Bank (FHLB) borrowing availability(2)	1,197,964		383,100		814,864
Federal Reserve Bank (FRB) borrowing availability(3)	640,635		—		640,635
Fed funds line borrowing availability with correspondent banks	215,000		—		215,000
Total liquidity	$	3,471,093	$	383,100	$	3,087,993

(1) Investment securities available for sale ~~with no stated maturities~~at fair value.

(2) Includes FHLB borrowing availability of ~~$11.6 million.~~$1.20 billion at March 31, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.10 billion.

~~Consolidated Cash Flows:~~ As(3) Includes the Discount Window and Bank Term Funding Program

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our capital resources since the information disclosed in our 2022 Annual Form 10-K. We are not aware of any reasonably likely material changes in the ~~Condensed Consolidated Statements~~mix and relative cost of ~~Cash Flows, net cash provided by operating activities was $53.8 million for~~such resources.

Critical Accounting Estimates

Our critical accounting estimates are described in detail in the ~~nine~~"Critical Accounting Estimates" section within Item 7 of our 2022 Annual Form the Form 10-K. The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's critical accounting estimates include estimates of the ACL on loans, the ACL on unfunded commitments and goodwill. There have been no material changes in these estimates during the three months ended ~~September 30, 2017,~~March 31, 2023.

Reconciliations of Non-GAAP Measures

This Form 10-Q contains certain financial measures not presented in accordance with GAAP in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this Form 10-Q because it believes they provide useful and ~~primarily consisted~~comparative information to assess trends in the Company’s performance and asset quality and to facilitate comparison of ~~net~~its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.

The Company believes presenting loan yield excluding the effect of discount accretion on acquired loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet. Incremental accretion on acquired loans represents the amount of interest income recorded on acquired loans in excess of ~~$31.8 million, net proceeds from origination and sale of loans held for sale of $2.2 million and net change~~the contractual stated interest rate in ~~accrued interest receivable, prepaid expenses and other assets, accrued expenses and other liabilities of $8.3 million. During~~ the ~~nine months ended September 30, 2017, net cash used in investing activities was $169.9 million, which consisted primarily of net~~individual loan originations of $178.8 million, investment in low income housing tax credit partnerships of $8.5 million and net proceeds from purchase and sale of investment securities available for sale of $3.4 million. Net cash provided by financing activities was $123.6 million for the nine months ended September 30, 2017, and primarily consisted of a net increase in deposits of $91.2 million, net FHLB advances of $37.8 million and a net increase in securities sold under agreements to repurchase of $6.6 million, offset partially by cash dividends on common stock of $11.4 million during the period.

~~Capital and Capital Requirements~~

Stockholders’ equity at September 30, 2017 was $507.6 million compared with $481.8 million at December 31, 2016. During the nine months ended September 30, 2017, the Company realized net income of $31.8 million, declared cash dividends of $11.4 million, recorded other comprehensive income of $4.4 million, recognized stock-based compensation expense of $1.6 million, and recorded a net decrease to common stocknotes due to ~~common stock repurchases~~incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and ~~exercises~~the fair value of ~~stock options, net~~acquired loans at the acquisition date, or as modified by the adoption of ~~tax, of $515,000~~.

~~Pursuant to minimum capital requirements~~ASU 2016-13. The purchased discount is accreted into income over the remaining life of the ~~FDIC effective~~loan. The impact of incremental accretion on ~~January 1, 2015, all FDIC-insured financial institutions, including Heritage Bank, are required~~loan yield will change during any period based on the volume of prepayments, but it is expected to ~~maintain~~decrease over time as the balance of the acquired loans decreases. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that have substantially decreased within a minimum common equity Tier 1 risk-based capital to risk-weighted assets ratio of 4.5%, a minimum Tier 1 leverage ratio to average assets of 4.0% and minimum risk-based capital ratios of Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets of 6.0% and 8.0%, respectively.short time frame.

As of September 30, 2017 and December 31, 2016, the most recent regulatory notifications categorized Heritage 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 provides our capital requirements and actual results.


	Three Months Ended March 31,
	2023		2022
	(Dollars in thousands)
Loan yield, excluding SBA PPP Loans and Incremental Accretion on Acquired Loans, annualized:
Interest and fees on loans (GAAP)	$	50,450	$	41,025
Exclude interest and fees on SBA PPP loans	(26)		(3,081)

Table of Contents


	Three Months Ended March 31,
	2023			2022
	(Dollars in thousands)
Exclude incremental accretion on acquired loans	(253)			(584)
Adjusted interest and fees on loans (non-GAAP)	$	50,171		$	37,360

Average loans receivable, net (GAAP)	$	4,039,395		$	3,773,325
Exclude average SBA PPP loans	(1,071)			(109,594)
Adjusted average loans receivable, net (non-GAAP)	$	4,038,324		$	3,663,731

Loan yield, annualized (GAAP)	5.07		%	4.41		%
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans, annualized (non-GAAP)	5.04		%	4.14		%

Minimum Requirements Well-Capitalized Requirements Actual
(Dollars in thousands)
As of September 30, 2017:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets $ 151,086
4.5 % N/A
N/A
$ 383,546
11.4 %
Tier 1 leverage capital to average assets 155,761
4.0
N/A
N/A
403,444
10.4
Tier 1 capital to risk-weighted assets 201,448
6.0
N/A
N/A
403,444
12.0
Total capital to risk-weighted assets 268,598
8.0
N/A
N/A
435,119
13.0
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets 150,874
4.5
$ 217,929
6.5 % 388,852
11.6
Tier 1 leverage capital to average assets 155,582
4.0
194,478
5.0
388,852
10.0
Tier 1 capital to risk-weighted assets 201,165
6.0
268,221
8.0
388,852
11.6
Total capital to risk-weighted assets 268,221
8.0
335,276
10.0
420,422
12.5

As of December 31, 2016:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets $ 142,688
4.5 % N/A
N/A
$ 362,350
11.4 %
Tier 1 leverage capital to average assets 148,144
4.0
N/A
N/A
381,989
10.3
Tier 1 capital to risk-weighted assets 190,250
6.0
N/A
N/A
381,989
12.0
Total capital to risk-weighted assets 253,667
8.0
N/A
N/A
413,320
13.0
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets 142,573
4.5
$ 205,938
6.5 % 369,915
11.7
Tier 1 leverage capital to average assets 148,024
4.0
185,030
5.0
369,915
10.0
Tier 1 capital to risk-weighted assets 190,097
6.0
253,462
8.0
369,915
11.7
Total capital to risk-weighted assets 253,462
8.0
316,828
10.0
401,168
12.7

Although new capital requirements were effective on January 1, 2015, certain provisions of the new rule will be phased-in from the effective date through 2019, including, among others, a new capital conservation buffer requirement, which requires financial institutions to maintain a common equity capital ratio more than 2.5% above the required minimum levels in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments based on percentages of eligible retained income that could be utilized for such actions. The new capital conservation buffer requirement began to be phased-in on January 1, 2016 at 0.625% of risk-weighted assets and will continue to increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. At September 30, 2017, the capital conservation buffer was 5.07% and 4.65% for the Company and the Bank, respectively, and the minimum conservation buffer requirement was 1.25%.

Quarterly, the Company reviews the potential payment of cash dividends to its common shareholders. The timing and amount of cash dividends paid on our common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. 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. On October 25, 2017, the Company’s Board of Directors declared a regular dividend of $0.13 per common share and a special dividend of $0.10 per common share payable on November 22, 2017 to shareholders of record on November 8, 2017.

~~Table of Contents~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through our exposure to market interest rates, equity prices and credit spreads. Our ~~results of operations are highly dependent upon our ability to manage interest rate risk. We consider~~primary market risk is interest rate risk, ~~to be a significant~~which is the risk of loss of net interest income or net interest margin resulting from changes in market ~~risk that could have a material effect on our financial condition and results of operations.~~interest rates. Interest rate risk ~~is measured~~results primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and ~~assessed~~extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on ~~a quarterly basis. In~~ our ~~opinion, there has not been a material change~~assets and the interest paid on our liabilities. Management regularly reviews our exposure to changes in ~~our~~interest rates. Among the factors considered are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and repricing periods. The risk committee of the Board of Directors oversees market risk management, including the monitoring of risk measures and limits and policy guidelines, for the amount of interest rate risk ~~exposure since~~and its effect on net interest income and capital.

Neither we, nor the ~~information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.~~

~~We do not~~Bank, maintain a trading account for any class of financial instrument, nor do we, or the Bank, engage in hedging activities or purchase ~~high-risk~~high risk derivative instruments. Moreover, neither we, ~~have no material~~nor the Bank, are subject to foreign currency exchange rate risk or commodity price risk.

Net interest income simulation

An income simulation model is the primary tool we use to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Modeling the sensitivity of net interest income is highly dependent on numerous assumptions incorporated into the modeling process. Key assumptions in the model include prepayment speeds on loans and investment securities, repricing betas on non-maturity deposits, and pricing on investment securities, loans, and borrowings. In order to measure the interest rate risk sensitivity, this simulation model uses a “no balance sheet growth” assumption and assumes an instantaneous and sustained uniform change in market interest rates at all maturities. These assumptions are inherently uncertain and, as a result, the net interest income projections should be viewed as an estimate of the net interest income sensitivity at the time of the analysis. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

Based on the results of the simulation model, the following table presents the change in our net interest income as a result of parallel rate shock scenarios for the presented periods after the dates shown:


	March 31, 2023				December 31, 2022
	Amount		% Change in Net Interest Income		Amount		% Change in Net Interest Income
	(Dollars in thousands)
Modeled increase in market interest rates of 100 basis points
Increase in net interest income in Year 1	$	2,198	0.9	%	$	5,113	2.0	%
Increase in net interest income in Year 2	7,871		3.1		11,147		4.1
Modeled increase in market interest rates of 200 basis points
Increase in net interest income in Year 1	2,412		1.0		8,181		3.2
Increase in net interest income in Year 2	13,218		5.2		19,889		7.3

Table of Contents


	March 31, 2023				December 31, 2022
	Amount		% Change in Net Interest Income		Amount		% Change in Net Interest Income
	(Dollars in thousands)
Modeled decrease in market interest rates of 100 basis points
Decrease in net interest income in Year 1	(2,011)		(0.8)		(5,433)		(2.1)
Decrease in net interest income in Year 2	(6,425)		(2.5)		(10,534)		(3.9)
Modeled decrease in market interest rates of 200 basis points
Decrease in net interest income in Year 1	(7,879)		(3.3)		(16,840)		(6.6)
Decrease in net interest income in Year 2	$	(19,686)	(7.7)	%	$	(29,942)	(11.0)	%

These scenarios are based on market interest rates as of the last day of a reporting period published by independent sources that are actively traded in the open market. The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of reprice characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and actual results will differ, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower net interest income.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and ~~procedure~~procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and the Company’s Disclosure Committee as of the end of the period covered by this quarterly report. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of ~~September 30, 2017 are~~March 31, 2023 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act iswas (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the ~~quarter~~three months ended ~~September 30, 2017,~~March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~Heritage and Heritage~~Neither the Company nor the Bank ~~are not~~is a party to any material pending legal proceedings other than ordinary routine litigation incidental to the business of the Bank.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors set forth in ~~Part I.~~ Item 1A of the Company’s 2022 Annual ~~Report on~~ Form ~~10-K for the year ended December 31, 2016.~~10-K.

~~Table of Contents~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

Table of Contents

The following table provides information about repurchases of common stock by the Company ~~has had various~~during the three months ended March 31, 2023:


Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share (1)		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs (2)
January 1, 2023—January 31, 2023	—	$	—	9,986,863	638,214
February 1, 2023— February 28, 2023	40	28.28		9,986,863	638,214
March 1, 2023—March 31, 2023	115,039	22.83		10,075,218	549,859
Total	115,079	$	22.83

(1)Of the common shares repurchased by the Company between January 1, 2023 and March 31, 2023, a total of 26,724 shares represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units and were not repurchased pursuant to the publicly announced stock repurchase ~~programs since~~program.

(2)On March ~~1999. On October 23, 2014,~~12, 2020 the Company's Board of Directors ~~authorized~~announced the repurchase of up to 5% of the Company's outstanding common shares, or ~~approximately 1,513,000~~1,799,054 shares, under the ~~eleventh~~twelfth stock repurchase plan. The ~~number, timing~~repurchase program does not have a set expiration date and ~~price~~will expire upon repurchase of the full amount of authorized shares, ~~repurchased will depend on business and market conditions, and other factors, including opportunities to deploy~~unless terminated sooner by the ~~Company's capital.~~

board of directors. The ~~following table provides total repurchased shares and average share prices under the applicable plan for the periods indicated:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016 Plan Total (1)
Eleventh Plan
Repurchased shares —
38,000
—
138,000
579,996
Stock repurchase average share price $ —
$ 17.46
$ —
$ 17.16
$ 16.76


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

In addition to the stock repurchases disclosed in the table above, the Company repurchased shares to pay withholding taxes on the vesting of restricted stock. During the three and nine months ended September 30, 2017, the Company repurchased 344 and 27,711 shares of common stockrepurchase program may be suspended or discontinued at an average price per share of $25.80 and $24.61 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods. During the three and nine months ended September 30, 2016, the Company repurchased 5,276 and 29,206 shares of common stock at an average price per share of $18.64 and $17.77 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods.

~~The following table sets forth information about~~any time by the Company’s ~~purchases~~board of ~~its outstanding common stock during the quarter ended September 30, 2017.~~directors.

Period
Total Number
of Shares
Purchased(1)

Average Price
Paid Per
Share(1)

Total Number of Shares Purchased as
Part of Publicly
Announced Plans or Programs

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
July 1, 2017— July 31, 2017 —
$ —
7,893,389
935,034
August 1, 2017— August 31, 2017 —
—
7,893,389
935,034
September 1, 2017— September 30, 2017 344
25.80
7,893,389
935,034
Total 344
$ 25.80
7,893,389
935,034


~~(1)~~	~~All of the common shares repurchased by the Company between July 1, 2017 and September 30, 2017 were shares of restricted stock that represented the cancellation of stock to pay withholding taxes.~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

~~Table of Contents~~

ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

101.INS

XBRL Instance Document (1)

101.SCH

XBRL Taxonomy Extension Schema Document (1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

(1) Filed herewith.

Incorporated by Reference
Exhibit No. Description of Exhibit Form Exhibit Filing Date/Period End Date

2.5

Agreement and Plan of Merger with Puget Sound Bank
8-K 2.1 7/27/17

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101
The following financial information from Heritage Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 is formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity, (v) the Unaudited Condensed Consolidated Statements of Cash Flows and (vi) the Unaudited Notes to Condensed Consolidated Financial Statements.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	HERITAGE FINANCIAL CORPORATION
Date:
~~Date:~~May 4, 2023		/S/ JEFFREY J. DEUEL
~~November 9, 2017~~		~~/S/ BRIAN L. VANCE~~Jeffrey J. Deuel
		~~Brian L. Vance~~
	President and Chief Executive Officer
Date:		~~(Duly Authorized Officer)~~
May 4, 2023
~~Date:~~
~~November 9, 2017~~	/S/ DONALD J. HINSON
		Donald J. Hinson
		Executive Vice President and Chief Financial Officer
	~~(Principal Financial and Accounting Officer)~~

7047



	September 30, 2017			December 31, 2016
	(Dollars in thousands)
ASSETS
Cash on hand and in banks	$	82,905		$	77,117
Interest earning deposits	28,353			26,628
Cash and cash equivalents	111,258			103,745
Investment securities available for sale, at fair value	800,060			794,645
Loans held for sale	5,368			11,662
Loans receivable, net	2,797,513			2,640,749
Allowance for loan losses	(31,400		)	(31,083		)
Total loans receivable, net	2,766,113			2,609,666
Other real estate owned	523			754
Premises and equipment, net	60,457			63,911
Federal Home Loan Bank stock, at cost	9,343			7,564
Bank owned life insurance	71,474			70,355
Accrued interest receivable	12,295			10,925
Prepaid expenses and other assets	87,728			79,351
Other intangible assets, net	6,408			7,374
Goodwill	119,029			119,029
Total assets	$	4,050,056		$	3,878,981
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	$	3,320,818		$	3,229,648
Federal Home Loan Bank advances	117,400			79,600
Junior subordinated debentures	19,936			19,717
Securities sold under agreement to repurchase	28,668			22,104
Accrued expenses and other liabilities	55,626			46,149
Total liabilities	3,542,448			3,397,218
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016	—			—
Common stock, no par value, 50,000,000 shares authorized; 29,929,106 and 29,954,931 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	360,113			359,060
Retained earnings	145,677			125,309
Accumulated other comprehensive income (loss), net	1,818			(2,606		)
Total stockholders’ equity	507,608			481,763
Total liabilities and stockholders’ equity	$	4,050,056		$	3,878,981



	September 30, 2017
	Pass		OAEM		Substandard		Doubtful/Loss		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	625,387	$	11,067	$	29,128	$	—	$	665,582
Owner-occupied commercial real estate	576,313		8,305		17,620		—		602,238
Non-owner occupied commercial real estate	897,677		15,790		16,721		—		930,188
Total commercial business	2,099,377		35,162		63,469		—		2,198,008
One-to-four family residential	79,882		—		1,540		—		81,422
Real estate construction and land development:
One-to-four family residential	48,101		273		3,077		—		51,451
Five or more family residential and commercial properties	121,854		722		405		—		122,981
Total real estate construction and land development	169,955		995		3,482		—		174,432
Consumer	335,073		—		5,045		525		340,643
Gross loans receivable	$	2,684,287	$	36,157	$	73,536	$	525	$	2,794,505



	September 30, 2017
	Recorded Investment With No Specific Valuation Allowance		Recorded Investment With Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Commercial business:
Commercial and industrial	$	3,131	$	8,581	$	11,712	$	12,060	$	1,254
Owner-occupied commercial real estate	1,082		4,676		5,758		6,068		767
Non-owner occupied commercial real estate	4,749		6,034		10,783		10,927		895
Total commercial business	8,962		19,291		28,253		29,055		2,916
One-to-four family residential	—		304		304		311		96
Real estate construction and land development:
One-to-four family residential	1,347		—		1,347		2,305		—
Five or more family residential and commercial properties	—		658		658		658		39
Total real estate construction and land development	1,347		658		2,005		2,963		39
Consumer	160		274		434		457		60
Total	$	10,469	$	20,527	$	30,996	$	32,786	$	3,111



	September 30, 2017				December 31, 2016
	Performing TDRs		Nonaccrual TDRs		Performing TDRs		Nonaccrual TDRs
	(In thousands)
TDR loans	$	20,044	$	5,903	$	22,288	$	6,900
Allowance for loan losses on TDR loans	2,136		555		1,965		437



	September 30, 2017				December 31, 2016
	Outstanding Principal		Recorded Investment		Outstanding Principal		Recorded Investment
	(In thousands)
Commercial business:
Commercial and industrial	$	9,220	$	5,001	$	13,067	$	9,317
Owner-occupied commercial real estate	14,059		12,492		17,639		15,973
Non-owner occupied commercial real estate	15,026		13,058		25,037		23,360
Total commercial business	38,305		30,551		55,743		48,650
One-to-four family residential	4,426		3,983		5,120		4,905
Real estate construction and land development:
One-to-four family residential	2,928		1,749		2,958		2,123
Five or more family residential and commercial properties	2,392		2,284		2,614		2,488
Total real estate construction and land development	5,320		4,033		5,572		4,611
Consumer	3,998		5,129		5,296		6,282
Gross PCI loans	$	52,049	$	43,696	$	71,731	$	64,448



	Balance at Beginning of Period		Charge-offs			Recoveries		Provision for Loan Losses			Balance at End of Period
	(In thousands)
Three Months Ended September 30, 2017
Commercial business:
Commercial and industrial	$	10,651	$	(3	)	$	4	$	(772	)	$	9,880
Owner-occupied commercial real estate	4,154		(1,494		)	4		1,397			4,061
Non-owner occupied commercial real estate	7,709		—			—		(415		)	7,294
Total commercial business	22,514		(1,497		)	8		210			21,235
One-to-four family residential	1,073		(15		)	—		(21		)	1,037
Real estate construction and land development:
One-to-four family residential	821		(556		)	191		337			793
Five or more family residential and commercial properties	1,666		—			—		(271		)	1,395
Total real estate construction and land development	2,487		(556		)	191		66			2,188
Consumer	5,710		(478		)	112		453			5,797
Unallocated	967		—			—		176			1,143
Total	$	32,751	$	(2,546	)	$	311	$	884		$	31,400

Nine Months Ended September 30, 2017
Commercial business:
Commercial and industrial	$	10,968	$	(361	)	$	679	$	(1,406	)	$	9,880
Owner-occupied commercial real estate	3,661		(1,579		)	155		1,824			4,061
Non-owner occupied commercial real estate	7,753		—			—		(459		)	7,294
Total commercial business	22,382		(1,940		)	834		(41		)	21,235
One-to-four family residential	1,015		(15		)	1		36			1,037
Real estate construction and land development:
One-to-four family residential	797		(556		)	201		351			793
Five or more family residential and commercial properties	1,359		—			—		36			1,395
Total real estate construction and land development	2,156		(556		)	201		387			2,188
Consumer	5,024		(1,419		)	329		1,863			5,797
Unallocated	506		—			—		637			1,143
Total	$	31,083	$	(3,930	)	$	1,365	$	2,882		$	31,400



	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		PCI Loans		Total Allowance for Loan Losses
	(In thousands)
Commercial business:
Commercial and industrial	$	1,254	$	7,589	$	1,037	$	9,880
Owner-occupied commercial real estate	767		2,434		860		4,061
Non-owner occupied commercial real estate	895		5,389		1,010		7,294
Total commercial business	2,916		15,412		2,907		21,235
One-to-four family residential	96		740		201		1,037
Real estate construction and land development:
One-to-four family residential	—		568		225		793
Five or more family residential and commercial properties	39		1,259		97		1,395
Total real estate construction and land development	39		1,827		322		2,188
Consumer	60		4,991		746		5,797
Unallocated	—		1,143		—		1,143
Total	$	3,111	$	24,113	$	4,176	$	31,400


	March 31, 2023			December 31, 2022
	Notional Amounts		Estimated Fair Value	Notional Amounts		Estimated Fair Value
	(In thousands)
Non-hedging interest rate derivatives
Interest rate swap asset (1)	$	288,320	24,498	$	288,785	$	30,107
Interest rate swap liability (1)	288,320		(24,498)	288,785		(30,107)


~~(1)~~	(1)Represents ~~the effect of the assumed exercise of stock options and vesting of restricted stock units.~~



	Three Months Ended September 30, 2017 ⁽¹⁾			Nine Months Ended September 30, 2017 ⁽¹⁾
	(In thousands)
Balance of AOCI at the beginning of period	$	1,557		$	(2,606	)
Other comprehensive income before reclassification	289			4,528
Amounts reclassified from AOCI for gain on sale of investment securities included in net income	(28		)	(104		)
Net current period other comprehensive income	261			4,424
Balance of AOCI at the end of period	$	1,818		$	1,818



	Three Months Ended September 30, 2016 ⁽¹⁾			Nine Months Ended September 30, 2016 ⁽¹⁾
	(In thousands)
Balance of AOCI at the beginning of period	$	12,343		$	2,559
Other comprehensive income before reclassification	(1,055		)	9,223
Amounts reclassified from AOCI for gain on sale of investment securities available for sale included in net income	(224		)	(718		)
Net current period other comprehensive income	(1,279		)	8,505
Balance of AOCI at the end of period	$	11,064		$	11,064



	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2015	79,408		$	14.19
Exercised	(27,867	)	14.37
Forfeited or expired	(4,200	)	16.80
Outstanding at September 30, 2016	47,341		$	13.85	2.80	$	194

Outstanding at December 31, 2016	37,495		$	13.77
Exercised	(12,304	)	12.92
Forfeited or expired	(1,308	)	13.53
Outstanding, vested and expected to vest and exercisable at September 30, 2017	23,883		$	14.23	2.45	$	365



	Shares		Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2015	264,521		$	15.92
Granted	119,939		17.53
Vested	(111,357	)	15.62
Forfeited	(9,216	)	16.57
Nonvested at September 30, 2016	263,887		$	16.76

Nonvested at December 31, 2016	261,296		$	16.80
Granted	—		—
Vested	(107,202	)	16.49
Forfeited	(10,418	)	16.80
Nonvested at September 30, 2017	143,676		$	17.02



Shares	Expected Term in Years	Weighted-Average Risk Free Interest Rate		Expected Volatility		Expected Dividend Yield		Weighted-Average Fair Value
6,089	2.85	1.40	%	21.8	%	—	%	$	24.39


			Fair Value at March 31, 2023
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	220	$	119	$	—	$	—	$	119












Total assets measured at fair value on a nonrecurring basis	$	220	$	119	$	—	$	—	$	119



	Basis⁽¹⁾		Fair Value at September 30, 2017
	Basis⁽¹⁾		Total		Level 1		Level 2		Level 3		Net Losses Recorded in Earnings During the Three Months Ended September 30, 2017		Net Losses (Gains) Recorded in Earnings During the Nine Months Ended September 30, 2017
	(In thousands)
Impaired loans:
Commercial business:
Commercial and industrial	$	172	$	163	$	—	$	—	$	163	$	—	$	7
Owner-occupied commercial real estate	182		179		—		—		179		—		8
Total commercial business	354		342		—		—		342		—		15
Total assets measured at fair value on a nonrecurring basis	$	354	$	342	$	—	$	—	$	342	$	—	$	15



	Basis⁽¹⁾		Fair Value at December 31, 2016
	Basis⁽¹⁾		Total		Level 1		Level 2		Level 3		Net Losses (Gains) Recorded in Earnings During the Three Months Ended September 30, 2016			Net Losses (Gains) Recorded in Earnings During the Nine Months Ended September 30, 2016
	(In thousands)
Impaired loans:
Commercial business:
Commercial and industrial	$	205	$	200	$	—	$	—	$	200	$	24		$	25
Owner-occupied commercial real estate	780		603		—		—		603		23			(2		)
Total commercial business	985		803		—		—		803		47			23
Real estate construction and land development:
One-to-four family residential	828		822		—		—		822		(13		)	(26		)
Total real estate construction and land development	828		822		—		—		822		(13		)	(26		)
Consumer	16		9		—		—		9		—			—
Total assets measured at fair value on a nonrecurring basis	$	1,829	$	1,634	$	—	$	—	$	1,634	$	34		$	(3	)



	September 30, 2017
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	111,258	$	111,258	$	111,258	$	—	$	—
Investment securities available for sale	800,060		800,060		150		799,910		—
Federal Home Loan Bank stock	9,343		N/A		N/A		N/A		N/A
Loans held for sale	5,368		5,553		—		5,553		—
Total loans receivable, net	2,766,113		2,772,338		—		—		2,772,338
Accrued interest receivable	12,295		12,295		3		3,770		8,522
Derivative assets - interest rate swaps	3,308		3,308		—		3,308		—
Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts	2,925,637		2,925,637		2,925,637		—		—
Certificate of deposit accounts	395,181		394,164		—		394,164		—
Federal Home Loan Bank advances	117,400		117,400		—		117,400		—
Securities sold under agreement to repurchase	28,668		28,668		28,668		—		—
Junior subordinated debentures	19,936		15,250		—		—		15,250
Accrued interest payable	148		148		42		73		33
Derivative liabilities - interest rate swaps	3,308		3,308		—		3,308		—



	Minimum Requirements				Well-Capitalized Requirements				Actual
	(Dollars in thousands)
As of September 30, 2017:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets	$	151,086	4.5	%	N/A		N/A		$	383,546	11.4	%
Tier 1 leverage capital to average assets	155,761		4.0		N/A		N/A		403,444		10.4
Tier 1 capital to risk-weighted assets	201,448		6.0		N/A		N/A		403,444		12.0
Total capital to risk-weighted assets	268,598		8.0		N/A		N/A		435,119		13.0
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets	150,874		4.5		$	217,929	6.5	%	388,852		11.6
Tier 1 leverage capital to average assets	155,582		4.0		194,478		5.0		388,852		10.0
Tier 1 capital to risk-weighted assets	201,165		6.0		268,221		8.0		388,852		11.6
Total capital to risk-weighted assets	268,221		8.0		335,276		10.0		420,422		12.5

As of December 31, 2016:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets	$	142,688	4.5	%	N/A		N/A		$	362,350	11.4	%
Tier 1 leverage capital to average assets	148,144		4.0		N/A		N/A		381,989		10.3
Tier 1 capital to risk-weighted assets	190,250		6.0		N/A		N/A		381,989		12.0
Total capital to risk-weighted assets	253,667		8.0		N/A		N/A		413,320		13.0
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets	142,573		4.5		$	205,938	6.5	%	369,915		11.7
Tier 1 leverage capital to average assets	148,024		4.0		185,030		5.0		369,915		10.0
Tier 1 capital to risk-weighted assets	190,097		6.0		253,462		8.0		369,915		11.7
Total capital to risk-weighted assets	253,462		8.0		316,828		10.0		401,168		12.7



Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share(1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2017— July 31, 2017	—	$	—	7,893,389	935,034
August 1, 2017— August 31, 2017	—	—		7,893,389	935,034
September 1, 2017— September 30, 2017	344	25.80		7,893,389	935,034
Total	344	$	25.80	7,893,389	935,034