UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, ~~2022~~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

HERITAGE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-1857900

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

201 Fifth Avenue SW,

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging 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 ☒

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

As of ~~August 1, 2022,~~July 25, 2023, there were ~~35,103,929~~35,047,800 shares of the registrant's common stock, no par value per share, outstanding.

Table of ~~Content~~Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

June 30, ~~2022~~2023

TABLE OF CONTENTS


			Page
GLOSSARY OF ACRONYMS, ABBREVIATIONS AND TERMS			3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			3

PART I.	FINANCIAL INFORMATION		5
ITEM 1.	FINANCIAL STATEMENTS		5
	CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF JUNE 30, ~~2022~~2023 AND DECEMBER 31, ~~2021~~2022		5
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, ~~2022~~2023 AND ~~2021~~2022		6
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (~~LOSS~~)INCOME (LOSS) ~~INCOME~~(UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, ~~2022~~2023 AND ~~2021~~2022		7
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, ~~2022~~2023 AND ~~2021~~2022		8
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, ~~2022~~2023 AND ~~2021~~2022		10
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		12
	NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	12
	NOTE 2.	INVESTMENT SECURITIES	13
	NOTE 3.	LOANS RECEIVABLE	1516
	NOTE 4.	ALLOWANCE FOR CREDIT LOSSES ON LOANS	2324

	NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	2527
	NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	2527
	NOTE 7.	STOCKHOLDERS’ EQUITY	2628
	NOTE 8.	FAIR VALUE MEASUREMENTS	2729
	NOTE 9.	CASH RESTRICTION	3132
	NOTE 10.	COMMITMENTS AND CONTINGENCIES	3233

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3233
	OVERVIEW		3233
	RESULTS OF OPERATIONS		33
		~~AVERAGE BALANCES, YIELDS AND RATES PAID~~	3435
		NET INTEREST INCOME AND MARGIN OVERVIEW	3436
		PROVISION FOR CREDIT LOSSES OVERVIEW	3739
		NONINTEREST INCOME OVERVIEW	3840
		NONINTEREST EXPENSE OVERVIEW	3941
		INCOME TAX EXPENSE OVERVIEW	4042
	FINANCIAL CONDITION OVERVIEW		4043
		INVESTMENT ACTIVITIES OVERVIEW	4143
		LOAN PORTFOLIO OVERVIEW	4244
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	4346
		DEPOSITS OVERVIEW	4447
		BORROWINGS OVERVIEW	47
		STOCKHOLDERS' EQUITY OVERVIEW	4448
	REGULATORY REQUIREMENTS OVERVIEW		4448
	LIQUIDITY AND CAPITAL RESOURCES		4548
	CRITICAL ACCOUNTING POLICIES		4549
	~~RECONCILIATIONS OF NON-GAAP MEASURES~~	45
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		4649
ITEM 4.	CONTROLS AND PROCEDURES		4650
PART II.	OTHER INFORMATION		50

Table of ~~Content~~Contents


~~PART II.~~	~~OTHER INFORMATION~~	47
ITEM 1.	LEGAL PROCEEDINGS	4750
ITEM 1A.	RISK FACTORS	4750
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4750
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4751
ITEM 4.	MINE SAFETY DISCLOSURES	4751
ITEM 5.	OTHER INFORMATION	4751
ITEM 6.	EXHIBITS	4751
	SIGNATURES	4852

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.


~~2021~~2022 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022
ACL			Allowance for credit losses
AOCI			Accumulated other comprehensive income (loss), net

ASU			Accounting Standards Update
Bank			Heritage Bank
BTFP			Bank Term Funding Program
CECL			Current Expected Credit Loss
CMO			Collateralized Mortgage ~~Obligation~~Obligations
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~~FRB			Federal Reserve Bank of San Francisco
FHLB			Federal Home Loan Bank of Des Moines
GAAP			U.S. Generally Accepted Accounting Principles
LIBOR			London Interbank Offering Rate
LIHTC			Low-Income Housing Tax Credit
MBS			Mortgage-backed ~~security~~securities
PPP			Paycheck Protection Program
SBA			Small Business Administration
SEC			Securities and Exchange Commission
SM			Special Mention
SS			Substandard
TDR			Troubled debt restructured

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not 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 similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These statements relate to our financial condition, results of operations, beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance or 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

Table of Contents

results for future periods to differ materially from those expressed in

~~Table of Content~~

any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price ~~performance including,~~performance. These risks include, but are not limited to:

•potential adverse impacts to economic conditions nationally or in our local market areas, other markets where the ~~effect~~Company has lending relationships, or other aspects of the ~~COVID-19 pandemic,~~Company’s business operations or financial markets, including, onwithout limitation, as a result of employment levels, labor shortages and the ~~Company’s credit quality and business operations,~~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 its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;supply chain disruptions;

•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;

•~~changes~~higher inflation and the current and future monetary policies of the Federal Reserve in ~~general economic conditions, either nationally or in our market areas, including the risks of inflation;~~response thereto;

•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;

•~~risks related to acquiring assets in or entering markets in which we have not previously operated~~the transition away from LIBOR toward new interest rate benchmarks;

•the impact of repricing and ~~may not be familiar;~~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 ~~as a result of the COVID-19 Pandemic;~~

•~~implementing regulations,~~ changes in banking, securities, and tax law, regulatory policies and principles, or the interpretation of regulatory capital or other rules;

•our ability to attract and retain deposits;

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

•our ability to control operating costs and expenses;

•~~increases in premiums for deposit insurance;~~

•effects of critical accounting policies and judgments, including 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;

•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 ~~growth strategies;~~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;~~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 impact of bank failures or adverse developments at other banks and the related negative press about the banking industry in general on investor and depositor sentiment;

•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,~~services; and ~~the~~

•other risks detailed from time to time in our ~~filings~~reports filed with or furnished to the SEC including our ~~2021~~2022 Annual Form 10-K.

Table of ~~Content~~Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(In thousands, except shares)

June 30,
2022 December 31,
2021
ASSETS
Cash on hand and in banks $ 93,675 $ 61,377
Interest earning deposits 900,380 1,661,915
Cash and cash equivalents 994,055 1,723,292
Investment securities available for sale, at fair value, net (amortized cost of $1,267,715 and $883,832, respectively) 1,187,588 894,335
Investment securities held to maturity, at amortized cost, net (fair value of $559,312 and $376,331, respectively) 615,653 383,393
Total investment securities 1,803,241 1,277,728
Loans held for sale 1,311 1,476
Loans receivable 3,874,064 3,815,662
Allowance for credit losses on loans (39,696) (42,361)
Loans receivable, net 3,834,368 3,773,301
Premises and equipment, net 77,164 79,370
Federal Home Loan Bank stock, at cost 8,916 7,933
Bank owned life insurance 120,646 120,196
Accrued interest receivable 15,908 14,657
Prepaid expenses and other assets 211,350 183,543
Other intangible assets, net 8,569 9,977
Goodwill 240,939 240,939
Total assets $ 7,316,467 $ 7,432,412
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 6,330,190 $ 6,394,290
Junior subordinated debentures 21,326 21,180
Securities sold under agreement to repurchase 41,827 50,839
Accrued expenses and other liabilities 117,758 111,671
Total liabilities 6,511,101 6,577,980
Commitments and contingencies (Note 12)
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; 35,103,929 and 35,105,779 shares issued and outstanding, respectively 550,417 551,798
Retained earnings 316,732 293,238
Accumulated other comprehensive (loss) income, net (61,783) 9,396
Total stockholders’ equity 805,366 854,432
Total liabilities and stockholders’ equity $ 7,316,467 $ 7,432,412


	June 30, 2023		December 31, 2022
ASSETS
Cash on hand and in banks	$	73,464	$	74,295
Interest earning deposits	34,914		29,295
Cash and cash equivalents	108,378		103,590
Investment securities available for sale, at fair value, net (amortized cost of $1,402,144 and $1,460,033, respectively)	1,276,550		1,331,443
Investment securities held to maturity, at amortized cost, net (fair value of $664,810 and $673,434, respectively)	754,276		766,396
Total investment securities	2,030,826		2,097,839
Loans held for sale	752		—
Loans receivable	4,251,344		4,050,858
Allowance for credit losses on loans	(46,408)		(42,986)
Loans receivable, net	4,204,936		4,007,872

Premises and equipment, net	79,401		76,930
Federal Home Loan Bank stock, at cost	8,373		8,916
Bank owned life insurance	122,905		122,059
Accrued interest receivable	18,969		18,547
Prepaid expenses and other assets	293,950		296,181
Other intangible assets, net	5,981		7,227
Goodwill	240,939		240,939
Total assets	$	7,115,410	$	6,980,100
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	$	5,579,657	$	5,907,420
Deposits held for sale	15,886		17,420
Total deposits	5,595,543		5,924,840
Borrowings	450,000		—
Junior subordinated debentures	21,619		21,473
Securities sold under agreement to repurchase	38,215		46,597
Accrued expenses and other liabilities	190,300		189,297
Total liabilities	6,295,677		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; 35,047,800 and 35,106,697 shares issued and outstanding, respectively	550,103		552,397
Retained earnings	367,085		345,346
Accumulated other comprehensive loss, net	(97,455)		(99,850)
Total stockholders’ equity	819,733		797,893
Total liabilities and stockholders’ equity	$	7,115,410	$	6,980,100

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of ~~Content~~Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

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

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
INTEREST INCOME:
Interest and fees on loans $ 40,890 $ 50,750 $ 81,915 $ 100,274
Taxable interest on investment securities 7,607 4,050 13,610 7,584
Nontaxable interest on investment securities 893 947 1,753 1,905
Interest on interest earning deposits 2,342 263 3,048 438
Total interest income 51,732 56,010 100,326 110,201
INTEREST EXPENSE:
Deposits 1,413 1,524 2,837 3,252
Junior subordinated debentures 239 186 433 373
Other borrowings 32 35 64 73
Total interest expense 1,684 1,745 3,334 3,698
Net interest income 50,048 54,265 96,992 106,503
Reversal of provision for credit losses (1,204) (13,987) (4,781) (21,186)
Net interest income after reversal of provision for credit losses 51,252 68,252 101,773 127,689
NONINTEREST INCOME:
Service charges and other fees 2,391 2,067 4,687 3,959
Card revenue 2,332 2,338 4,773 4,435
Gain on sale of investment securities, net — — — 29
Gain on sale of loans, net 219 1,003 460 2,373
Interest rate swap fees 26 209 305 361
Bank owned life insurance income 764 717 2,459 1,373
Gain on sale of other assets, net — 724 204 746
Other income 1,284 1,239 2,666 3,272
Total noninterest income 7,016 8,297 15,554 16,548
NONINTEREST EXPENSE:
Compensation and employee benefits 21,778 21,803 43,030 44,004
Occupancy and equipment 4,171 4,091 8,502 8,545
Data processing 4,185 3,998 8,246 7,810
Marketing 344 567 610 1,080
Professional services 529 1,037 1,228 2,307
State/municipal business and use taxes 867 991 1,663 1,963
Federal deposit insurance premium 425 339 1,025 928
Amortization of intangible assets 704 797 1,408 1,594
Other expense 2,704 2,773 5,715 5,407
Total noninterest expense 35,707 36,396 71,427 73,638
Income before income taxes 22,561 40,153 45,900 70,599
Income tax expense 3,977 7,451 7,559 12,553
Net income $ 18,584 $ 32,702 $ 38,341 $ 58,046
Basic earnings per share $ 0.53 $ 0.91 $ 1.09 $ 1.61
Diluted earnings per share $ 0.52 $ 0.90 $ 1.08 $ 1.60
Dividends declared per share $ 0.21 $ 0.20 $ 0.42 $ 0.40
Average number of basic shares outstanding 35,110,334 35,994,740 35,102,572 35,961,032
Average number of diluted shares outstanding 35,409,524 36,289,464 35,412,722 36,268,861

amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
INTEREST INCOME:
Interest and fees on loans	$	53,623	$	40,890	$	104,073	$	81,915
Taxable interest on investment securities	14,774		7,607		29,431		13,610
Nontaxable interest on investment securities	520		893		1,106		1,753
Interest on interest earning deposits	1,154		2,342		2,126		3,048
Total interest income	70,071		51,732		136,736		100,326
INTEREST EXPENSE:
Deposits	8,607		1,413		13,135		2,837
Junior subordinated debentures	499		239		981		433
Securities sold under agreement to repurchase	63		32		110		64
Borrowings	5,078		—		6,844		—
Total interest expense	14,247		1,684		21,070		3,334
Net interest income	55,824		50,048		115,666		96,992
Provision for (reversal of) credit losses	1,909		(1,204)		3,734		(4,781)
Net interest income after provision for (reversal of) credit losses	53,915		51,252		111,932		101,773
NONINTEREST INCOME:
Service charges and other fees	2,682		2,577		5,306		5,051
Card revenue	2,123		2,146		4,123		4,409
Loss on sale of investment securities, net	—		—		(286)		—
Gain on sale of loans, net	101		219		150		460
Interest rate swap fees	115		26		168		305
Bank owned life insurance income	837		764		1,546		2,459
Gain on sale of other assets, net	—		—		2		204
Other income	1,423		1,284		4,530		2,666
Total noninterest income	7,281		7,016		15,539		15,554
NONINTEREST EXPENSE:
Compensation and employee benefits	24,781		21,778		50,317		43,030
Occupancy and equipment	4,666		4,171		9,558		8,502
Data processing	4,500		4,185		8,842		8,246
Marketing	441		344		843		610
Professional services	751		529		1,379		1,228
State/municipal business and use taxes	1,054		867		2,062		1,663
Federal deposit insurance premium	797		425		1,647		1,025

Amortization of intangible assets	623		704		1,246		1,408
Other expense	3,712		2,704		7,036		5,715
Total noninterest expense	41,325		35,707		82,930		71,427
Income before income taxes	19,871		22,561		44,541		45,900
Income tax expense	3,025		3,977		7,238		7,559
Net income	$	16,846	$	18,584	$	37,303	$	38,341
Basic earnings per share	$	0.48	$	0.53	$	1.06	$	1.09
Diluted earnings per share	$	0.48	$	0.52	$	1.06	$	1.08
Dividends declared per share	$	0.22	$	0.21	$	0.44	$	0.42
Average number of basic shares outstanding	35,058,155		35,110,334		35,083,133		35,102,572
Average number of diluted shares outstanding	35,126,590		35,409,524		35,348,268		35,412,722

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of ~~Content~~Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ~~INCOME~~ (Unaudited)

(In thousands)

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Net Income $ 18,584 $ 32,702 $ 38,341 $ 58,046
Change in fair value of investment securities available for sale, net of tax of $(7,638), $722, $(19,751) and $(2,482), respectively (27,397) 2,600 (70,879) (8,934)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(44), $0, $(83) and $0, respectively (158) — (300) —
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $0, $0, $0 and $(6), respectively — — — (23)
Other comprehensive (loss) income (27,555) 2,600 (71,179) (8,957)
Comprehensive (loss) income $ (8,971) $ 35,302 $ (32,838) $ 49,089


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net Income	$	16,846	$	18,584	$	37,303	$	38,341
Change in fair value of investment securities available for sale, net of tax of $(4,102), $(7,638), $415 and $(19,751), respectively	(14,595)		(27,397)		2,295		(70,879)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(18), $(44), $(34) and $(83), respectively	(63)		(158)		(123)		(300)
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax of $0, $0, $63 and $0, respectively	—		—		223		—
Other comprehensive (loss) income	(14,658)		(27,555)		2,395		(71,179)
Comprehensive income (loss)	$	2,188	$	(8,971)	$	39,698	$	(32,838)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of ~~Content~~Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(In thousands, except shares and per share amounts)


		Three Months Ended June 30, 2022										Three Months Ended June 30, 2023
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at March 31, 2022		35,102,372	$	550,096	$	305,581	$	(34,228)	$	821,449
Balance at March 31, 2023											Balance at March 31, 2023	35,108,120	$	550,869	$	358,010	$	(82,797)	$	826,082

Restricted stock units vested	Restricted stock units vested	22,737	—		—		—		—		Restricted stock units vested	38,138	—		—		—		—
Stock-based compensation expense	Stock-based compensation expense	—	843		—		—		843		Stock-based compensation expense	—	985		—		—		985
Common stock repurchased	Common stock repurchased	(21,180)	(522)		—		—		(522)		Common stock repurchased	(98,458)	(1,751)		—		—		(1,751)
Net income	Net income	—	—		18,584		—		18,584		Net income	—	—		16,846		—		16,846
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(27,555)		(27,555)		Other comprehensive loss, net of tax	—	—		—		(14,658)		(14,658)

Cash dividends declared on common stock ($0.21 per share)		—	—		(7,433)		—		(7,433)
Balance at June 30, 2022		35,103,929	$	550,417	$	316,732	$	(61,783)	$	805,366
Cash dividends declared on common stock ($0.22 per share)											Cash dividends declared on common stock ($0.22 per share)	—	—		(7,771)		—		(7,771)
Balance at June 30, 2023											Balance at June 30, 2023	35,047,800	$	550,103	$	367,085	$	(97,455)	$	819,733


		Six Months Ended June 30, 2022										Six Months Ended June 30, 2023
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			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
Balance at December 31, 2022											Balance at December 31, 2022	35,106,697	$	552,397	$	345,346	$	(99,850)	$	797,893

Restricted stock units vested	Restricted stock units vested	124,420	—		—		—		—		Restricted stock units vested	154,640	—		—		—		—
Stock-based compensation expense	Stock-based compensation expense	—	1,793		—		—		1,793		Stock-based compensation expense	—	2,084		—		—		2,084
Common stock repurchased	Common stock repurchased	(126,270)	(3,174)		—		—		(3,174)		Common stock repurchased	(213,537)	(4,378)		—		—		(4,378)
Net income	Net income	—	—		38,341		—		38,341		Net income	—	—		37,303		—		37,303
Other comprehensive loss, net of tax		—	—		—		(71,179)		(71,179)
Other comprehensive income, net of tax											Other comprehensive income, net of tax	—	—		—		2,395		2,395

Cash dividends declared on common stock ($0.42 per share)		—	—		(14,847)		—		(14,847)
Balance at June 30, 2022		35,103,929	$	550,417	$	316,732	$	(61,783)	$	805,366
Cash dividends declared on common stock (0.44 per share)											Cash dividends declared on common stock (0.44 per share)	—	—		(15,564)		—		(15,564)
Balance at June 30, 2023											Balance at June 30, 2023	35,047,800	$	550,103	$	367,085	$	(97,455)	$	819,733


		Three Months Ended June 30, 2021										Three Months Ended June 30, 2022
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at March 31, 2021		35,981,317	$	571,204	$	242,486	$	13,461	$	827,151
Balance at March 31, 2022											Balance at March 31, 2022	35,102,372	$	550,096	$	305,581	$	(34,228)	$	821,449

Restricted stock units vested	Restricted stock units vested	27,800	—		—		—		—		Restricted stock units vested	22,737	—		—		—		—
Stock-based compensation expense	Stock-based compensation expense	—	926		—		—		926		Stock-based compensation expense	—	843		—		—		843
Common stock repurchased	Common stock repurchased	(2,557)	(70)		—		—		(70)		Common stock repurchased	(21,180)	(522)		—		—		(522)
Net income	Net income	—	—		32,702		—		32,702		Net income				18,584				18,584
Other comprehensive income, net of tax		—	—		—		2,600		2,600
Other comprehensive loss, net of tax											Other comprehensive loss, net of tax	—	—		—		(27,555)		(27,555)

Cash dividends declared on common stock ($0.20 per share)		—	—		(7,325)		—		(7,325)
Balance at June 30, 2021		36,006,560	$	572,060	$	267,863	$	16,061	$	855,984
Cash dividends declared on common stock ($0.21 per share)											Cash dividends declared on common stock ($0.21 per share)	—	—		(7,433)		—		(7,433)
Balance at June 30, 2022											Balance at June 30, 2022	35,103,929	$	550,417	$	316,732	$	(61,783)	$	805,366

Table of ~~Content~~Contents


		Six Months Ended June 30, 2021
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			Six Months Ended June 30, 2022
Balance at December 31, 2020		35,912,243	$	571,021	$	224,400	$	25,018	$	820,439
												Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2021											Balance at December 31, 2021	35,105,779	$	551,798	$	293,238	$	9,396	$	854,432

Restricted stock units vested	Restricted stock units vested	120,120	—		—		—		—		Restricted stock units vested	124,420	—		—		—		—
Stock-based compensation expense	Stock-based compensation expense	—	1,796		—		—		1,796		Stock-based compensation expense	—	1,793		—		—		1,793
Common stock repurchased	Common stock repurchased	(25,803)	(757)		—		—		(757)		Common stock repurchased	(126,270)	(3,174)		—		—		(3,174)
Net income	Net income	—	—		58,046		—		58,046		Net income	—	—		38,341		—		38,341
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(8,957)		(8,957)		Other comprehensive loss, net of tax	—	—		—		(71,179)		(71,179)

Cash dividends declared on common stock ($0.40 per share)		—	—		(14,583)		—		(14,583)
Balance at June 30, 2021		36,006,560	$	572,060	$	267,863	$	16,061	$	855,984
Cash dividends declared on common stock ($0.42 per share)											Cash dividends declared on common stock ($0.42 per share)	—	—		(14,847)		—		(14,847)
Balance at June 30, 2022											Balance at June 30, 2022	35,103,929	$	550,417	$	316,732	$	(61,783)	$	805,366

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of ~~Content~~Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


		Six Months Ended June 30,					June 30,
		2022		2021			2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	38,341	$	58,046	Net income	$	37,303	$	38,341
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	Depreciation, amortization and accretion	(1,654)		(13,901)		Depreciation, amortization and accretion	1,737		(1,654)
Reversal of provision for credit losses		(4,781)		(21,186)
Provision for (reversal of) credit losses						Provision for (reversal of) credit losses	3,734		(4,781)
Stock-based compensation expense	Stock-based compensation expense	1,793		1,796		Stock-based compensation expense	2,084		1,793
Amortization of intangible assets	Amortization of intangible assets	1,408		1,594		Amortization of intangible assets	1,246		1,408
Origination of mortgage loans held for sale	Origination of mortgage loans held for sale	(12,396)		(53,807)		Origination of mortgage loans held for sale	(6,511)		(12,396)
Proceeds from sale of mortgage loans held for sale	Proceeds from sale of mortgage loans held for sale	13,021		58,373		Proceeds from sale of mortgage loans held for sale	5,909		13,021
Bank owned life insurance income	Bank owned life insurance income	(2,459)		(1,373)		Bank owned life insurance income	(1,546)		(2,459)

Valuation adjustment on interest rate swaps	Valuation adjustment on interest rate swaps	(64)		(254)		Valuation adjustment on interest rate swaps	—		(64)
Gain on sale of mortgage loans held for sale, net	Gain on sale of mortgage loans held for sale, net	(460)		(2,373)		Gain on sale of mortgage loans held for sale, net	(150)		(460)
Gain on sale of investment securities available for sale, net		—		(29)
Loss on sale of investment securities available for sale, net						Loss on sale of investment securities available for sale, net	286		—

Gain on sale of assets held for sale	Gain on sale of assets held for sale	(204)		(746)		Gain on sale of assets held for sale	—		(204)
Other	Other	1,360		3,630		Other	3,371		1,360
Net cash provided by operating activities	Net cash provided by operating activities	33,905		29,770		Net cash provided by operating activities	47,463		33,905
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Loan originations and purchases, net of payments	Loan originations and purchases, net of payments	(51,198)		295,618		Loan originations and purchases, net of payments	(198,937)		(51,198)
Maturities and repayments of investment securities available for sale	Maturities and repayments of investment securities available for sale	86,678		126,669		Maturities and repayments of investment securities available for sale	49,733		86,678
Maturities and repayments of investment securities held to maturity	Maturities and repayments of investment securities held to maturity	11,767		—		Maturities and repayments of investment securities held to maturity	11,673		11,767
Purchase of investment securities available for sale	Purchase of investment securities available for sale	(472,361)		(388,636)		Purchase of investment securities available for sale	(14,994)		(472,361)
Purchase of investment securities held to maturity	Purchase of investment securities held to maturity	(244,911)		—		Purchase of investment securities held to maturity	—		(244,911)
Purchase of premises and equipment	Purchase of premises and equipment	(1,191)		(1,748)		Purchase of premises and equipment	(5,477)		(1,191)
Purchases of bank owned life insurance		(105)		(105)
Purchase of bank owned life insurance						Purchase of bank owned life insurance	—		(105)

Purchases of Federal Home Loan Bank stock	Purchases of Federal Home Loan Bank stock	(985)		(1,272)		Purchases of Federal Home Loan Bank stock	(44,192)		(985)

Proceeds from sales of investment securities available for sale	Proceeds from sales of investment securities available for sale	—		1,248		Proceeds from sales of investment securities available for sale	22,688		—
Proceeds from redemption of Federal Home Loan Bank stock	Proceeds from redemption of Federal Home Loan Bank stock	2		—		Proceeds from redemption of Federal Home Loan Bank stock	44,735		2
Proceeds from sales of assets held for sale	Proceeds from sales of assets held for sale	1,173		3,730		Proceeds from sales of assets held for sale	—		1,173
Proceeds from sales of premises and equipment	Proceeds from sales of premises and equipment	—		10		Proceeds from sales of premises and equipment	2		—
Capital contributions to low-income housing tax credit partnerships	Capital contributions to low-income housing tax credit partnerships	(978)		(12,637)		Capital contributions to low-income housing tax credit partnerships	(419)		(978)
Cash received from return of New Market Tax Credit equity method investment		—		9,642

Net cash (used) provided by investing activities		(672,109)		32,519
Net cash used by investing activities						Net cash used by investing activities	(135,188)		(672,109)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net (decrease) increase in deposits		(64,100)		463,716
Federal Home Loan Bank advances		50		10
Repayment of Federal Home Loan Bank advances		(50)		(10)
Net decrease in deposits						Net decrease in deposits	(329,297)		(64,100)
Proceeds from borrowings						Proceeds from borrowings	1,754,800		50
Repayment of borrowings						Repayment of borrowings	(1,304,800)		(50)
Common stock cash dividends paid	Common stock cash dividends paid	(14,747)		(14,383)		Common stock cash dividends paid	(15,430)		(14,747)
Net (decrease) increase in securities sold under agreement to repurchase		(9,012)		10,746
Net decrease in securities sold under agreement to repurchase						Net decrease in securities sold under agreement to repurchase	(8,382)		(9,012)
Repurchase of common stock	Repurchase of common stock	(3,174)		(757)		Repurchase of common stock	(4,378)		(3,174)
Net cash (used) provided by financing activities		(91,033)		459,322
Net (decrease) increase in cash and cash equivalents		(729,237)		521,611
Net cash provided (used) by financing activities						Net cash provided (used) by financing activities	92,513		(91,033)
Net increase (decrease) in cash and cash equivalents						Net increase (decrease) in cash and cash equivalents	4,788		(729,237)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	1,723,292		743,322		Cash and cash equivalents at beginning of period	103,590		1,723,292
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	994,055	$	1,264,933	Cash and cash equivalents at end of period	$	108,378	$	994,055

Table of ~~Content~~Contents


		Six Months Ended June 30,					June 30,
		2022		2021			2023		2022
Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Cash paid for interest	Cash paid for interest	$	3,188	$	3,571	Cash paid for interest	$	17,587	$	3,188
Cash paid for income taxes, net of refunds	Cash paid for income taxes, net of refunds	167		7,967		Cash paid for income taxes, net of refunds	1,384		167

Supplemental non-cash disclosures of cash flow information:	Supplemental non-cash disclosures of cash flow information:					Supplemental non-cash disclosures of cash flow information:

Investment in LIHTC partnership and related funding commitment	Investment in LIHTC partnership and related funding commitment	11,284		—		Investment in LIHTC partnership and related funding commitment	47		11,284
Right of use assets obtained in exchange for new operating lease liabilities	Right of use assets obtained in exchange for new operating lease liabilities	2,222		8,393		Right of use assets obtained in exchange for new operating lease liabilities	6,111		2,222
Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued	Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued	2,114		—		Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued	700		2,114
Transfers of properties classified as held for sale to prepaid expenses and other assets from premises and equipment, net		730		1,685
Loans received from return of New Market Tax Credit equity method investment		—		15,596
Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net						Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net	—		730

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of ~~Content~~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

(a) Description of Business

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 5051 branch offices located throughout Washington State, the greater Portland, Oregon area, Eugene, Oregon and ~~Eugene, Oregon.~~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. The Bank's deposits are insured by the ~~FDIC.~~FDIC subject to limitations.

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the ~~2021~~2022 Annual Form 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 six months ended June 30, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023.

The accompanying Condensed Consolidated Financial Statements presented for the year end December 31, 2022 were derived from audited financial statements and do not include all disclosures required by GAAP.

To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes the judgments, estimates and assumptions used in the preparation of the 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 ~~Financial Condition, the unaudited Condensed Consolidated Statements of Income and the unaudited Condensed Consolidated Statements of Cash Flows.~~Income. Reclassifications had no effect on the prior year's net income or stockholders’ equity.

The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the ~~2021~~2022 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the ~~2021~~2022 Annual Form 10-K during the six months ended June 30, ~~2022.~~2023.

(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, and ASU 2022-06 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, ~~2020 through~~2020. In December 2022, FASB amended this ASU and deferred the sunset date of Topic 848 from December 31, ~~2022.~~2022, to 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 the Company's LIBOR exposure.~~ Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. ~~Additionally, effective January 1, 2022,~~The majority of the ~~Bank is no longer initiating or renewing~~Bank’s interest rate swap-related transactions indexed to LIBOR were transferred to another index during the three months ended June 30, 2023. The remaining instruments including loans, ~~using LIBOR as an index.~~investments, and junior subordinated debentures will be transferred to a new index at the next repricing date. The Company does not expect the adoption of this ASU to have a material impact on its business operations ~~and the~~or Consolidated Statements of Financial ~~Statements.~~Condition.

FASB ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, was issued in March 2022. The ASU eliminates the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, the entity will apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or continuation of an existing loan. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. These amendments are effective for fiscal years

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beginning after December 15, 2022, including interim periods within those fiscal ~~years, since Heritage previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020.~~years. Early adoption is permitted in any interim period if an entity has adopted ASU 2016-13 and ~~should~~such election may be ~~applied prospectively; however,~~made individually to adopt the guidance related to TDRs, including related disclosures, and the presentation of gross write-offs in the vintage disclosure. This update requires prospective transition ~~method~~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

~~Table of Content~~

measurement of TDRs may be adopted on a prospective or modified retrospective transition method.

The Company adopted ASU 2022-02 on a prospective basis January 1, 2023. The Company elected at the date of adoption to account for existing TDR loans ~~may~~as of December 31, 2022 under the Company's TDR accounting policy which is disclosed in the 2022 Annual Form 10-K. All loan modifications post adoption are accounted for under the loan modification guidance in ASC 310-20. The adoption of this ASU did not have a material impact on business operations or the Consolidated Statements of Financial Condition.

FASB ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), was issued in February 2023. The amendments in this ASU permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the statement of operations as a component of income tax expense (benefit). The amendments also require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understand the investments that generate income tax credits and other income tax benefits from a tax credit program. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The amendments in the ASU can be applied ~~under~~either on a modified retrospective ~~transition method.~~or a retrospective basis. The Company ~~is evaluating~~does not expect the ~~effect~~adoption of this ASU ~~will~~to have a material impact on its business operations or Consolidated Statements of Financial ~~Statements and related disclosures.~~Condition.

(2)Investment Securities

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

There were no investment securities classified as trading at June 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

(a) Investment Securities by Classification, Type and Maturity

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


		June 30, 2022									June 30, 2023
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(In thousands)									(In thousands)
Investment securities available for sale:	Investment securities available for sale:									Investment securities available for sale:
U.S. government and agency securities	U.S. government and agency securities	$	68,912	$	—	$	(3,244)	$	65,668	U.S. government and agency securities	$	68,514	$	—	$	(4,255)	$	64,259
Municipal securities	Municipal securities	213,402		977		(14,369)		200,010		Municipal securities	145,681		48		(15,714)		130,015
Residential CMO and MBS		433,903		70		(35,817)		398,156
Commercial CMO and MBS		520,772		466		(27,618)		493,620
Residential CMO and MBS(1)										Residential CMO and MBS(1)	465,625		—		(54,653)		410,972
Commercial CMO and MBS(1)										Commercial CMO and MBS(1)	698,833		17		(50,509)		648,341
Corporate obligations	Corporate obligations	6,003		—		(25)		5,978		Corporate obligations	4,000		—		(226)		3,774
Other asset-backed securities	Other asset-backed securities	24,723		6		(573)		24,156		Other asset-backed securities	19,491		9		(311)		19,189
Total	Total	$	1,267,715	$	1,519	$	(81,646)	$	1,187,588	Total	$	1,402,144	$	74	$	(125,668)	$	1,276,550

Investment securities held to maturity:
U.S. government and agency securities		$	150,960	$	—	$	(23,416)	$	127,544

Residential CMO and MBS		159,007		257		(5,774)		153,490
Commercial CMO and MBS		305,686		—		(27,408)		278,278

Total		$	615,653	$	257	$	(56,598)	$	559,312

December 31, 2021
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
(In thousands)
Investment securities available for sale:
U.S. government and agency securities $ 21,494 $ 55 $ (176) $ 21,373
Municipal securities 213,158 8,908 (854) 221,212
Residential CMO and MBS 307,366 2,111 (2,593) 306,884
Commercial CMO and MBS 313,169 3,891 (1,199) 315,861
Corporate obligations 2,007 7 — 2,014
Other asset-backed securities 26,638 369 (16) 26,991
Total $ 883,832 $ 15,341 $ (4,838) $ 894,335
Investment securities held to maturity:
U.S. government and agency securities $ 141,011 $ 120 $ (1,768) $ 139,363
Residential CMO and MBS 24,529 — (153) 24,376
Commercial CMO and MBS 217,853 — (5,261) 212,592
Total $ 383,393 $ 120 $ (7,182) $ 376,331
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

Table of ~~Content~~Contents


	June 30, 2023
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	151,005	$	—	$	(30,245)	$	120,760

Residential CMO and MBS(1)	280,032		—		(17,219)		262,813
Commercial CMO and MBS(1)	323,239		—		(42,002)		281,237


Total	$	754,276	$	—	$	(89,466)	$	664,810

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	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(1)	479,473		—		(55,087)		424,386
Commercial CMO and MBS(1)	714,136		19		(49,734)		664,421
Corporate obligations	4,000		—		(166)		3,834
Other asset-backed securities	22,425		14		(522)		21,917
Total	$	1,460,033	$	205	$	(128,795)	$	1,331,443

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	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(1)	290,318		—		(17,440)		272,878
Commercial CMO and MBS(1)	325,142		—		(41,937)		283,205


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

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

The following table presents the amortized cost and fair value of investment securities ~~at June 30, 2022,~~ 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.


											June 30, 2023
		Securities Available for Sale				Securities Held to Maturity					Securities Available for Sale				Securities Held to Maturity
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(In thousands)									(In thousands)
Due in one year or less	Due in one year or less	$	8,283	$	8,306	$	—	$	—	Due in one year or less	$	30,995	$	30,804	$	—	$	—
Due after one year through five years	Due after one year through five years	82,106		80,881		—		—		Due after one year through five years	38,496		36,522		—		—
Due after five years through ten years	Due after five years through ten years	67,161		65,321		83,210		72,516		Due after five years through ten years	47,291		44,222		83,244		68,938
Due after ten years	Due after ten years	130,767		117,148		67,750		55,028		Due after ten years	101,413		86,500		67,761		51,822
Total investment securities due at a single maturity date	Total investment securities due at a single maturity date	288,317		271,656		150,960		127,544		Total investment securities due at a single maturity date	218,195		198,048		151,005		120,760
Mortgage-backed securities (1)		979,398		915,932		464,693		431,768
Total investment securities		$	1,267,715	$	1,187,588	$	615,653	$	559,312

Table of Contents


	June 30, 2023
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
MBS(1)	1,183,949		1,078,502		603,271		544,050
Total investment securities	$	1,402,144	$	1,276,550	$	754,276	$	664,810

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

There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

(b) Unrealized Losses on Investment Securities Available for Sale

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


		June 30, 2022													June 30, 2023
		Less than 12 Months				12 Months or Longer				Total					Less than 12 Months				12 Months or Longer				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
		(In thousands)													(In thousands)
U.S. government and agency securities	U.S. government and agency securities	$	64,200	$	(2,995)	$	1,468	$	(249)	$	65,668	$	(3,244)	U.S. government and agency securities	$	—	$	—	$	64,259	$	(4,255)	$	64,259	$	(4,255)
Municipal securities	Municipal securities	106,205		(11,287)		15,712		(3,082)		121,917		(14,369)		Municipal securities	28,423		(243)		90,903		(15,471)		119,326		(15,714)
Residential CMO and MBS(1)	Residential CMO and MBS(1)	352,074		(32,446)		31,008		(3,371)		383,082		(35,817)		Residential CMO and MBS(1)	94,015		(3,598)		316,957		(51,055)		410,972		(54,653)
Commercial CMO and MBS(1)	Commercial CMO and MBS(1)	406,835		(27,145)		8,711		(473)		415,546		(27,618)		Commercial CMO and MBS(1)	170,005		(4,692)		475,114		(45,817)		645,119		(50,509)
Corporate obligations	Corporate obligations	5,978		(25)		—		—		5,978		(25)		Corporate obligations	—		—		3,774		(226)		3,774		(226)
Other asset-backed securities	Other asset-backed securities	19,054		(552)		921		(21)		19,975		(573)		Other asset-backed securities	4,219		(4)		12,308		(307)		16,527		(311)
Total	Total	$	954,346	$	(74,450)	$	57,820	$	(7,196)	$	1,012,166	$	(81,646)	Total	$	296,662	$	(8,537)	$	963,315	$	(117,131)	$	1,259,977	$	(125,668)

December 31, 2021
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 $ 14,828 $ (176) $ — $ — $ 14,828 $ (176)
Municipal securities 29,774 (619) 9,351 (235) 39,125 (854)
Residential CMO and MBS 204,039 (2,470) 19,862 (123) 223,901 (2,593)
Commercial CMO and MBS 83,283 (1,161) 1,936 (38) 85,219 (1,199)
Other asset-backed securities 2,763 (9) 1,118 (7) 3,881 (16)
Total $ 334,687 $ (4,435) $ 32,267 $ (403) $ 366,954 $ (4,838)
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	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)

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

The Company evaluated investment securities available for sale as of June 30, ~~2022~~2023 and December 31, ~~2021~~2022 and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all

~~Table of Content~~

rated investment securities and none of these securities had a below investment grade credit rating as of both June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

The Company also evaluated investment securities held to maturity for current expected credit losses as of June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. There were no investment securities held to maturity classified as nonaccrual or past due as of June 30, ~~2022~~2023 and December 31, ~~2021~~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

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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 June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

(d) Realized Gains and Losses

During the three months ended June 30, 2023 and 2022 there were no sales of investment securities available for sale. The following table presents the gross realized gains and losses on the sale of investment securities available for sale ~~during~~determined using the ~~following periods:~~

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
(In thousands)
Gross realized gains $ — $ — $ — $ 29
specific identification for the dates indicated:


	Six Months Ended June 30,
		2023		2022
		(In thousands)
Gross realized gains		$	36	$	—
Gross realized losses		(322)		—
Net realized (loss) gain		$	(286)	$	—

(e) Pledged Securities

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


		June 30, 2022				December 31, 2021					June 30, 2023				December 31, 2022
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(In thousands)									(In thousands)
Washington and Oregon state public deposits		$	139,868	$	128,842	$	128,216	$	130,217
Federal Reserve Bank credit facility		60,865		52,530		61,057		59,674
State and local governments public deposits										State and local governments public deposits	$	225,512	$	210,173	$	156,784	$	137,931
FRB										FRB	881,662		765,440		60,660		49,506
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	69,358		62,647		59,887		59,655		Securities sold under agreement to repurchase	52,084		46,614		63,685		55,836
Other securities pledged	Other securities pledged	49,941		45,739		56,419		55,633		Other securities pledged	54,113		47,024		54,910		48,358
Total	Total	$	320,032	$	289,758	$	305,579	$	305,179	Total	$	1,213,371	$	1,069,251	$	336,039	$	291,631

(f) Accrued Interest Receivable

Accrued interest receivable excluded from the amortized cost of investment securities available for sale totaled $4.6 million and ~~$3.5~~$4.8 million at June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled ~~$1.8~~$2.3 million and ~~$1.1~~$2.4 million at June 30, ~~2022~~2023 and December 31, ~~2021,~~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 the ~~three or~~ six months ended June 30, 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 ~~2021.~~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 six months ended June 30, 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

The Bank originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Bank's amortized cost of loans receivable as it was deemed insignificant. In addition to originating loans, the Bank may also purchase loans through pool purchases, participation purchases and syndicated loan purchases.

(a) Loan Origination/Risk Management

The Bank categorizes the individual loans in the total loan portfolio into 4four segments: commercial business; residential real estate; real estate construction and land 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 ~~2021~~2022 Annual Form 10-K.

The 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,

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

~~Table of Content~~

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

The amortized cost of loans receivable, net of ACL on loans, consisted of the following portfolio segments and classes at the dates indicated:


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
		(In thousands)					(In thousands)
Commercial business:	Commercial business:					Commercial business:
Commercial and industrial	Commercial and industrial	$	698,828	$	621,567	Commercial and industrial	$	708,021	$	692,100
SBA PPP	SBA PPP	11,334		145,840		SBA PPP	567		1,468
Owner-occupied CRE	Owner-occupied CRE	950,699		931,150		Owner-occupied CRE	958,912		937,040
Non-owner occupied CRE	Non-owner occupied CRE	1,515,796		1,493,099		Non-owner occupied CRE	1,644,490		1,586,632
Total commercial business	Total commercial business	3,176,657		3,191,656		Total commercial business	3,311,990		3,217,240
Residential real estate	Residential real estate	265,382		164,582		Residential real estate	375,659		343,631
Real estate construction and land development:	Real estate construction and land development:					Real estate construction and land development:
Residential	Residential	90,546		85,547		Residential	78,660		80,074
Commercial and multifamily	Commercial and multifamily	128,060		141,336		Commercial and multifamily	307,041		214,038
Total real estate construction and land development	Total real estate construction and land development	218,606		226,883		Total real estate construction and land development	385,701		294,112
Consumer	Consumer	213,419		232,541		Consumer	177,994		195,875
Loans receivable	Loans receivable	3,874,064		3,815,662		Loans receivable	4,251,344		4,050,858
Allowance for credit losses on loans		(39,696)		(42,361)
ACL on loans						ACL on loans	(46,408)		(42,986)
Loans receivable, net	Loans receivable, net	$	3,834,368	$	3,773,301	Loans receivable, net	$	4,204,936	$	4,007,872

Balances included in the amortized cost of loans receivable:	Balances included in the amortized cost of loans receivable:					Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans	Unamortized net discount on acquired loans	$	3,084	$	3,938	Unamortized net discount on acquired loans	$	(2,151)	$	(2,501)
Unamortized net deferred fee	Unamortized net deferred fee	$	4,947	$	7,954	Unamortized net deferred fee	$	(10,621)	$	(10,016)

(b) Concentrations of Credit

Most of the Bank’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County, Washington to ~~Clark~~Lane County, ~~in Washington State, Multnomah County and Washington County in~~ Oregon, as well as ~~other contiguous markets~~Yakima County in Washington and ~~represents a geographic concentration.~~Ada County in Idaho. Additionally, the Bank's loan portfolio is concentrated in commercial ~~loans, including commercial~~ business loans, which include commercial and industrial, SBA PPP, owner-occupied and nonowner-occupied CRE, and commercial and multifamily real estate construction and land development loans. Commercial business loans, excluding SBA PPP loans, are generally considered as having a more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.

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

The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. 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, including qualitative information on how the risk grades relate to the risk of loss, are contained in the ~~2021~~2022 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. 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.

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

~~Table of Content~~

likelihood of loss for SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a SS grade ~~are generally~~have further credit deterioration and include both accrual loans ~~at risk of being classified as~~and nonaccrual ~~loans and includes all of our loans classified as nonaccrual.~~loans. For Doubtful and Loss graded loans, the Bank is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value.

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 January 1, 2023.

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


		June 30, 2022																					June 30, 2023
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (2)				Loans Receivable		Term Loans Amortized Cost Basis by Origination Year																		Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
		2022		2021(1)		2020		2019		2018		Prior								2023				2022				2021			2020			2019			Prior
		(In thousands)																					(In thousands)
Commercial business:	Commercial business:																					Commercial business:
Commercial and industrial	Commercial and industrial																					Commercial and industrial
Pass	Pass	$	96,128	$	101,302	$	93,475	$	73,299	$	38,742	$	90,980		$	168,030		$	45				$	662,001	Pass	$	50,075		$	171,694		$	88,238		$	76,218		$	48,393	$		93,741	$	136,899	$	89	$	665,347
SM	SM	234		253		729		4,842		8,764		2,981		1,619			—				19,422	SM	—				567			180			1,763			4,541			4,821		8,512		—		20,384
SS	SS	882		169		696		4,581		1,163		6,866		2,171			877				17,405	SS	—				1,216			164			1,599			3,095			5,271		10,945		—		22,290

Total	Total	97,244		101,724		94,900		82,722		48,669		100,827		171,820			922				698,828	Total	50,075				173,477			88,582			79,580			56,029			103,833		156,356		89		708,021
SBA PPP	SBA PPP																					SBA PPP
Pass	Pass	—		11,175		159		—		—		—		—			—				11,334	Pass	—				—			492			75			—			—		—		—		567

Owner-occupied CRE	Owner-occupied CRE																					Owner-occupied CRE
Pass	Pass	78,387		171,470		91,633		180,596		73,797		316,424		—			—				912,307	Pass	48,375				138,539			166,088			88,519			152,446			322,680		—		—		916,647
SM	SM	—		—		—		1,698		2,573		12,042		—			—				16,313	SM	—				—			3,853			2,027			318			19,892		—		—		26,090
SS	SS	—		261		679		—		3,755		17,384		—			—				22,079	SS	—				—			—			663			—			15,512		—		—		16,175

Total	Total	78,387		171,731		92,312		182,294		80,125		345,850		—			—				950,699	Total	48,375				138,539			169,941			91,209			152,764			358,084		—		—		958,912
Non-owner occupied CRE	Non-owner occupied CRE																					Non-owner occupied CRE
Pass	Pass	125,451		185,105		166,150		240,396		139,626		578,421		—			—				1,435,149	Pass	97,701				239,551			208,212			156,484			243,460			657,188		—		—		1,602,596
SM	SM	—		8,435		—		3,652		—		16,655		—			—				28,742	SM	—				604			8,260			—			578			19,656		—		—		29,098
SS	SS	—		—		—		—		3,626		48,279		—			—				51,905	SS	—				—			—			—			—			12,796		—		—		12,796

Total	Total	125,451		193,540		166,150		244,048		143,252		643,355		—			—				1,515,796	Total	97,701				240,155			216,472			156,484			244,038			689,640		—		—		1,644,490
Total commercial business	Total commercial business																					Total commercial business
Pass	Pass	299,966		469,052		351,417		494,291		252,165		985,825		168,030			45				3,020,791	Pass	196,151				549,784			463,030			321,296			444,299			1,073,609		136,899		89		3,185,157
SM	SM	234		8,688		729		10,192		11,337		31,678		1,619			—				64,477	SM	—				1,171			12,293			3,790			5,437			44,369		8,512		—		75,572
SS	SS	882		430		1,375		4,581		8,544		72,529		2,171			877				91,389	SS	—				1,216			164			2,262			3,095			33,579		10,945		—		51,261

Total	Total	301,082		478,170		353,521		509,064		272,046		1,090,032		171,820			922				3,176,657	Total	196,151				552,171			475,487			327,348			452,831			1,151,557		156,356		89		3,311,990
Commercial business gross charge-offs																						Commercial business gross charge-offs
Current period																						Current period	—				—			—			61			—			100		—		—		161
Residential real estate	Residential real estate																					Residential real estate
Pass(1)	Pass(1)	60,870		140,448		24,564		17,699		4,716		16,907		—			—				265,204	Pass(1)	32,678				136,416			148,353			25,345			15,644			17,055		—		—		375,491

SS	SS	—		—		—		—		—		178		—			—				178	SS	—				—			—			—			—			168		—		—		168

Total	Total	60,870		140,448		24,564		17,699		4,716		17,085		—			—				265,382	Total	32,678				136,416			148,353			25,345			15,644			17,223		—		—		375,659
Real estate construction and land development:
Residential
Pass		21,664		43,877		10,330		12,002		1,005		1,668		—			—				90,546

Commercial and multifamily
Pass		8,832		75,096		23,991		6,952		3,186		2,013		—			—				120,070
SM		—		—		1,871		5,714		—		—		—			—				7,585
SS		—		—		—		—		—		405		—			—				405

Total		8,832		75,096		25,862		12,666		3,186		2,418		—			—				128,060
Total real estate construction and land development
Pass		30,496		118,973		34,321		18,954		4,191		3,681		—			—				210,616
SM		—		—		1,871		5,714		—		—		—			—				7,585
SS		—		—		—		—		—		405		—			—				405

Total		30,496		118,973		36,192		24,668		4,191		4,086		—			—				218,606
Residential real estate gross charge-offs:																						Residential real estate gross charge-offs:
Current period																						Current period	—				—			—			—			—			—		—		—		—

1718

Table of ~~Content~~Contents


		June 30, 2022																						June 30, 2023
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (2)				Loans Receivable			Term Loans Amortized Cost Basis by Origination Year																			Revolving Loans			Revolving Loans Converted (1)			Loans Receivable
		2022		2021(1)		2020		2019		2018		Prior								2023					2022				2021			2020			2019			Prior
Real estate construction and land development:																							Real estate construction and land development:
Residential																							Residential
Pass																							Pass	17,930				40,499			9,970			1,766			840			1,792				760			—			73,557

SS																							SS	784				—			4,319			—			—			—			—			—			5,103
Total																							Total	18,714				40,499			14,289			1,766			840			1,792			760			—			78,660
Commercial and multifamily																							Commercial and multifamily
Pass																							Pass	10,033				138,805			138,228			6,711			780			3,433			—			—			297,990
SM																							SM	—				—			—			2,984			5,687			380			—			—			9,051

Total																							Total	10,033				138,805			138,228			9,695			6,467			3,813			—			—			307,041
Total real estate construction and land development																							Total real estate construction and land development
Pass																							Pass	27,963				179,304			148,198			8,477			1,620			5,225			760			—			371,547
SM																							SM	—				—			—			2,984			5,687			380			—			—			9,051
SS																							SS	784				—			4,319			—			—			—			—			—			5,103
Total																							Total	28,747				179,304			152,517			11,461			7,307			5,605			760			—			385,701
Real estate construction and land development gross charge-offs:																							Real estate construction and land development gross charge-offs:
Current period																							Current period	—				—			—			—			—			—			—			—			—
Consumer	Consumer																						Consumer
Pass	Pass	2,475		770		12,451		35,722		21,337		19,062				118,826			329					210,972		Pass	962			2,809			415			7,995			20,989			26,490			115,616			597			175,873

SS	SS	—		—		169		558		366		1,346		8			—				2,447		SS	—				—			—			152			446			1,135			366			22			2,121

Total	Total	2,475		770		12,620		36,280		21,703		20,408		118,834			329				213,419		Total	962				2,809			415			8,147			21,435			27,625			115,982			619			177,994
Consumer gross charge-offs:																							Consumer gross charge-offs:
Current period																							Current period	—				—			12			13			53			70			149			—			297
Loans receivable	Loans receivable																						Loans receivable
Pass	Pass	393,807		729,243		422,753		566,666		282,409		1,025,475		286,856			374				3,707,583		Pass	257,754				868,313			759,996			363,113			482,552			1,122,379			253,275			686			4,108,068
SM	SM	234		8,688		2,600		15,906		11,337		31,678		1,619			—				72,062		SM	—				1,171			12,293			6,774			11,124			44,749			8,512			—			84,623
SS	SS	882		430		1,544		5,139		8,910		74,458		2,179			877				94,419		SS	784				1,216			4,483			2,414			3,541			34,882			11,311			22			58,653

Total	Total	$	394,923	$	738,361	$	426,897	$	587,711	$	302,656	$	1,131,611	$	290,654		$	1,251			$	3,874,064	Total	$	258,538			$	870,700		$	776,772		$	372,301		$	497,217		$	1,202,010		$	273,098		$	708		$	4,251,344
Gross charge-offs:																							Gross charge-offs:
Current period total																							Current period total	$	—			$	—		$	12		$	74		$	53		$	170		$	149		$	—		$	458

(1)The 2021 origination year includes $42.2 million of pass grade residential real estate loans purchased during the six months ended June 30, 2022 which were originated during the year ended December 31, 2021.

~~(2)~~ Represents the loans receivable balance at June 30, 2023 which was converted from a revolving loan to a non-revolving amortizing loan during the six months ended months ended June 30, 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

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)
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
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 six months ended June 30, 2022.~~

December 31, 2021
Term Loans
Amortized Cost Basis by Origination Year Revolving Loans
Revolving Loans Converted (1)
Loans Receivable
2021 2020 2019 2018 2017 Prior
(In thousands)
Commercial business:
Commercial and industrial
Pass $ 95,960 $ 100,193 $ 94,657 $ 54,707 $ 28,558 $ 77,294 $ 127,651 $ 1,035 $ 580,055
SM 326 884 5,998 1,425 2,223 2,401 2,048 353 15,658
SS 1,443 1,287 5,912 2,809 2,526 6,907 4,402 568 25,854
Total 97,729 102,364 106,567 58,941 33,307 86,602 134,101 1,956 621,567
SBA PPP
Pass 139,253 6,587 — — — — — — 145,840
Owner-occupied CRE
Pass 182,742 90,609 188,380 73,714 66,039 273,518 — 72 875,074
SM 264 — 3,079 7,521 3,937 16,724 — — 31,525
SS — 1,332 — 3,787 3,014 16,418 — — 24,551
Total 183,006 91,941 191,459 85,022 72,990 306,660 — 72 931,150
Non-owner-occupied CRE
Pass 187,860 185,650 244,863 149,090 144,896 499,486 — — 1,411,845
SM — — 5,674 — 15,482 2,400 — — 23,556
SS — — — 3,379 — 54,319 — — 57,698
Total 187,860 185,650 250,537 152,469 160,378 556,205 — — 1,493,099
Total commercial business
Pass 605,815 383,039 527,900 277,511 239,493 850,298 127,651 1,107 3,012,814
SM 590 884 14,751 8,946 21,642 21,525 2,048 353 70,739
SS 1,443 2,619 5,912 9,975 5,540 77,644 4,402 568 108,103
Total 607,848 386,542 548,563 296,432 266,675 949,467 134,101 2,028 3,191,656
Residential real estate
Pass 85,089 27,090 23,295 5,672 6,141 16,891 — — 164,178
SS — — — — — 404 — — 404
Total 85,089 27,090 23,295 5,672 6,141 17,295 — — 164,582

~~Table of Content~~

December 31, 2021
Term Loans
Amortized Cost Basis by Origination Year Revolving Loans
Revolving Loans Converted (1)
Loans Receivable
2021 2020 2019 2018 2017 Prior
(In thousands)
Real estate construction and land development:
Residential
Pass 44,892 23,728 12,266 2,921 389 1,351 — — 85,547
Commercial and multifamily
Pass 56,448 41,616 34,117 5,794 710 1,379 — — 140,064
SM — — 68 — — 213 — — 281
SS — 571 — — — 420 — — 991
Total 56,448 42,187 34,185 5,794 710 2,012 — — 141,336
Total real estate construction and land development
Pass 101,340 65,344 46,383 8,715 1,099 2,730 — — 225,611
SM — — 68 — — 213 — — 281
SS — 571 — — — 420 — — 991
Total 101,340 65,915 46,451 8,715 1,099 3,363 — — 226,883
Consumer
Pass 1,286 15,737 46,041 29,819 15,068 13,026 108,492 120 229,589
SS — 181 657 476 542 1,043 36 17 2,952
Total 1,286 15,918 46,698 30,295 15,610 14,069 108,528 137 232,541
Loans receivable
Pass 793,530 491,210 643,619 321,717 261,801 882,945 236,143 1,227 3,632,192
SM 590 884 14,819 8,946 21,642 21,738 2,048 353 71,020
SS 1,443 3,371 6,569 10,451 6,082 79,511 4,438 585 112,450
Total $ 795,563 $ 495,465 $ 665,007 $ 341,114 $ 289,525 $ 984,194 $ 242,629 $ 2,165 $ 3,815,662

~~(1)~~ ~~Represents the loans receivable balance at December 31, 2021 which was converted from a revolving loan to an~~non-revolving amortizing loan during the year ended December 31, ~~2021.~~2022.

Table of Contents

(d) Nonaccrual Loans

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


		June 30, 2022							June 30, 2023
		Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual			Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
		(In thousands)							(In thousands)
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	$	5,604	$	569	$	6,173	Commercial and industrial	$	3,919	$	503	$	4,422
Owner-occupied CRE	Owner-occupied CRE	—		4,302		4,302		Owner-occupied CRE	—		208		208

Total	Total	$	5,604	$	4,871	$	10,475	Total	$	3,919	$	711	$	4,630

December 31, 2021
Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial $ 6,454 $ 3,827 $ 10,281
Owner-occupied CRE 3,036 5,138 8,174
Non-owner occupied CRE 1,273 3,379 4,652
Total commercial business 10,763 12,344 23,107
Residential real estate — 47 47

~~Table of Content~~


		December 31, 2021							December 31, 2022
		Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual			Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
									(In thousands)
Commercial business:								Commercial business:
Commercial and industrial								Commercial and industrial	$	4,503	$	1,154	$	5,657
Owner-occupied CRE								Owner-occupied CRE	—		212		212

Total commercial business								Total commercial business	4,503		1,366		5,869
		(In thousands)
Real estate construction and land development:	Real estate construction and land development:							Real estate construction and land development:

Commercial and multifamily	Commercial and multifamily	—		571		571		Commercial and multifamily	—		37		37

Consumer		—		29		29

Total	Total	$	10,763	$	12,991	$	23,754	Total	$	4,503	$	1,403	$	5,906

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


		Three Months Ended June 30, 2022				Three Months Ended June 30, 2021					Three Months Ended June 30, 2023				Three Months Ended June 30, 2022
		Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized			Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
		(In thousands)									(In thousands)
Commercial business:	Commercial business:									Commercial business:
Commercial and industrial	Commercial and industrial	$	(12)	$	90	$	(5)	$	1,981	Commercial and industrial	$	—	$	2	$	(12)	$	90
Owner-occupied CRE		—		—		—		3

Total	Total	$	(12)	$	90	$	(5)	$	1,984	Total	$	—	$	2	$	(12)	$	90


		Six Months Ended June 30, 2022				Six Months Ended June 30, 2021					Six Months Ended June 30, 2023				Six Months Ended June 30, 2022
		Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized			Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
		(in thousands)									(in thousands)
Commercial business:	Commercial business:									Commercial business:
Commercial and industrial	Commercial and industrial	$	(14)	$	229	$	(10)	$	2,044	Commercial and industrial	$	(14)	$	30	$	(14)	$	229
Owner-occupied CRE	Owner-occupied CRE	—		53		—		117		Owner-occupied CRE	—		—		—		53
Non-owner occupied CRE	Non-owner occupied CRE	—		774		—		313		Non-owner occupied CRE	—		—		—		774
Total commercial business	Total commercial business	(14)		1,056		(10)		2,474		Total commercial business	(14)		30		(14)		1,056
Residential real estate	Residential real estate	—		19		—		—		Residential real estate	—		—		—		19
Real estate construction and land development:
Residential		—		—		—		73

Consumer	Consumer	—		68		—		—		Consumer	—		—		—		68
Total	Total	$	(14)	$	1,143	$	(10)	$	2,547	Total	$	(14)	$	30	$	(14)	$	1,143

For the three months and six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.

Table of Contents

(e) Past due loans

The Bank performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The following table presents the amortized cost of past due loans ~~as of June 30, 2022 and December 31, 2021 were as follows:~~at the dates indicated:


		June 30, 2022											June 30, 2023
		30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable			30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
		(In thousands)											(In thousands)
Commercial business:	Commercial business:											Commercial business:
Commercial and industrial	Commercial and industrial	$	259	$	7,190	$	7,449	$	691,379	$	698,828	Commercial and industrial	$	953	$	4,605	$	5,558	$	702,463	$	708,021
SBA PPP	SBA PPP	—		—		—		11,334		11,334		SBA PPP	—		—		—		567		567
Owner-occupied CRE	Owner-occupied CRE	1,056		189		1,245		949,454		950,699		Owner-occupied CRE	—		751		751		958,161		958,912
Non-owner occupied CRE	Non-owner occupied CRE	—		—		—		1,515,796		1,515,796		Non-owner occupied CRE	—		—		—		1,644,490		1,644,490
Total commercial business												Total commercial business	953		5,356		6,309		3,305,681		3,311,990
Residential real estate												Residential real estate	—		—		—		375,659		375,659
Real estate construction and land development:												Real estate construction and land development:
Residential												Residential	—		—		—		78,660		78,660
Commercial and multifamily												Commercial and multifamily	—		—		—		307,041		307,041
Total real estate construction and land development												Total real estate construction and land development	—		—		—		385,701		385,701
Consumer												Consumer	625		325		950		177,044		177,994
Total												Total	$	1,578	$	5,681	$	7,259	$	4,244,085	$	4,251,344

~~Table of Content~~

June 30, 2022
30-89 Days 90 Days or
Greater Total Past
Due Current Loans Receivable
(In thousands)
Total commercial business 1,315 7,379 8,694 3,167,963 3,176,657
Residential real estate — — — 265,382 265,382
Real estate construction and land development:
Residential — — — 90,546 90,546
Commercial and multifamily — — — 128,060 128,060
Total real estate construction and land development — — — 218,606 218,606
Consumer 651 199 850 212,569 213,419
Total $ 1,966 $ 7,578 $ 9,544 $ 3,864,520 $ 3,874,064


		December 31, 2021											December 31, 2022
		30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable			30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
		(In thousands)											(In thousands)
Commercial business:	Commercial business:											Commercial business:
Commercial and industrial	Commercial and industrial	$	1,858	$	6,821	$	8,679	$	612,888	$	621,567	Commercial and industrial	$	586	$	6,104	$	6,690	$	685,410	$	692,100
SBA PPP	SBA PPP	223		293		516		145,324		145,840		SBA PPP	236		—		236		1,232		1,468
Owner-occupied CRE	Owner-occupied CRE	2,397		112		2,509		928,641		931,150		Owner-occupied CRE	—		189		189		936,851		937,040
Non-owner occupied CRE	Non-owner occupied CRE	—		—		—		1,493,099		1,493,099		Non-owner occupied CRE	—		—		—		1,586,632		1,586,632
Total commercial business	Total commercial business	4,478		7,226		11,704		3,179,952		3,191,656		Total commercial business	822		6,293		7,115		3,210,125		3,217,240
Residential real estate	Residential real estate	420		10		430		164,152		164,582		Residential real estate	3,066		—		3,066		340,565		343,631
Real estate construction and land development:	Real estate construction and land development:											Real estate construction and land development:
Residential	Residential	792		—		792		84,755		85,547		Residential	—		—		—		80,074		80,074
Commercial and multifamily	Commercial and multifamily	3,474		571		4,045		137,291		141,336		Commercial and multifamily	—		—		—		214,038		214,038
Total real estate construction and land development	Total real estate construction and land development	4,266		571		4,837		222,046		226,883		Total real estate construction and land development	—		—		—		294,112		294,112
Consumer	Consumer	1,026		—		1,026		231,515		232,541		Consumer	1,561		—		1,561		194,314		195,875
Total	Total	$	10,190	$	7,807	$	17,997	$	3,797,665	$	3,815,662	Total	$	5,449	$	6,293	$	11,742	$	4,039,116	$	4,050,858

Loans 90 days or more past due and still accruing interest were ~~$2.0~~$2.3 million and ~~$293,000~~$1.6 million as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

(f) Collateral-dependent Loans

The following tables present the type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral ~~as of June 30, 2022 and December 31, 2021 was as follows,~~at the dates indicated, with balances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:

June 30, 2022
CRE Farmland Residential Real Estate Total
(In thousands)
Commercial business:
Commercial and industrial $ 1,239 $ 2,492 $ 1,316 $ 5,047
Owner-occupied CRE 189 — — 189
Total $ 1,428 $ 2,492 $ 1,316 $ 5,236

~~December 31, 2021~~

~~CRE~~

~~Farmland~~

~~Residential Real Estate~~

~~Other~~

~~Total~~

~~(In thousands)~~

~~Commercial business:~~

2122

Table of ~~Content~~Contents

December 31, 2021
CRE Farmland Residential Real Estate Other Total
(In thousands)
Commercial and industrial $ 1,499 $ 4,362 $ 1,036 $ 245 $ 7,142
Owner-occupied CRE 3,035 — — — 3,035
Non-owner occupied CRE 1,273 — — — 1,273
Total commercial business 5,807 4,362 1,036 245 11,450
Real estate construction and land development:
Commercial and multifamily 571 — — — 571
Total $ 6,378 $ 4,362 $ 1,036 $ 245 $ 12,021


	June 30, 2023
	CRE		Farmland		Residential Real Estate		Equipment		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	499	$	1,977	$	652	$	439	$	3,567
Owner-occupied CRE	189		—		—		—		189








Total	$	688	$	1,977	$	652	$	439	$	3,756


	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

There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the six months ended June 30, ~~2022,~~2023, except changes due to additions or removals of loans ~~from~~in this classification.

(g) Modification of Loans

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt ~~Restructured Loans~~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 borrower is experiencing financial difficulty. This guidance was applied on a prospective basis.

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

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


	Three Months Ended June 30, 2023
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable, net

	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	5,899	$	5,899	0.83	%




Real estate construction and land development:

Commercial and multifamily	2,984		2,984		0.97

Consumer	29		29		0.02
Total	$	8,912	$	8,912	0.21	%


	Six Months Ended June 30, 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	$	5,899	$	—	$	5,899	0.83	%

Non-owner occupied CRE	2,730		—		2,730		0.17
Total commercial business	8,629		—		8,629		0.26

Table of Contents


Real estate construction and land development:

Commercial and multifamily	2,984		—		2,984		0.97	%

Consumer	29		18		47		0.03	%
Total	$	11,642	$	18	$	11,660	0.27	%

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

Three Months Ended June 30,
2022 2021
Number of
Contracts
Amortized Cost (1) (2)
Number of
Contracts
Amortized Cost (1) (2)
(Dollars in thousands)
Commercial business:
Commercial and industrial 3 $ 1,727 18 $ 5,673
Owner-occupied CRE — — 1 2,200
Non-owner occupied CRE — — 1 251
Total commercial business 3 1,727 20 8,124
Real estate construction and land development:
Commercial and multifamily — — 1 443
Consumer 3 44 6 146
Total 6 $ 1,771 27 $ 8,713

Six Months Ended June 30,
2022 2021
Number of
Contracts
Amortized Cost (1) (2)
Number of
Contracts
Amortized Cost (1) (2)
(Dollars in thousands)
Commercial business:
Commercial and industrial 4 $ 2,610 31 $ 8,713
Owner-occupied CRE — — 2 5,857
Non-owner occupied CRE — — 2 2,222
Total commercial business 4 2,610 35 16,792
Residential real estate — — 1 181
Real estate construction and land development:
Commercial and multifamily — — 1 443
Consumer 8 95 21 511
Total 12 $ 2,705 58 $ 17,927

Three Months Ended
June 30, 2023

Weighted Average Years of Term Extensions

Commercial business:

Commercial and industrial

0.50

Real estate construction and land development:

Commercial and multifamily

0.42

Consumer

2.88

Total

0.48

~~(1)~~
~~Number of contracts and amortized cost represent~~


	Six Months Ended June 30, 2023
	Weighted Average % of Interest Rate Reductions		Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial	—	%	0.50

Non-owner occupied CRE	—		1.00
Total commercial business	—		0.66
Residential real estate	—		0.00
Real estate construction and land development:

Commercial and multifamily	—		0.42

Consumer	1.00		2.61
Total	1.00	%	0.61

There were no modified loans ~~which have balances~~past due or on nonaccrual as of ~~period end, net of subsequent payments after modifications. Certain TDR~~June 30, 2023.

There were no modified loans ~~may have been paid-down or charged-off~~made during the three months and six months ended June 30, ~~2022 and 2021.~~

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

~~The Bank had an ACL on loans of~~ ~~$4,000~~ an~~d $1.7 million at June 30, 2022 and June 30, 2021, respectively, related to these TDR loans which were restructured during the six months ended June 30, 2022 and June 30, 2021, respectively.~~

~~Table of Content~~

~~The unfunded commitment to borrowers related to TDR loans was $3.4 million and $5.7 million at June 30, 2022 and December 31, 2021, respectively.~~

~~The following table presents loans~~2023, that ~~were modified in a TDR and~~ subsequently ~~defaulted within twelve months from the modification date during the periods indicated:~~

Three Months Ended June 30,
2022 2021
Number of
Contracts (1)
Amortized Cost (1)
Number of
Contracts (1)
Amortized Cost (1)
(Dollars in thousands)
Commercial business:
Commercial and industrial — $ — 1 $ 46

Six Months Ended June 30,
2022 2021
Number of
Contracts (1)
Amortized Cost (1)
Number of
Contracts (1)
Amortized Cost (1)
(Dollars in thousands)
Commercial business:
Commercial and industrial — $ — 2 $ 789
Owner-occupied CRE 1 189 — —

~~(1)~~ Number of contracts and amortized cost represent TDR loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the six months ended June 30, 2022 and 2021.

~~The Bank had $3,000 ACL on loans at June 30, 2022 and $7,000 at June 30, 2021 related to these TDR loans which defaulted during the six months ended June 30, 2022 and 2021.~~defaulted.

(h) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled ~~$9.5~~$12.0 million and ~~$10.1~~$11.3 million at June 30, ~~2022~~2023 and December 31, ~~2021, respectively. It~~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 June 30, ~~2022,~~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 ~~baseline loss rates used to calculate~~Company's methodology for determining the ACL on loans ~~at June 30,~~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

Table of Contents

Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2022 ~~utilized~~Annual Form 10-K.

GAAP requires the ~~Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date. There were no changes~~Company to ~~this assumption during the six months ended June 30, 2022. The Bank believes the historic loss rates~~develop reasonable and supportable forecasts of future conditions, and estimate how those forecasts are ~~viable inputs~~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 ~~CECL model as~~conditions, and the ~~Bank's lending practice and business has remained relatively stable throughout the periods. While the Bank's assets have grown, the credit culture has stayed relatively consistent.~~

~~Prepayments included in the CECL~~likelihood of future events occurring. The Company’s ACL model at June 30, ~~2022 were based on~~2023 includes assumptions concerning the ~~48-month rolling historical averages~~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 ~~each segment, which management believes is an accurate representation of future prepayment activity. There were no changes to this assumption during the six months ended June 30, 2022.~~recessionary conditions.

The ~~reasonable~~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 ~~supportable period and subsequent reversion period~~include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the ~~CECL~~ model ~~was five quarters~~ and ~~two quarters, respectively, at December 31, 2021. There were no~~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 ~~these assumptions during~~determine the ~~six months ended~~ACL.

As of June 30, ~~2022. Management believes forecasts beyond this seven quarter time period tend~~2023, qualitative adjustments primarily relate to ~~diverge in economic assumptions and may be less comparable to actual future events. As the length~~certain segments of the ~~reasonable~~loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have fully captured the associated impact to the ACL. In addition, qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and ~~supportable period increases,~~ the ~~degree~~related impact on certain loan segments. Management reviews the need for an appropriate level of ~~judgment involved~~qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in ~~estimating the allowance increases.~~future periods.

During the six months ended June 30, ~~2022,~~2023, the ACL on loans ~~decreased $2.7~~increased $3.4 million, or ~~6.3%~~8.0%, to $46.4 million from $43.0 million at December 31, 2022 due primarily to a ~~reversal of~~ provision for credit losses on loans of ~~$3.2~~$3.7 million driven by ~~a $2.9 million reduction~~growth in ~~the ACL on~~ loans individually evaluated for losses and their related ACL as well as changes in the loan mix and continued improvement in forecasted economic indicators used to calculate credit losses. The ACL on loans at June 30, 2022 and December 31, 2021 did not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.

~~Table of Content~~

~~A summary of the changes in the ACL on loans during the six months ended June 30, 2022 and 2021 is as follows:~~

Six Months Ended
June 30,
2022 2021
(In thousands)
Beginning balance $ 42,361 $ 70,185
Charge-offs (604) (320)
Recoveries of loans previously charged-off 1,110 653
Reversal of provision for credit losses on loans (3,171) (18,956)
Ending balance $ 39,696 $ 51,562
receivable, net.

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

Three Months Ended June 30, 2022
Beginning Balance Charge-offs Recoveries (Reversal of) Provision for Credit Losses Ending Balance
(In thousands)
Commercial business:
Commercial and industrial $ 15,265 $ (117) $ 149 $ (1,264) $ 14,033
Owner-occupied CRE 7,085 — — 1,077 8,162
Non-owner occupied CRE 9,582 — — (70) 9,512
Total commercial business 31,932 (117) 149 (257) 31,707
Residential real estate 1,803 — — 334 2,137
Real estate construction and land development:
Residential 1,124 — 6 (49) 1,081
Commercial and multifamily 3,175 — 53 (1,025) 2,203
Total real estate construction and land development 4,299 — 59 (1,074) 3,284
Consumer 2,299 (132) 53 348 2,568
Total $ 40,333 $ (249) $ 261 $ (649) $ 39,696

Six Months Ended June 30, 2022
Beginning Balance Charge-offs Recoveries (Reversal of) Provision for Credit Losses Ending Balance
(In thousands)
Commercial business:
Commercial and industrial $ 17,777 $ (280) $ 421 $ (3,885) $ 14,033
Owner-occupied CRE 6,411 (36) — 1,787 8,162
Non-owner occupied CRE 8,861 — — 651 9,512
Total commercial business 33,049 (316) 421 (1,447) 31,707
Residential real estate 1,409 (30) 3 755 2,137
Real estate construction and land development:
Residential 1,304 — 14 (237) 1,081
Commercial and multifamily 3,972 — 53 (1,822) 2,203
Total real estate construction and land development 5,276 — 67 (2,059) 3,284
Consumer 2,627 (258) 619 (420) 2,568
Total $ 42,361 $ (604) $ 1,110 $ (3,171) $ 39,696


	Three Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	13,566	$	—	$	38	$	(316)	$	13,288
Owner-occupied CRE	7,525		—		—		978		8,503
Non-owner occupied CRE	8,846		—		—		636		9,482
Total commercial business	29,937		—		38		1,298		31,273
Residential real estate	2,902		—		—		(37)		2,865
Real estate construction and land development:
Residential	1,542		—		—		129		1,671
Commercial and multifamily	7,443		—		—		571		8,014
Total real estate construction and land development	8,985		—		—		700		9,685
Consumer	2,645		(144)		57		27		2,585
Total	$	44,469	$	(144)	$	95	$	1,988	$	46,408


	Six Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	13,962	$	(161)	$	89	$	(602)	$	13,288
Owner-occupied CRE	7,480		—		—		1,023		8,503
Non-owner occupied CRE	9,276		—		—		206		9,482
Total commercial business	30,718		(161)		89		627		31,273

2425

Table of Contents


	Six Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Residential real estate	2,872		—		—		(7)		2,865
Real estate construction and land development:
Residential	1,654		—		—		17		1,671
Commercial and multifamily	5,409		—		—		2,605		8,014
Total real estate construction and land development	7,063		—		—		2,622		9,685
Consumer	2,333		(297)		90		459		2,585
Total	$	42,986	$	(458)	$	179	$	3,701	$	46,408


	Three Months Ended June 30, 2022
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	15,265	$	(117)	$	149	$	(1,264)	$	14,033
Owner-occupied CRE	7,085		—		—		1,077		8,162
Non-owner occupied CRE	9,582		—		—		(70)		9,512
Total commercial business	31,932		(117)		149		(257)		31,707
Residential real estate	1,803		—		—		334		2,137
Real estate construction and land development:
Residential	1,124		—		6		(49)		1,081
Commercial and multifamily	3,175		—		53		(1,025)		2,203
Total real estate construction and land development	4,299		—		59		(1,074)		3,284
Consumer	2,299		(132)		53		348		2,568
Total	$	40,333	$	(249)	$	261	$	(649)	$	39,696


	Six Months Ended June 30, 2022
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	17,777	$	(280)	$	421	$	(3,885)	$	14,033
Owner-occupied CRE	6,411		(36)		—		1,787		8,162
Non-owner occupied CRE	8,861		—		—		651		9,512
Total commercial business	33,049		(316)		421		(1,447)		31,707
Residential real estate	1,409		(30)		3		755		2,137
Real estate construction and land development:
Residential	1,304		—		14		(237)		1,081
Commercial and multifamily	3,972		—		53		(1,822)		2,203
Total real estate construction and land development	5,276		—		67		(2,059)		3,284
Consumer	2,627		(258)		619		(420)		2,568
Total	$	42,361	$	(604)	$	1,110	$	(3,171)	$	39,696

Table of ~~Content~~Contents

Three Months Ended June 30, 2021
Beginning Balance Charge-offs Recoveries (Reversal of) Provision for Credit Losses Ending Balance
(In thousands)
Commercial business:
Commercial and industrial $ 21,770 $ (13) $ 132 $ (4,404) $ 17,485
Owner-occupied CRE 10,464 — 11 (1,913) 8,562
Non-owner occupied CRE 12,970 — — (2,340) 10,630
Total commercial business 45,204 (13) 143 (8,657) 36,677
Residential real estate 1,402 — — (249) 1,153
Real estate construction and land development:
Residential 2,048 — 4 (416) 1,636
Commercial and multifamily 11,223 — — (2,388) 8,835
Total real estate construction and land development 13,271 — 4 (2,804) 10,471
Consumer 4,348 (120) 144 (1,111) 3,261
Total $ 64,225 $ (133) $ 291 $ (12,821) $ 51,562

Six Months Ended June 30, 2021
Beginning Balance Charge-offs Recoveries (Reversal of) Provision for Credit Losses Ending Balance
(In thousands)
Commercial business:
Commercial and industrial $ 30,010 $ (14) $ 337 $ (12,848) $ 17,485
Owner-occupied CRE 9,486 — 13 (937) 8,562
Non-owner occupied CRE 10,112 — — 518 10,630
Total commercial business 49,608 (14) 350 (13,267) 36,677
Residential real estate 1,591 — — (438) 1,153
Real estate construction and land development:
Residential 1,951 — 20 (335) 1,636
Commercial and multifamily 11,141 (1) — (2,305) 8,835
Total real estate construction and land development 13,092 (1) 20 (2,640) 10,471
Consumer 5,894 (305) 283 (2,611) 3,261
Total $ 70,185 $ (320) $ 653 $ (18,956) $ 51,562

(5)Goodwill and Other Intangible Assets

(a) Goodwill

There were no additions to goodwill during the ~~three and~~ six months ended June 30, ~~2022~~2023 and ~~2021.~~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 extent the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, ~~2021~~2022 and concluded that there was no impairment. Due to a sustained decline in stock price during the three months ended June 30, 2023, the Company determined a triggering event occurred and consequently performed a quantitative assessment of goodwill as of May 31, 2023. We estimated the fair value of the reporting unit by weighting results from the market approach and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill were employed and included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, we determined that the fair value of the reporting unit more likely than not exceeded the carrying value. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.

(b) Other Intangible Assets

Other intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets during the ~~three and~~ six months ended June 30, ~~2022~~2023 and ~~2021.~~2022.

(6)Derivative Financial Instruments

The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. The transaction allows the Company’s customer to effectively convert a variable rate loan to a

~~Table of Content~~

fixed rate loan, or a fixed rate loan to a variable rate loan, and the Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third-party. These interest rate swaps are not designated as hedging instruments.

The Company is exposed to interest rate risk as part of the transaction. However, the Company acts as an intermediary for its customer therefore changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

Fee income related to interest rate swap derivative contract transactions is recorded in Interest rate swap fees on the unaudited Condensed Consolidated Statements of Income. The fair value of derivative positions outstanding is included in Prepaid expenses and other assets and Accrued expenses and other liabilities in the unaudited Condensed Consolidated Statements of Financial Condition. The gains and losses due to changes in fair value and all cash flows are included in Other income in the unaudited Condensed Consolidated Statements of Income, but typically net to zero based on the identical back-to-back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at the dates indicated:


		June 30, 2022			December 31, 2021					June 30, 2023			December 31, 2022
		Notional Amounts		Estimated Fair Value	Notional Amounts		Estimated Fair Value			Notional Amounts		Estimated Fair Value	Notional Amounts		Estimated Fair Value
		(In thousands)								(In thousands)
Non-hedging interest rate derivatives	Non-hedging interest rate derivatives								Non-hedging interest rate derivatives
Interest rate swap asset (1)	Interest rate swap asset (1)	$	305,902	19,842	$	322,726	$	15,219	Interest rate swap asset (1)	$	288,359	28,032	$	288,785	$	30,107
Interest rate swap liability (1)	Interest rate swap liability (1)	305,902		(19,842)	322,726		(15,286)		Interest rate swap liability (1)	288,359		(28,032)	288,785		(30,107)

(1) The estimated fair value of derivatives with customers was ~~$(19.0)~~$(28.0) million and ~~$9.8~~$(30.1) million as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The estimated fair value of derivatives with third-parties was ~~$19.0~~$28.0 million and ~~$(9.8)~~$30.1 million as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk for derivatives with the customer is controlled through the credit approval process, amount limits, and monitoring procedures and is concentrated within our primary market areas. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.

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(7)Stockholders’ Equity

(a) Earnings Per Common Share

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

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
(In thousands, except shares)
Net income $ 18,584 $ 32,702 $ 38,341 $ 58,046
Basic:
Weighted average common shares outstanding 35,110,334 35,994,740 35,102,572 35,961,032
Diluted:
Basic weighted average common shares outstanding 35,110,334 35,994,740 35,102,572 35,961,032
Effect of potentially dilutive common shares (1)
299,190 294,724 310,150 307,829
Total diluted weighted average common shares outstanding 35,409,524 36,289,464 35,412,722 36,268,861
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)
16,978 7,065 14,334 4,766


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(In thousands, except shares)

Net income	$	16,846	$	18,584	$	37,303	$	38,341


Basic:
Weighted average common shares outstanding	35,058,155		35,110,334		35,083,133		35,102,572


Diluted:
Basic weighted average common shares outstanding	35,058,155		35,110,334		35,083,133		35,102,572
Effect of potentially dilutive common shares (1)	68,435		299,190		265,135		310,150
Total diluted weighted average common shares outstanding	35,126,590		35,409,524		35,348,268		35,412,722
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)	328,084		16,978		142,197		14,334

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

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

(b) Dividends

The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend

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substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.

The following table summarizes the dividend activity during the six months ended June 30, ~~2022~~ 2023and the calendar year ~~2021:~~2022:

Declared

Cash Dividend per Share

Record Date

Paid Date

~~January 27, 2021~~

~~$0.20~~

~~February 10, 2021~~

~~February 24, 2021~~

~~April 21, 2021~~

~~$0.20~~

~~May 5, 2021~~

~~May 19, 2021~~

~~July 21, 2021~~

~~$0.20~~

~~August 4, 2021~~

~~August 18, 2021~~

~~October 20, 2021~~

~~$0.21~~

~~November 3, 2021~~

~~November 17, 2021~~

January 26, 2022

$0.21

February 9, 2022

February 23, 2022

April 20, 2022

$0.21

May 4, 2022

May 18, 2022

July 20, 2022

$0.21

August 3, 2022

August 17, 2022

October 19, 2022

$0.21

November 2, 2022

November 16, 2022

January 25, 2023

$0.22

February 8, 2023

February 22, 2023

April 19, 2023

$0.22

May 4, 2023

May 18, 2023

The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.

The Company has had various stock repurchase programs since March 1999. On March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase ~~plan.~~plan with 455,909 shares remaining available for repurchase as of June 30, 2023. The number, timing and price of shares repurchased under the twelfth stock repurchase plan will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.

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

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Plan Total(1)
Repurchased shares 19,531 — 100,090 — 1,160,840
Stock repurchase average share price $ 24.63 $ — $ 25.07 $ — $ 23.94

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	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022		Plan Total(1)




Twelfth Stock Repurchase Plan
Repurchased shares	93,950		19,531		182,305		100,090		1,343,145
Stock repurchase average share price	$	17.79	$	24.63	$	20.23	$	25.07	$	23.43

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

In addition to the stock repurchases under a stock repurchase plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock ~~awards and~~ units. The following table provides total shares repurchased to pay withholding taxes during the periods indicated:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Repurchased shares to pay withholding taxes	Repurchased shares to pay withholding taxes	1,649		2,557		26,180		25,803		Repurchased shares to pay withholding taxes	4,508		1,649		31,232		26,180
Stock repurchase to pay withholding taxes average share price	Stock repurchase to pay withholding taxes average share price	$	24.43	$	27.47	$	25.40	$	29.33	Stock repurchase to pay withholding taxes average share price	$	17.60	$	24.43	$	22.08	$	25.40

(8)Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.

Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.

Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

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(a) Recurring and Nonrecurring Basis

The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:

Investment Securities:

The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third-party pricing services.

Collateral-Dependent Loans:

Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Bank also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.

Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Bank. Once received, the Bank's internal appraisal department reviews and approves the assumptions and approaches utilized

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in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Derivative Financial Instruments:

The Bank obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Bank assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.

~~Branches held for sale~~:

Branches held for sale are recorded at fair value less costs to sell when transferred from premises and equipment, net to prepaid expenses and other assets on the unaudited Condensed Consolidated Statements of Financial Condition with any valuation adjustment recorded within other noninterest expense on the unaudited Condensed Consolidated Statements of Income. The fair value of branches held for sale is determined based on a real estate appraisal or broker price opinion. Adjustments are routinely made in the appraisal and broker price opinion process by independent appraisers and commercial real estate brokers, respectively, to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value. Additionally, the fair value of branches held for sale can be adjusted based on executed agreements of sale to be completed at a future date.

Recurring Basis

The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:


		June 30, 2022									June 30, 2023
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3
		(In thousands)									(In thousands)
Assets	Assets									Assets
Investment securities available for sale:	Investment securities available for sale:									Investment securities available for sale:
U.S. government and agency securities	U.S. government and agency securities	$	65,668	$	19,939	$	45,729	$	—	U.S. government and agency securities	$	64,259	$	—	$	64,259	$	—
Municipal securities	Municipal securities	200,010		—		200,010		—		Municipal securities	130,015		2,168		127,847		—
Residential CMO and MBS	Residential CMO and MBS	398,156		—		398,156		—		Residential CMO and MBS	410,972		—		410,972		—
Commercial CMO and MBS										Commercial CMO and MBS	648,341		—		648,341		—
Corporate obligations										Corporate obligations	3,774		—		3,774		—
Other asset-backed securities										Other asset-backed securities	19,189		—		19,189		—
Total investment securities available for sale										Total investment securities available for sale	1,276,550		2,168		1,274,382		—
Equity security										Equity security	244		244		—		—
Derivative assets - interest rate swaps										Derivative assets - interest rate swaps	28,032		—		28,032		—
Liabilities										Liabilities
Derivative liabilities - interest rate swaps										Derivative liabilities - interest rate swaps	$	28,032	$	—	$	28,032	$	—

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June 30, 2022
Total Level 1 Level 2 Level 3
(In thousands)
Commercial CMO and MBS 493,620 — 493,620 —
Corporate obligations 5,978 — 5,978 —
Other asset-backed securities 24,156 — 24,156 —
Total investment securities available for sale 1,187,588 19,939 1,167,649 —
Equity security 186 186 — —
Derivative assets - interest rate swaps 19,842 — 19,842 —
Liabilities
Derivative liabilities - interest rate swaps $ 19,842 $ — $ 19,842 $ —


		December 31, 2021									December 31, 2022
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3
		(In thousands)									(In thousands)
Assets	Assets									Assets
Investment securities available for sale:	Investment securities available for sale:									Investment securities available for sale:
U.S. government and agency securities	U.S. government and agency securities	$	21,373	$	—	$	21,373	$	—	U.S. government and agency securities	$	63,859	$	19,779	$	44,080	$	—
Municipal securities	Municipal securities	221,212		—		221,212		—		Municipal securities	153,026		5,399		147,627		—
Residential CMO and MBS	Residential CMO and MBS	306,884		—		306,884		—		Residential CMO and MBS	424,386		—		424,386		—
Commercial CMO and MBS	Commercial CMO and MBS	315,861		—		315,861		—		Commercial CMO and MBS	664,421		—		664,421		—
Corporate obligations	Corporate obligations	2,014		—		2,014		—		Corporate obligations	3,834		—		3,834		—
Other asset-backed securities	Other asset-backed securities	26,991		—		26,991		—		Other asset-backed securities	21,917		—		21,917		—
Total investment securities available for sale	Total investment securities available for sale	894,335		—		894,335		—		Total investment securities available for sale	1,331,443		25,178		1,306,265		—
Equity security	Equity security	240		240		—		—		Equity security	185		185		—		—
Derivative assets - interest rate swaps	Derivative assets - interest rate swaps	15,219		—		15,219		—		Derivative assets - interest rate swaps	30,107		—		30,107		—
Liabilities	Liabilities									Liabilities
Derivative liabilities - interest rate swaps	Derivative liabilities - interest rate swaps	$	15,286	$	—	$	15,286	$	—	Derivative liabilities - interest rate swaps	$	30,107	$	—	$	30,107	$	—

Nonrecurring Basis

The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following tables represent assets measured at fair value on a nonrecurring basis at the dates indicated:

Fair Value at June 30, 2022
Basis(1)
Total Level 1 Level 2 Level 3
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial $ 1,054 $ 969 $ — $ — $ 969
Owner-occupied CRE 613 186 — — 186
Total assets measured at fair value on a nonrecurring basis $ 1,667 $ 1,155 $ — $ — $ 1,155

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			Fair Value at June 30, 2023
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	220	$	114	$	—	$	—	$	114
Owner-occupied CRE	613		178		—		—		178











Total assets measured at fair value on a nonrecurring basis	$	833	$	292	$	—	$	—	$	292

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

Fair Value at December 31, 2021
Basis(1)
Total Level 1 Level 2 Level 3
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial $ 1,911 $ 1,049 $ — $ — $ 1,049
Owner-occupied CRE 613 189 — — 189
Total commercial business 2,524 1,238 — — 1,238

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Real estate construction and land development:
Commercial and multifamily 991 $ 534 — — 534
Total 3,515 1,772 — — 1,772
Prepaid expenses and other assets:
Branch held for sale (2)
698 698 — — 698
Total assets measured at fair value on a nonrecurring basis $ 4,213 $ 2,470 $ — $ — $ 2,470


			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 and the carrying value of the branch held for sale.~~loans.

~~(2)~~ ~~In December 2021, one branch was written down to its net realizable value concurrent with the signing of an agreement for sale at a future date.~~

~~The following table represents the net (loss) gain recorded in earnings as a result of nonrecurring fair value adjustments recorded during the periods indicated:~~

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial $ 35 $ 6 $ 23 $ (28)
Owner-occupied CRE (3) (76) (3) (76)
Total commercial business 32 (70) 20 (104)
Real estate construction and land development:
Commercial and multifamily — (23) — (38)
Net loss from nonrecurring fair value adjustments $ 32 $ (93) $ 20 $ (142)

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the dates indicated:

~~June 30, 2022~~

Fair
Value

Valuation
Technique(s)

~~Unobservable Input(s)~~

Range of Inputs; Weighted
Average

~~(Dollars in thousands)~~

~~Collateral-dependent loans~~

~~1,155~~

~~Market approach~~

~~Adjustment for differences between the comparable sales~~

~~N/A(1)~~

June 30, 2023

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs

Weighted

Average (1)

(Dollars in thousands)

Collateral-dependent loans

292

Market approach

Adjustments to reflect current conditions and selling costs

16.1% - 16.5%

16.3%

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

~~December 31, 2021~~

December 31, 2022

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs

Weighted

Average (1)

(Dollars in thousands)

Collateral-dependent loans

182

Market approach

Adjustments to reflect current conditions and selling costs

14.6% - 14.6%

14.6%

(1) Weighted by net discount to net appraisal fair value

Fair
Value

Valuation
Technique(s)

~~Unobservable Input(s)~~

Range of Inputs; Weighted
Average

~~(Dollars in thousands)~~

~~Collateral-dependent loans~~

~~1,772~~

~~Market approach~~

~~Adjustment for differences between the comparable sales~~

~~35.0% - (11.0%); 13.8%~~

~~Branch held for sale~~

~~698~~

~~Market approach~~

~~Sale agreement~~

~~Not applicable~~

(b) Fair Value of Financial Instruments

Broadly traded markets do not exist for most of the Company’s financial 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 dodoes not represent, and should not be construed to represent, the underlying value of the Company.

The following tables present the carrying value amount of the Company’s financial instruments and their corresponding

~~Table of Content~~

estimated fair values at the dates indicated:

June 30, 2022
Carrying
Value Fair
Value Fair Value Measurements Using:
Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents $ 994,055 $ 994,055 $ 994,055 $ — $ —
Investment securities available for sale 1,187,588 1,187,588 19,939 1,167,649 —
Investment securities held to maturity 615,653 559,312 — 559,312 —
Loans held for sale 1,311 1,353 — 1,353 —
Loans receivable, net 3,834,368 3,760,294 — — 3,760,294
Accrued interest receivable 15,908 15,908 272 6,185 9,451
Derivative assets - interest rate swaps 19,842 19,842 — 19,842 —
Equity security 186 186 186 — —
Financial Liabilities:
Non-maturity deposits $ 6,019,421 $ 6,019,421 $ 6,019,421 $ — $ —
Certificates of deposit 310,769 311,481 — 311,481 —
Securities sold under agreement to repurchase 41,827 41,827 41,827 — —
Junior subordinated debentures 21,326 19,250 — — 19,250
Accrued interest payable 83 83 31 16 36
Derivative liabilities - interest rate swaps 19,842 19,842 — 19,842 —

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December 31, 2021
Carrying
Value Fair
Value Fair Value Measurements Using:
Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents $ 1,723,292 $ 1,723,292 $ 1,723,292 $ — $ —
Investment securities available for sale 894,335 894,335 — 894,335 —
Investment securities held to maturity 383,393 376,331 — 376,331 —
Loans held for sale 1,476 1,527 — 1,527 —
Loans receivable, net 3,773,301 3,849,602 — — 3,849,602
Accrued interest receivable 14,657 14,657 14 4,582 10,061
Derivative assets - interest rate swaps 15,219 15,219 — 15,219 —
Equity security 240 240 240 — —
Financial Liabilities:
Non-maturity deposits $ 6,038,498 $ 6,038,498 $ 6,038,498 $ — $ —
Certificates of deposit 342,839 344,025 — 344,025 —
Securities sold under agreement to repurchase 50,839 50,839 50,839 — —
Junior subordinated debentures 21,180 18,750 — — 18,750
Accrued interest payable 73 73 33 19 21
Derivative liabilities - interest rate swaps 15,286 15,286 — 15,286 —


	June 30, 2023
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	108,378	$	108,378	$	108,378	$	—	$	—
Investment securities available for sale	1,276,550		1,276,550		2,168		1,274,382		—
Investment securities held to maturity	754,276		664,810		—		664,810		—
Loans held for sale	752		765		—		765		—
Loans receivable, net	4,204,936		4,086,835		—		—		4,086,835
Accrued interest receivable	18,969		18,969		22		6,949		11,998
Derivative assets - interest rate swaps	28,032		28,032		—		28,032		—
Equity security	244		244		244		—		—
Financial Liabilities:
Non-maturity deposits	$	5,154,380	$	5,154,380	$	5,154,380	$	—	$	—
Certificates of deposit	441,163		446,196		—		446,196		—
Borrowings	450,000		447,251		—		447,251		—
Securities sold under agreement to repurchase	38,215		38,215		38,215		—		—
Junior subordinated debentures	21,619		19,500		—		—		19,500
Accrued interest payable	3,480		3,480		60		3,344		76
Derivative liabilities - interest rate swaps	28,032		28,032		—		28,032		—


	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		—

(9)Cash Restriction

The Bank had no cash restrictions at June 30, ~~2022~~2023 and ~~had restricted cash included in interest earning deposits of $9.8 million at~~ December 31, 2021 relating to collateral required on interest rate swaps from third-parties as discussed in Note (6) Derivative Financial Instruments. The Bank does not have a collateral requirement with customers.2022.

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(10)Commitments and Contingencies

In the ordinary course of business, the Bank may enter into various types of transactions that include commitments to extend credit that are not included in its unaudited Condensed Consolidated Financial Statements. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. 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, at the dates indicated:


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
		(In thousands)					(In thousands)
Commercial business:	Commercial business:					Commercial business:
Commercial and industrial	Commercial and industrial	$	553,134	$	570,156	Commercial and industrial	$	544,443	$	548,438
Owner-occupied CRE	Owner-occupied CRE	3,612		2,252		Owner-occupied CRE	2,970		3,083
Non-owner occupied CRE	Non-owner occupied CRE	13,310		7,487		Non-owner occupied CRE	18,917		13,396
Total commercial business	Total commercial business	570,056		579,895		Total commercial business	566,330		564,917

Real estate construction and land development:	Real estate construction and land development:					Real estate construction and land development:
Residential	Residential	52,374		51,838		Residential	49,081		43,460
Commercial and multifamily	Commercial and multifamily	217,177		209,217		Commercial and multifamily	346,083		348,956
Total real estate construction and land development	Total real estate construction and land development	269,551		261,055		Total real estate construction and land development	395,164		392,416
Consumer	Consumer	307,906		285,010		Consumer	334,088		323,016
Total outstanding commitments	Total outstanding commitments	$	1,147,513	$	1,125,960	Total outstanding commitments	$	1,295,582	$	1,280,349

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
		(In thousands)									(In thousands)
Balance, beginning of period	Balance, beginning of period	$	1,552	$	3,617	$	2,607	$	4,681	Balance, beginning of period	$	1,856	$	1,552	$	1,744	$	2,607
Reversal of provision for credit losses on unfunded commitments		(555)		(1,166)		(1,610)		(2,230)
(Reversal of) provision for credit losses on unfunded commitments										(Reversal of) provision for credit losses on unfunded commitments	(79)		(555)		33		(1,610)
Balance, end of period	Balance, end of period	$	997	$	2,451	$	997	$	2,451	Balance, end of period	$	1,777	$	997	$	1,777	$	997

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 six months ended June 30, ~~2022.~~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, ~~2021~~2022 audited Consolidated Financial Statements and the accompanying Notes included in our ~~2021~~2022 Annual Form 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. 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 residential real estate loans on single family properties located primarily in our markets. ~~During the three months ended March 31, 2020, we ceased indirect auto loan originations, included in our consumer loan portfolio.~~

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.~~

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deposits and borrowings. Management manages the repricing characteristics of the Company's interest earning assets and interest

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bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates including 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 in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.

Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan 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, card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and 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 ~~consists~~consist primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services ~~consists~~consist primarily of third-party service providers such as auditors, consultants and lawyers.

Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from ~~the COVID-19 Pandemic and~~ inflation and the governmental actions taken to address ~~these issues.~~this issue. Net income is also impacted by growth of operations through organic growth or acquisitions.

~~COVID-19 Pandemic Response~~Recent Developments

Inflationary pressures persisted in 2022 and through the six months ended June 30, 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 500 basis point increase to the federal funds rate from March 2022 through June 30, 2023. Management notes that the rapid intervals of rate increases by the Federal Reserve and flattening or inversion of the yield curve, have boosted expectations of the US entering a recession within the next 12 months. 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 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.

•AOCI - 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 costs - Given the significant rate increases by the FOMC, it is likely that deposit costs will continue to increase and 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.

Further, recent developments and events in the financial services industry, including the failures of two large U.S. banks in the span of three days during March 2023 and another failure in early May 2023, created industry-wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations and eroding consumer confidence in the banking system. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks and more competition for bank deposits. While many factors played a role in the ultimate failures, these institutions had significant industry/demographic concentrations within their

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deposit bases and high ratios of uninsured deposits. Lack of diversity within a deposit base may increase the risk of events or trends that could prompt a larger-scale demand for deposits outflow. Further, concerns over a financial institution's ability to protect deposit balances in excess of the federally insured limit may increase the risk of a deposit run.

Heritage’s business, Consolidated Statements of Financial Condition and depositor profiles differ substantially from the banking institutions that are the focus of the recent bank failures. We consider our deposit base to be seasoned, stable and well-diversified, and we do not have any significant industry concentrations among our non-insured deposits. At June 30, 2023, our average deposit account size, calculated by dividing period-end deposits by the population of accounts with balances, was approximately $51,000. The recent industry events and developments have not had a material impact on our financial condition, operations, customer base, liquidity capital position or risk profile, nor have they required us to make any significant changes to our interest rate risk and asset/liability management policies following a review by our Asset Liability Committee. Nevertheless, in response to these recent developments, we have (1) reviewed our contingent liquidity funding plan, including validating procedures and reviewing execution risks in the event of a sudden critical liquidity event, (2) enhanced communication with our customers by holding a bank-wide training session to provide client-facing personnel with information on FDIC insurance, alternative product offerings, and data demonstrating the financial strength of the Bank, and (3) enhanced our monitoring of deposit flows and liquidity including monitoring of (i) deposits by segment, region and location, (ii) liquidity levels and (iii) transaction volumes to better enable us to detect any potential material changes in our financial condition.

Notwithstanding the above, the continued effects of recent industry events and developments could materially and adversely impact our business or financial condition, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses. Moreover, these recent events and developments have, and could continue to, adversely impact the market price and volatility of Heritage’s securities. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments. We are generally unable to control the amount of premiums or special assessments that our banking subsidiary may be required to pay for FDIC insurance.

The Company ~~maintains~~continues to focus on serving its ~~commitment to supporting its community~~customers and ~~customers during~~communities, maintaining the ~~COVID-19 Pandemic and remains focused on keeping~~well-being of its employees, ~~safe~~ and ~~the Bank running effectively to serve~~executing its ~~customers.~~strategic initiatives. The ~~Bank will continue~~Company continues to monitor ~~branch access~~the economic environment and ~~occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.~~

~~Branch Consolidation Plan~~

The Company reduced the branch count to 49 from 61 branches during the year ended December 31, 2021, including the consolidation of eight branches and four branches during the three months ended March 31, 2021 and December 31, 2021, respectively. The Company integrated these locations into other branches within its network. These actions were the result of the Company’s increased focus on balancing physical locations and digital banking channels, driven by increased customer usage of online and mobile banking and a commitment to improve digital banking technology.makes changes as appropriate.

Results of Operations

Comparison of quarter ended June 30, ~~2022~~2023 to the comparable quarter in the prior year

Net ~~inco~~meincome was ~~$18.6~~$16.8 million, or ~~$0.52~~$0.48 per diluted common share, for the three months ended June 30, ~~2022~~2023, compared to ~~$32.7~~$18.6 million, or ~~$0.90~~$0.52 per diluted common share, for the same period in ~~2021.~~2022. Net income decreased ~~$14.1~~$1.7 million, or ~~43.2%~~9.4%, for the three months ended June 30, 2023 compared to the same period in 2022 due primarily to a ~~lower~~$1.9 million provision for credit losses for the three months ended June 30, 2023 compared to a $1.2 million reversal of provision for credit losses for the same period in 2022 and ~~secondarily~~an increase in noninterest expense of $5.6 million for the three months ended June 30, 2023 compared to the same period in 2022.

The decrease in net income was partially offset by an increase in net interest income of $5.8 million, or 11.5%, to $55.8 million for the three months ended June 30, 2023, compared to $50.0 million for the same period in 2022 due primarily to ~~lower~~an increase of $18.3 million in interest earned on interest earning assets following increases in market interest rates offset partially by a $12.6 million increase in interest paid on interest bearing deposits and ~~fees on loans.~~ borrowings.

The Company’s efficiency ratio was ~~62.57%~~65.5% for the three months endedJune 30, ~~2022~~2023 compared to ~~58.18%~~62.6% for the same period in ~~2021.~~2022.

Comparison of six months endedJune 30, ~~2022~~2023 to the comparable period in the prior year.

Net income was $~~38.3~~37.3 million, or $1.06 per diluted common share, for the six months ended June 30, 2023 compared to $38.3 million, or $1.08 per diluted common share, for the ~~six months ended June 30, 2022 compared t~~same period in 2022. Net income decreased ~~o $58.0~~$1.0 million, or ~~$1.60~~ ~~per diluted common share,~~2.7%, due primarily to a $3.7 million provision for credit losses for the six months ended June 30, ~~2021. Net income decreased~~2023, compared to a $4.8 million ~~$19.7 million, or 33.9%, also due primarily to lower~~ reversal ofof provision for credit losses for the same period in 2022, and ~~secondarily due to lower interest and fees on loans~~an increase in noninterest expense of ~~. The Company’s efficiency ratio was 63.46%~~$11.5 million for the six months ended June 30, ~~2022~~2023 compared to ~~59.84%~~the same period in 2022.

The decrease in net income was partially offset by an increase in net interest income of $18.7 million, or 19.3%, to $115.7 million for the six months ended June 30, 2023, compared to $97.0 million for the same period in ~~2021.~~2022 due primarily to a $36.4 million increase in interest earned on interest earning assets following increases in market interest rates offset partially by a $17.7 million increase in interest paid on interest bearing deposits and borrowings

The Company’s efficiency ratio was 63.21% for the six months endedJune 30, 2023 compared to 63.46% for the same period in 2022.

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Table of ~~Content~~Contents

~~Average Balances, Yields and Rates Paid~~

~~The following table provides relevant net interest income information for the periods indicated:~~

Three Months Ended June 30,
2022 2021 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)
$ 3,812,045 $ 40,890 4.30 % $ 4,402,868 $ 50,750 4.62 % $ (590,823) $ (9,860) (0.32) %
Taxable securities 1,450,328 7,607 2.10 799,023 4,050 2.03 651,305 3,557 0.07
Nontaxable securities (3)
137,429 893 2.61 160,489 947 2.37 (23,060) (54) 0.24
Interest earning deposits 1,213,156 2,342 0.77 964,791 263 0.11 248,365 2,079 0.66
Total interest earning assets 6,612,958 51,732 3.14 % 6,327,171 56,010 3.55 % 285,787 (4,278) (0.41) %
Noninterest earning assets 772,658 752,034 20,624
Total assets $ 7,385,616 $ 7,079,205 $ 306,411
Interest Bearing Liabilities:
Certificates of Deposit $ 321,926 $ 324 0.40 % $ 381,417 $ 481 0.51 % $ (59,491) $ (157) (0.11) %
Savings accounts 652,407 88 0.05 591,616 89 0.06 60,791 (1) (0.01)
Interest bearing demand and money market accounts 3,067,373 1,001 0.13 2,836,717 954 0.13 230,656 47 —
Total interest bearing deposits 4,041,706 1,413 0.14 3,809,750 1,524 0.16 231,956 (111) (0.02)
Junior subordinated debentures 21,287 239 4.50 20,986 186 3.55 301 53 0.95
Securities sold under agreement to repurchase 48,272 32 0.27 43,259 35 0.32 5,013 (3) (0.05)
Total interest bearing liabilities 4,111,265 1,684 0.16 % 3,873,995 1,745 0.18 % 237,270 (61) (0.02) %
Noninterest bearing demand deposits 2,349,746 2,261,373 88,373
Other noninterest bearing liabilities 113,644 108,076 5,568
Stockholders’ equity 810,961 835,761 (24,800)
Total liabilities and stock-holders’ equity $ 7,385,616 $ 7,079,205 $ 306,411
Net interest income and spread $ 50,048 2.98 % $ 54,265 3.37 % $ (4,217) (0.39) %
Net interest margin 3.04 % 3.44 % (0.40) %

~~(1)~~ ~~Average balances are calculated using daily balances.~~

~~(2)~~ Average loan 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 fees of $2.4 million and $8.2 million for the three months ended June 30, 2022 and 2021, respectively.

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

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, other noninterest bearing liabilities and stockholders' equity; 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	%
May 3, 2023	5.00% - 5.25%	0.25	%

Comparison of quarter ended June 30, 2023 to the comparable quarter in the prior year

The following table provides relevant net interest income information for the periods indicated:


	Three Months Ended June 30,
	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)	$	4,145,556	$	53,623	5.19	%	$	3,812,045	$	40,890	4.30	%	$	333,511	$	12,733	0.89	%
Taxable securities	1,989,297		14,774		2.98		1,450,328		7,607		2.10		538,969		7,167		0.88
Nontaxable securities (3)	71,803		520		2.90		137,429		893		2.61		(65,626)		(373)		0.29
Interest earning deposits	90,754		1,154		5.10		1,213,156		2,342		0.77		(1,122,402)		(1,188)		4.33
Total interest earning assets	6,297,410		70,071		4.46	%	6,612,958		51,732		3.14	%	(315,548)		18,339		1.32	%
Noninterest earning assets	845,455						772,658						72,797
Total assets	$	7,142,865					$	7,385,616					$	(242,751)
Interest Bearing Liabilities:
Certificates of Deposit	$	421,451	$	2,483	2.36	%	$	321,926	$	324	0.40	%	$	99,525	$	2,159	1.96	%
Savings accounts	551,201		157		0.11		652,407		88		0.05		(101,206)		69		0.06
Interest bearing demand and money market accounts	2,782,353		5,967		0.86		3,067,373		1,001		0.13		(285,020)		4,966		0.73
Total interest bearing deposits	3,755,005		8,607		0.92		4,041,706		1,413		0.14		(286,701)		7,194		0.78
Junior subordinated debentures	21,577		499		9.28		21,287		239		4.50		290		260		4.78
Securities sold under agreement to repurchase	39,755		63		0.64		48,272		32		0.27		(8,517)		31		0.37
Borrowings	417,896		5,078		4.87		—		—		—		417,896		5,078		4.87
Total interest bearing liabilities	4,234,233		14,247		1.35	%	4,111,265		1,684		0.16	%	122,968		12,563		1.19	%
Noninterest bearing demand deposits	1,900,640						2,349,746						(449,106)

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	Three Months Ended June 30,
	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)
Other noninterest bearing liabilities	183,250						113,644						69,606
Stockholders’ equity	824,742						810,961						13,781
Total liabilities and stock-holders’ equity	$	7,142,865					$	7,385,616					$	(242,751)
Net interest income and spread			$	55,824	3.11	%			$	50,048	2.98	%			$	5,776	0.13	%
Net interest margin					3.56	%					3.04	%					0.52	%

(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 fees of $726,000 and $2.4 million for the three months ended June 30, 2023 and 2022, respectively.

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

The following table provides the changes in net interest income for the three months ended June 30, ~~2022~~2023 compared to the three months ended June 30, ~~2021~~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	$	3,797	$	8,936	$	12,733	31.1	%
Taxable securities	3,382		3,785		7,167		94.2
Nontaxable securities	(466)		93		(373)		(41.8)
Interest earning deposits	(3,887)		2,699		(1,188)		(50.7)
Total interest income	$	2,826	$	15,513	$	18,339	35.5	%
Interest Bearing Liabilities:
Certificates of deposit	$	129	$	2,030	$	2,159	666.4	%
Savings accounts	(16)		85		69		78.4
Interest bearing demand and money market accounts	(101)		5,067		4,966		496.1
Total interest bearing deposits	12		7,182		7,194		509.1
Junior subordinated debentures	3		257		260		108.8
Securities sold under agreement to repurchase	(7)		38		31		96.9
Borrowings	5,078		—		5,078		100.0
Total interest expense	$	5,086	$	7,477	$	12,563	746.0	%
Net interest income	$	(2,260)	$	8,036	$	5,776	11.5	%

Net interest income increased $5.8 million, or 11.5%, to $55.8 million for the three months ended June 30, 2023 as compared to $50.0 million for the same period in 2022 due primarily to an increase in total interest income offset partially by an increase in total interest expense.

Total interest income increased $18.3 million, or 35.5%, to $70.1 million for the three months ended June 30, 2023, compared to $51.7 million for the same period in 2022 primarily due to a 132 basis point increase to the yield on interest earning assets to 4.46% for the three months ended June 30, 2023, as compared to 3.14% for the same period in 2022 due to an increase in market interest rates.

Total interest expense increased $12.6 million, or 746.0%, to $14.2 million during the three months ended June 30, 2023 compared to $1.7 million for the same period in 2022 due primarily to a 78 basis point increase in the cost of interest bearing deposits to 0.92% for the three months ended June 30, 2023, as compared to 0.14% for the same period in 2022 due to competitive rate pressures and the addition of interest expense on borrowings during the three months ended June 30, 2023 as compared to no interest expense on borrowings during the same period in 2022.

Net interest margin increased 52 basis points to 3.56% for the three months ended June 30, 2023 compared to 3.04% for the same period in 2022.The increase in the net interest margin was due to a shift into higher yielding interest earning assets

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as well as higher average yields on all interest earning assets following increases in market interest rates offset partially by an increase in cost of interest bearing liabilities.

Comparison of six months ended June 30, 2023 to the comparable period in the prior year

The following table provides relevant net interest income information for the periods indicated:


	Six Months Ended June 30,
	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)	$	4,092,769	$	104,073	5.13	%	$	3,792,792	$	81,915	4.36	%	$	299,977	$	22,158	0.77	%
Taxable securities	1,998,268		29,431		2.97		1,361,437		13,610		2.02		636,831		15,821		0.95
Nontaxable securities (3)	77,317		1,106		2.88		141,894		1,753		2.49		(64,577)		(647)		0.39
Interest earning deposits	87,086		2,126		4.92		1,357,420		3,048		0.45		(1,270,334)		(922)		4.47
Total interest earning assets	6,255,440		136,736		4.41	%	6,653,543		100,326		3.04	%	(398,103)		36,410		1.37	%
Noninterest earning assets	847,195						756,523						90,672
Total assets	$	7,102,635					$	7,410,066					$	(307,431)
Interest Bearing Liabilities:
Certificates of Deposit	$	386,026	$	3,707	1.94	%	$	329,100	$	662	0.41	%	$	56,926	$	3,045	1.53	%
Savings accounts	576,046		299		0.10		649,562		175		0.05		(73,516)		124		0.05
Interest bearing demand and money market accounts	2,805,645		9,129		0.66		3,066,849		2,000		0.13		(261,204)		7,129		0.53
Total interest bearing deposits	3,767,717		13,135		0.70		4,045,511		2,837		0.14		(277,794)		10,298		0.56
Junior subordinated debentures	21,539		981		9.18		21,250		433		4.11		289		548		5.07
Securities sold under agreement to repurchase	41,469		110		0.53		49,140		64		0.26		(7,671)		46		0.27
Borrowings	282,502		6,844		4.89		—		—		—	%	282,502		6,844		4.89
Total interest bearing liabilities	4,113,227		21,070		1.03	%	4,115,901		3,334		0.16	%	(2,674)		17,736		0.87	%
Noninterest bearing demand deposits	1,984,200						2,354,571						(370,371)
Other noninterest bearing liabilities	186,553						111,167						75,386
Stockholders’ equity	818,655						828,427						(9,772)
Total liabilities and stock-holders’ equity	$	7,102,635					$	7,410,066					$	(307,431)
Net interest income and spread			$	115,666	3.38	%			$	96,992	2.88	%			$	18,674	0.50	%
Net interest margin					3.73	%					2.94	%					0.79	%

(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 fees of $1.5 million and $5.8 million for the six months ended June 30, 2023 and 2022, respectively.

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

The following table provides the changes in net interest income for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 due to changes in average asset and liability balances (volume), changes in average 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:								Increase (Decrease) Due to Changes In:
		Volume		Yield/Rate		Total		% Change				Volume		Yield/Rate		Total		% Change
		(Dollars in thousands)								(Dollars in thousands)
Interest Earning Assets:	Interest Earning Assets:										Interest Earning Assets:
Loans receivable, net	Loans receivable, net	$	(6,499)	$	(3,361)	$	(9,860)	(19.4)	%		Loans receivable, net	$	6,833	$	15,325	$	22,158	27.0	%
Taxable securities											Taxable securities	7,864		7,957		15,821		116.2
Nontaxable securities											Nontaxable securities	(892)		245		(647)		(36.9)

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Increase (Decrease) Due to Changes In:
Volume Yield/Rate Total % Change
(Dollars in thousands)
Taxable securities 3,411 146 3,557 87.8
Nontaxable securities (144) 90 (54) (5.7)
Interest earning deposits 84 1,995 2,079 790.5
Total interest income $ (3,148) $ (1,130) $ (4,278) (7.6) %
Interest Bearing Liabilities:
Certificates of deposit $ (68) $ (89) $ (157) (32.6) %
Savings accounts 9 (10) (1) (1.1)
Interest bearing demand and money market accounts 76 (29) 47 4.9
Total interest bearing deposits 17 (128) (111) (7.3)
Junior subordinated debentures 3 50 53 28.5
Securities sold under agreement to repurchase 4 (7) (3) (8.6)
Total interest expense $ 24 $ (85) $ (61) (3.5) %
Net interest income $ (3,172) $ (1,045) $ (4,217) (7.8) %

~~Comparison of quarter ended June 30, 2022 to the comparable quarter in the prior year~~


	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total		% Change
	(Dollars in thousands)
Interest earning deposits	(5,290)		4,368		(922)		(30.2)
Total interest income	$	8,515	$	27,895	$	36,410	36.3	%
Interest Bearing Liabilities:
Certificates of deposit	$	134	$	2,911	$	3,045	460.0	%
Savings accounts	(21)		145		124		70.9
Interest bearing demand and money market accounts	(185)		7,314		7,129		356.5
Total interest bearing deposits	(72)		10,370		10,298		363.0
Junior subordinated debentures	6		542		548		126.6
Securities sold under agreement to repurchase	(11)		57		46		71.9
Borrowings	6,844		—		6,844		100.0
Total interest expense	$	6,767	$	10,969	$	17,736	532.0	%
Net interest income	$	1,748	$	16,926	$	18,674	19.3	%

Net interest income ~~decreased~~increased $18.7 million, or 19.3%, to $115.7 million for the six months ended June 30, 2023 as compared to $97.0 million for the same period in 2022 due primarily ~~as a result of the decrease~~to an increase in ~~deferred SBA PPP loan fees recognized due to a decrease in the volume of forgiven SBA PPP loans,~~total interest income offset partially by an increase in total interest expense.

Total interest income increased $36.4 million, or 36.3%, to $136.7 million for the six months ended June 30, 2023, compared to $100.3 million for the same period in 2022. The increase was the result of a ~~higher average balance of taxable investment securities and higher~~137 basis point increase on the yield ~~earned~~ on interest earning ~~deposits.~~

~~Net~~assets to 4.41% for the six months ended June 30, 2023, as compared to 3.04% for the same period in 2022, due to an increase in market interest ~~margin decreased due primarily to the~~rates as well as change in the mix of total interest earning assets into a higher ~~proportion of lower~~ yielding ~~investment securities and~~assets.

Total interest ~~earning deposits, resulting mostly from a significant decrease in SBA PPP loan balances.~~

~~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
June 30,
2022 June 30,
2021
Loan yield (GAAP) 4.30 % 4.62 %
Exclude impact from SBA PPP loans (0.15) (0.12)
Exclude impact from incremental accretion on acquired loans (0.03) (0.05)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1)
4.12 % 4.45 %

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

~~The impact~~expense increased $17.7 million, or 532.0%, to ~~loan yield from recoveries of interest and fees on loans classified as nonaccrual was one basis point~~$21.1 million during the ~~three months ended June 30, 2022 compared to 18 basis points during the same period in 2021.~~

~~Comparison of~~ six months ended June 30, ~~2022~~2023 compared to $3.3 million for the ~~comparable~~same period in ~~the prior year~~

~~The following table provides relevant net~~2022 due primarily to a 56 basis point increase in cost of interest ~~income information for the periods indicated:~~

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Six Months Ended June 30,
2022 2021 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)
Noninterest earning assets 756,523 754,533 1,990
Total assets $ 7,410,066 $ 6,940,187 $ 469,879
Interest Bearing Liabilities:
Certificates of Deposit $ 329,100 $ 662 0.41 % $ 387,310 $ 1,040 0.54 % $ (58,210) $ (378) (0.13) %
Savings accounts 649,562 175 0.05 575,942 184 0.06 73,620 (9) (0.01)
Interest bearing demand and money market accounts 3,066,849 2,000 0.13 2,784,714 2,028 0.15 282,135 (28) (0.02)
Total interest bearing deposits 4,045,511 2,837 0.14 3,747,966 3,252 0.17 297,545 (415) (0.03)
Junior subordinated debentures 21,250 433 4.11 20,950 373 3.59 300 60 0.52
Securities sold under agreement to repurchase 49,140 64 0.26 41,676 73 0.35 7,464 (9) (0.09)
Total interest bearing liabilities 4,115,901 3,334 0.16 % 3,810,592 3,698 0.20 % 305,309 (364) (0.04) %
Noninterest bearing demand deposits 2,354,571 2,183,638 170,933
Other noninterest bearing liabilities 111,167 114,542 (3,375)
Stockholders’ equity 828,427 831,415 (2,988)
Total liabilities and stock-holders’ equity $ 7,410,066 $ 6,940,187 $ 469,879
Net interest income and spread $ 96,992 2.88 % $ 106,503 3.39 % $ (9,511) (0.51) %
Net interest margin 2.94 % 3.47 % (0.53) %

~~(1)~~ ~~Average balances are calculated using daily balances.~~

~~(2)~~ Average loan 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 fees of $5.8 million and $15.4 millionbearing deposits to 0.70% for the six months ended June 30, 2023, as compared to 0.14% for the same period in 2022, ~~and 2021, respectively.~~

~~(3)~~ ~~Yields~~due to competitive rate pressures as well as the addition of interest expense on ~~tax-exempt loans and securities have not been stated~~borrowings during the six months ended June 30, 2023 as compared to no interest expense on ~~a tax-equivalent basis.~~borrowing during the same period in 2022.

Net ~~Interest Income and Margin Overview~~

~~The following table provides the changes in net~~ interest ~~income~~margin increased 79 basis points to 3.73% for the six months ended June 30, ~~2022~~2023 compared to the six months ended June 30, 2021 due to changes in average asset and liability balances (volume), changes in average 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 $ (14,257) $ (4,102) $ (18,359) (18.3) %
Taxable securities 6,248 (222) 6,026 79.5
Nontaxable securities (247) 95 (152) (8.0)
Interest earning deposits 410 2,200 2,610 595.9
Total interest income $ (7,846) $ (2,029) $ (9,875) (9.0) %
Interest Bearing Liabilities:
Certificates of deposit $ (142) $ (236) $ (378) (36.3) %
Savings accounts 22 (31) (9) (4.9)
Interest bearing demand and money market accounts 195 (223) (28) (1.4)
Total interest bearing deposits 75 (490) (415) (12.8)
Junior subordinated debentures 5 55 60 16.1
Securities sold under agreement to repurchase 12 (21) (9) (12.3)
Total interest expense $ 92 $ (456) $ (364) (9.8) %
Net interest income $ (7,938) $ (1,573) $ (9,511) (8.9) %

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~~Comparison of six months ended June 30, 2022 to the comparable period in the prior year~~

Net interest income decreased due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decrease in the volume of forgiven SBA PPP loans, offset partially by a higher average balance of taxable investment securities and higher yield earned on interest earning deposits.

~~Net interest margin decreased due primarily to the change in the mix of total interest earning assets into a higher proportion of lower yielding investment securities and interest earning deposits.~~

~~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~~2.94% for ~~the periods presented below~~:

Six Months Ended
June 30,
2022 2021
Loan yield (GAAP) 4.36 % 4.55 %
Exclude impact from SBA PPP loans (0.18) (0.05)
Exclude impact from incremental accretion on acquired loans (0.05) (0.09)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1) 4.13 % 4.41 %

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

~~The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was six basis points during the six months ended June 30, 2022 compared to 13 basis points during~~ the same period in ~~2021.~~2022. The increase in the net interest margin was due to a shift into higher yielding interest earning assets as well as higher average yields on all interest earning assets following increases in market interest rates offset partially by an increase in cost of interest bearing liabilities.

Provision for Credit Losses Overview

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

Comparison of quarter ended June 30, ~~2022~~2023 to the comparable quarter in the prior year

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

Three Months Ended
June 30,
2022 2021 Change % Change
(Dollars in thousands)
Reversal of provision for credit losses on loans $ (649) $ (12,821) $ 12,172 (94.9) %
Reversal of provision for credit losses on unfunded commitments (555) (1,166) 611 (52.4)
Reversal of provision for credit losses $ (1,204) $ (13,987) $ 12,783 (91.4) %


	Three Months Ended June 30,				Change
	2023		2022		$		%
	(Dollars in thousands)
Provision for (reversal of) credit losses on loans	$	1,988	$	(649)	$	2,637	406.3	%
Reversal of credit losses on unfunded commitments	(79)		(555)		476		85.8
Provision for (reversal of) credit losses	$	1,909	$	(1,204)	$	3,113	258.6	%

The provision for credit losses on loans reflects the amount required to maintain the ACL 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 increased during the three months ended June 30, 2023 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

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reversion period. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended June 30, 2023 was due primarily to higher loan utilization rates.

The reversal of provision for credit losses on loans recognized during the three months ended June 30, 2022 was due primarily to a reduction of loans individually evaluated for losses and, as a result, their related ACL. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended June 30, 2022 was due primarily to higher loan utilization ~~rates on commercial and industrial lines of credit.~~

The reversal of provision for credit losses on loans and unfunded commitments recognized during the three months ended June 30, 2021 was due primarily to continued improvements in the economic forecast at June 30, 2021 as compared to the forecast at March 31, 2021.

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rates.

Comparison of six months ended June 30, ~~2022~~2023 to the comparable period in the prior year

The following table presents the provision for credit losses for the periods indicated:

Six Months Ended
June 30,
2022 2021 Change Percentage Change
(Dollars in thousands)
Reversal of provision for credit losses on loans $ (3,171) $ (18,956) $ 15,785 (83.3) %
Reversal of provision for credit losses on unfunded commitments (1,610) (2,230) 620 (27.8)
Reversal of provision for credit losses $ (4,781) $ (21,186) $ 16,405 (77.4) %


	Six Months Ended June 30,
	2023		2022		Change		Percentage Change
	(Dollars in thousands)
Provision for (reversal of) credit losses on loans	$	3,701	$	(3,171)	$	6,872	(216.7)	%
Provision for (reversal of) credit losses on unfunded commitments	33		(1,610)		1,643		(102.0)
Provision for (reversal of) credit losses	$	3,734	$	(4,781)	$	8,515	(178.1)	%

The provision for credit losses recognized during the six months endedJune 30, 2023was due primarily to an increase in loans receivable as well as a change in mix of loans. The provision for credit losses on unfunded commitments recognized during the six months ended June 30, 2023 was due primarily to an increase in unfunded loan commitments offset partially by higher loan utilization rates.

The reversal of provision for credit losses recognized during the six months endedJune 30, 2022 was ~~also~~ due primarily to a reduction of loans individually evaluated for losses and, as a result, their related ACL.

The reversal of provision for credit losses on unfunded commitments recognized during the six months ended June 30, ~~2021~~2022 was ~~also~~ due ~~substantially~~primarily to ~~continued improvements in the economic forecast at June 30, 2021 as compared to the forecast at December 31, 2020.~~higher loan utilization rates.

Noninterest Income Overview

Comparison of ~~quarter ended June 30, 2022 to the comparable quarter in the prior year~~

~~The following table presents the change in the key components of noninterest income for the periods indicated:~~

Three Months Ended
June 30,
2022 2021 Change % Change
(Dollars in thousands)
Service charges and other fees $ 2,391 $ 2,067 $ 324 15.7 %
Card revenue 2,332 2,338 (6) (0.3)
Gain on sale of loans, net 219 1,003 (784) (78.2)
Interest rate swap fees 26 209 (183) (87.6)
Bank owned life insurance income 764 717 47 6.6
Gain on sale of other assets, net — 724 (724) (100.0)
Other income 1,284 1,239 45 3.6
Total noninterest income $ 7,016 $ 8,297 $ (1,281) (15.4) %

Noninterest income decreased due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined and secondarily due to gain on sale other assets, net reflecting the sale of of branches recognized during the second quarter of 2021.

~~Comparison of six~~three months ended June 30, ~~2022~~2023 to the comparable period in the prior year

The following table presents the change in the key components of noninterest income for the periods indicated:


		Six Months Ended June 30,									Three Months Ended June 30,				Change
		2022		2021		Change		% Change			2023		2022		$		%
		(Dollars in thousands)									(Dollars in thousands)
Service charges and other fees	Service charges and other fees	$	4,687	$	3,959	$	728	18.4	%	Service charges and other fees	$	2,682	$	2,577	$	105	4.1	%
Card revenue	Card revenue	4,773		4,435		338		7.6		Card revenue	2,123		2,146		(23)		(1.1)
Gain on sale of investment securities, net		—		29		(29)		(100.0)

Gain on sale of loans, net	Gain on sale of loans, net	460		2,373		(1,913)		(80.6)		Gain on sale of loans, net	101		219		(118)		(53.9)
Interest rate swap fees	Interest rate swap fees	305		361		(56)		(15.5)		Interest rate swap fees	115		26		89		342.3
Bank owned life insurance income	Bank owned life insurance income	2,459		1,373		1,086		79.1		Bank owned life insurance income	837		764		73		9.6
Gain on sale of other assets, net		204		746		(542)		(72.7)

Other income										Other income	1,423		1,284		139		10.8
Total noninterest income										Total noninterest income	$	7,281	$	7,016	$	265	3.8	%

Noninterest income increased $265,000, or 3.8%, during the three months ended June 30, 2023 compared to the same period in 2022 due primarily to an increase service charges on deposit accounts and dividend income on FHLB stock included in other income offset partially by a decline in gain on sale of loans, net due to a decline in the volume of mortgage loans sold.

Comparison of six months ended June 30, 2023 to the comparable period in the prior year

The following table presents the change in the key components of noninterest income for the periods indicated:



	Six Months Ended June 30,
	2023		2022		Change		% Change
	(Dollars in thousands)
Service charges and other fees	$	5,306	$	5,051	$	255	5.0	%
Card revenue	4,123		4,409		(286)		(6.5)
Loss on sale of investment securities, net	(286)		—		(286)		(100.0)

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		Six Months Ended June 30,
		2022		2021		Change		% Change			Six Months Ended June 30,
		(Dollars in thousands)									2023		2022		Change		% Change
Gain on sale of loans, net										Gain on sale of loans, net	150		460		(310)		(67.4)
Interest rate swap fees										Interest rate swap fees	168		305		(137)		(44.9)
Bank owned life insurance income										Bank owned life insurance income	1,546		2,459		(913)		(37.1)
Gain on sale of other assets, net										Gain on sale of other assets, net	2		204		(202)		(99.0)
Other income	Other income	2,666		3,272		(606)		(18.5)		Other income	4,530		2,666		1,864		69.9
Total noninterest income	Total noninterest income	$	15,554	$	16,548	$	(994)	(6.0)	%	Total noninterest income	$	15,539	$	15,554	$	(15)	(0.1)	%

Noninterest income decreased $15,000, or 0.1%, during the six months ended June 30, 2023 compared to the same period in 2022. Other income increased due primarily to ~~reduced~~a one-time $1.6 million gain on sale of Visa Inc. Class B common stock recognized during the six months ended June 30, 2023. Bank owned life insurance income decreased due primarily to a $1.0 million death benefit recognized during the six months ended June 30, 2022. Gain on sale of loans, net ~~as sales~~declined due primarily to a decrease in the volume of ~~secondary market mortgage~~ loans declined and higher gain on sale of other assets, net reflecting the sale of branches recognized during the six months end June 30, 2021, offset partially by an increase in bank owned life insurance income due to the recognition of a death benefit of $1.0 million during the three months ended March 31, 2022 as well as increases in service charges and other fees and card revenue reflecting increased customer transactions as businesses reopened in our market areas.sold.

Noninterest Expense Overview

Comparison of ~~quarter ended June 30, 2022 to the comparable quarter in the prior year~~

~~The following table presents changes in the key components of noninterest expense for the periods indicated:~~

Three Months Ended
June 30,
2022 2021 Change % Change
(Dollars in thousands)
Compensation and employee benefits $ 21,778 $ 21,803 $ (25) (0.1) %
Occupancy and equipment 4,171 4,091 80 2.0
Data processing 4,185 3,998 187 4.7
Marketing 344 567 (223) (39.3)
Professional services 529 1,037 (508) (49.0)
State/municipal business and use tax 867 991 (124) (12.5)
Federal deposit insurance premium 425 339 86 25.4
Amortization of intangible assets 704 797 (93) (11.7)
Other expense 2,704 2,773 (69) (2.5)
Total noninterest expense $ 35,707 $ 36,396 $ (689) (1.9) %

Noninterest expense decreased due primarily to third-party expenses related to SBA PPP loan forgiveness and higher legal costs related to loan collection efforts included in professional services expense for the second quarter of 2021.

~~Comparison of six~~three months ended June 30, ~~2022~~2023 to the comparable period in the prior year

The following table presents changes in the key components of noninterest expense for the periods indicated:


		Six Months Ended June 30,									Three Months Ended June 30,				Change
		2022		2021		Change		% Change			2023		2022		$		%
		(Dollars in thousands)									(Dollars in thousands)
Compensation and employee benefits	Compensation and employee benefits	$	43,030	$	44,004	$	(974)	(2.2)	%	Compensation and employee benefits	$	24,781	$	21,778	$	3,003	13.8	%
Occupancy and equipment	Occupancy and equipment	8,502		8,545		(43)		(0.5)		Occupancy and equipment	4,666		4,171		495		11.9
Data processing	Data processing	8,246		7,810		436		5.6		Data processing	4,500		4,185		315		7.5
Marketing	Marketing	610		1,080		(470)		(43.5)		Marketing	441		344		97		28.2
Professional services	Professional services	1,228		2,307		(1,079)		(46.8)		Professional services	751		529		222		42.0
State/municipal business and use tax	State/municipal business and use tax	1,663		1,963		(300)		(15.3)		State/municipal business and use tax	1,054		867		187		21.6
Federal deposit insurance premium	Federal deposit insurance premium	1,025		928		97		10.5		Federal deposit insurance premium	797		425		372		87.5

Amortization of intangible assets	Amortization of intangible assets	1,408		1,594		(186)		(11.7)		Amortization of intangible assets	623		704		(81)		(11.5)
Other expense	Other expense	5,715		5,407		308		5.7		Other expense	3,712		2,704		1,008		37.3
Total noninterest expense	Total noninterest expense	$	71,427	$	73,638	$	(2,211)	(3.0)	%	Total noninterest expense	$	41,325	$	35,707	$	5,618	15.7	%

Noninterest expense ~~decreased~~increased $5.6 million, or 15.7%, during the three months ended June 30, 2023 compared to the same period in 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 2023 and an increase in salaries and wages due to annual salary increases. Occupancy and equipment expense increased due to the expansion into Eugene, Oregon and Boise, Idaho. Data processing costs increased due primarily to the expansion of digital services including the addition of the ability to open consumer deposit accounts online. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023. Other expense increased due to an increase in customer deposit loss expense and employee related expenses which included additional expenses related to calling efforts for the newly added teams as well as a ~~decrease~~general increase in ~~professional services which was elevated~~operating costs.

Comparison of six months endedJune 30, 2023 to the comparable period in the prior year

The following table presents changes in the key components of noninterest expense for the periods indicated:


	Six Months Ended June 30,
	2023		2022		Change		% Change
	(Dollars in thousands)
Compensation and employee benefits	$	50,317	$	43,030	$	7,287	16.9	%
Occupancy and equipment	9,558		8,502		1,056		12.4
Data processing	8,842		8,246		596		7.2
Marketing	843		610		233		38.2
Professional services	1,379		1,228		151		12.3

Table of Contents


	Six Months Ended June 30,
	2023		2022		Change		% Change
	(Dollars in thousands)
State/municipal business and use tax	2,062		1,663		399		24.0
Federal deposit insurance premium	1,647		1,025		622		60.7

Amortization of intangible assets	1,246		1,408		(162)		(11.5)
Other expense	7,036		5,715		1,321		23.1
Total noninterest expense	$	82,930	$	71,427	$	11,503	16.1	%

Noninterest expense increased $11.5 million, or 16.1%, during the six months ended June 30, ~~2021~~2023 compared to the same period in 2022 due primarily to an increase in compensation and employee benefits resulting from a 6.0% increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in 2023 and an increase in salaries and wages due to annual salary increases. Occupancy and equipment expense increased due to the expansion into Eugene, Oregon and Boise, Idaho. Data processing costs ~~associated with our participation~~increased due primarily to the expansion of digital services including the addition of the ability to open consumer deposit accounts online. Federal deposit insurance premiums increased due to the increase in the ~~SBA PPP~~assessment rate starting in January 2023. Other expense increased due to an increase in customer deposit loss expense and employee related expenses which included additional expenses related to calling efforts for the newly added teams as well as a ~~decrease in~~

~~Table of Content~~

~~compensation and employee benefits from a lower headcount and a decrease in marketing expenses due to less activity offset partially by an~~general increase in ~~data processing as the Bank continues to invest in its technology platforms.~~operating costs.

Income Tax Expense Overview

Comparison of ~~quarter~~three months ended June 30, ~~2022~~2023 to the comparable ~~quarter~~period in the prior year

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


		Three Months Ended June 30,												Three Months Ended June 30,						Change
		2022			2021			Change			% Change			2023			2022			$			%
		(Dollars in thousands)												(Dollars in thousands)
Income before income taxes	Income before income taxes	$	22,561		$	40,153		$	(17,592)		(43.8)	%	Income before income taxes	$	19,871		$	22,561		$	(2,690)		(11.9)	%
Income tax expense	Income tax expense	$	3,977		$	7,451		$	(3,474)		(46.6)	%	Income tax expense	$	3,025		$	3,977		$	(952)		(23.9)	%
Effective income tax rate	Effective income tax rate	17.6		%	18.6		%	(1.0)		%	(5.4)	%	Effective income tax rate	15.2		%	17.6		%	(2.4)		%	(13.6)	%

Income tax expense ~~decreased due primarily to the change in income before income taxes earned between the periods~~ and ~~decreases in~~ the effective income tax rate both decreased due primarily to lower estimated ~~annual~~ pre-tax income ~~for the year ended December 31, 2022,~~ which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and ~~LIHTC.~~

investments in low-income housing tax credits during the three months ended June 30, 2023 compared to the same period in 2022.

Comparison of six months ended June 30, ~~2022~~2023 to the comparable period in the prior year.

The following table presents the income tax expense and related metrics and the change for the periods indicated:


		Six Months Ended June 30,												Six Months Ended June 30,
		2022			2021			Change			% Change			2023			2022			Change			% Change
		(Dollars in thousands)												(Dollars in thousands)
Income before income taxes	Income before income taxes	$	45,900		$	70,599		$	(24,699)		(35.0)	%	Income before income taxes	$	44,541		$	45,900		$	(1,359)		(3.0)	%
Income tax expense	Income tax expense	$	7,559		$	12,553		$	(4,994)		(39.8)	%	Income tax expense	$	7,238		$	7,559		$	(321)		(4.2)	%
Effective income tax rate	Effective income tax rate	16.5		%	17.8		%	(1.3)		%	(7.3)	%	Effective income tax rate	16.3		%	16.5		%	(0.2)		%	(1.2)	%

Income tax expense and the effective income rate both decreased ~~also~~slightly due primarily to ~~the change in income before income taxes earned between the periods and~~ lower estimated ~~annual~~ pre-tax income ~~for~~during the ~~year~~six months ended ~~December 31,~~June 30, 2023 compared to the same period in 2022.

Table of Contents

Financial Condition Overview

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

June 30,
2022 December 31, 2021 Change % Change
(Dollars in thousands)
Assets
Cash and cash equivalents $ 994,055 $ 1,723,292 $ (729,237) (42.3) %
Investment securities available for sale, at fair value, net 1,187,588 894,335 293,253 32.8
Investment securities held to maturity, at amortized cost, net 615,653 383,393 232,260 60.6
Loans held for sale 1,311 1,476 (165) (11.2)
Loans receivable, net 3,834,368 3,773,301 61,067 1.6
Premises and equipment, net 77,164 79,370 (2,206) (2.8)
Federal Home Loan Bank stock, at cost 8,916 7,933 983 12.4
Bank owned life insurance 120,646 120,196 450 0.4
Accrued interest receivable 15,908 14,657 1,251 8.5
Prepaid expenses and other assets 211,350 183,543 27,807 15.2
Other intangible assets, net 8,569 9,977 (1,408) (14.1)
Goodwill 240,939 240,939 — —
Total assets $ 7,316,467 $ 7,432,412 $ (115,945) (1.6) %

~~Table of Content~~

June 30,
2022 December 31, 2021 Change % Change
(Dollars in thousands)
Liabilities and Stockholders' Equity
Deposits $ 6,330,190 $ 6,394,290 $ (64,100) (1.0) %
Junior subordinated debentures 21,326 21,180 146 0.7
Securities sold under agreement to repurchase 41,827 50,839 (9,012) (17.7)
Accrued expenses and other liabilities 117,758 111,671 6,087 5.5
Total liabilities 6,511,101 6,577,980 (66,879) (1.0)
Common stock 550,417 551,798 (1,381) (0.3)
Retained earnings 316,732 293,238 23,494 8.0
Accumulated other comprehensive (loss) income, net (61,783) 9,396 (71,179) (757.5)
Total stockholders' equity 805,366 854,432 (49,066) (5.7)
Total liabilities and stockholders' equity $ 7,316,467 $ 7,432,412 $ (115,945) (1.6) %


	June 30, 2023		December 31, 2022		$ Change		% Change
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	108,378	$	103,590	$	4,788	4.6	%
Investment securities available for sale, at fair value, net	1,276,550		1,331,443		(54,893)		(4.1)
Investment securities held to maturity, at amortized cost, net	754,276		766,396		(12,120)		(1.6)
Loans held for sale	752		—		752		100.0
Loans receivable, net	4,204,936		4,007,872		197,064		4.9

Premises and equipment, net	79,401		76,930		2,471		3.2
Federal Home Loan Bank stock, at cost	8,373		8,916		(543)		(6.1)
Bank owned life insurance	122,905		122,059		846		0.7
Accrued interest receivable	18,969		18,547		422		2.3
Prepaid expenses and other assets	293,950		296,181		(2,231)		(0.8)
Other intangible assets, net	5,981		7,227		(1,246)		(17.2)
Goodwill	240,939		240,939		—		—
Total assets	$	7,115,410	$	6,980,100	$	135,310	1.9	%

Liabilities and Stockholders' Equity
Deposits	$	5,579,657	$	5,907,420	$	(327,763)	(5.5)	%
Deposits held for sale	15,886		17,420		(1,534)		(8.8)
Total deposits	5,595,543		5,924,840		(329,297)		(5.6)
Borrowings	450,000		—		450,000		100.0
Junior subordinated debentures	21,619		21,473		146		0.7
Securities sold under agreement to repurchase	38,215		46,597		(8,382)		(18.0)
Accrued expenses and other liabilities	190,300		189,297		1,003		0.5
Total liabilities	6,295,677		6,182,207		113,470		1.8
Common stock	550,103		552,397		(2,294)		(0.4)
Retained earnings	367,085		345,346		21,739		6.3
Accumulated other comprehensive loss, net	(97,455)		(99,850)		2,395		2.4
Total stockholders' equity	819,733		797,893		21,840		2.7
Total liabilities and stockholders' equity	$	7,115,410	$	6,980,100	$	135,310	1.9	%

Total assets ~~decreased~~increased due primarily ~~as a result of the decrease~~to an increase in ~~cash and cash equivalents reflecting purchases~~loans receivable, net due to ~~deploy excess liquidity into higher yielding investment securities and loans. Purchases of investment securities available for sale were~~loan growth, offset partially ~~offset~~ by a decrease in ~~AOCI as a result of the~~investment securities. Total liabilities and stockholders' equity increased due primarily to an increase in ~~market interest rates during the six months ended June 30, 2022 which negatively impacted the fair value of our investment securities available for sale at June 30, 2022.~~borrowings and retained earnings, offset partially by a decrease in deposits.

Investment Activities Overview

Our investment policy is established by the Company's Board of Directors and monitored by the Risk Committee of the Board of Directors. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Investments in non-investment grade bonds and stripped mortgage-backed securities are not permitted under the policy.

Table of Contents

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


		June 30, 2022				December 31, 2021									June 30, 2023				December 31, 2022				Change
		Balance		% of Total		Balance		% of Total		Change		% Change			Balance		% of Total		Balance		% of Total		$		%
		(Dollars in thousands)													(Dollars in thousands)
Investment securities available for sale, at fair value:	Investment securities available for sale, at fair value:													Investment securities available for sale, at fair value:
U.S. government and agency securities	U.S. government and agency securities	$	65,668	3.6	%	$	21,373	1.7	%	$	44,295	207.2	%	U.S. government and agency securities	$	64,259	3.2	%	$	63,859	3.0	%	$	400	0.6	%
Municipal securities	Municipal securities	200,010		11.1		221,212		17.3	%	(21,202)		(9.6)		Municipal securities	130,015		6.4		153,026		7.3		(23,011)		(15.0)
Residential CMO and MBS		398,156		22.1		306,884		24.0	%	91,272		29.7
Commercial CMO and MBS		493,620		27.4		315,861		24.7	%	177,759		56.3
Residential CMO and MBS(1)														Residential CMO and MBS(1)	410,972		20.2		424,386		20.2		(13,414)		(3.2)
Commercial CMO and MBS(1)														Commercial CMO and MBS(1)	648,341		32.0		664,421		31.8		(16,080)		(2.4)
Corporate obligations	Corporate obligations	5,978		0.3		2,014		0.2	%	3,964		196.8		Corporate obligations	3,774		0.2		3,834		0.2		(60)		(1.6)
Other asset-backed securities	Other asset-backed securities	24,156		1.3		26,991		2.1	%	(2,835)		(10.5)		Other asset-backed securities	19,189		0.9		21,917		1.0		(2,728)		(12.4)
Total	Total	$	1,187,588	65.8	%	$	894,335	70.0	%	$	293,253	32.8	%	Total	$	1,276,550	62.9	%	$	1,331,443	63.5	%	$	(54,893)	(4.1)	%

Investment securities held to maturity, at amortized cost:	Investment securities held to maturity, at amortized cost:													Investment securities held to maturity, at amortized cost:
U.S. government and agency securities	U.S. government and agency securities	$	150,960	8.4	%	$	141,011	11.0	%	$	9,949	7.1	%	U.S. government and agency securities	$	151,005	7.4	%	$	150,936	7.2	%	$	69	0.05	%

Residential CMO and MBS		159,007		8.8		24,529		1.9		134,478		548.2
Commercial CMO and MBS		305,686		17.0		217,853		17.1		87,833		40.3
Residential CMO and MBS(1)														Residential CMO and MBS(1)	280,032		13.8		290,318		13.8		(10,286)		(3.5)
Commercial CMO and MBS(1)														Commercial CMO and MBS(1)	323,239		15.9		325,142		15.5		(1,903)		(0.6)

Total	Total	$	615,653	34.2	%	$	383,393	30.0	%	$	232,260	60.6	%	Total	$	754,276	37.1	%	$	766,396	36.5	%	$	(12,120)	(1.6)	%

Total investment securities	Total investment securities	$	1,803,241	100.0	%	$	1,277,728	100.0	%	$	525,513	41.1	%	Total investment securities	$	2,030,826	100.0	%	$	2,097,839	100.0	%	$	(67,013)	(3.2)	%

(1) U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations.

Total investment securities ~~increased~~decreased $67.0 million, or 3.2%, to $2.03 billion at June 30, 2023 from $2.10 billion at December 31, 2022 due primarily to maturities and prepayments of $61.4 million and sales of $22.7 million, partially offset by purchases ~~to deploy excess liquidity into higher yielding assets, offset partially by a $90.6 million decrease in the fair value~~ of investment securities available for sale resulting in an unrealized loss at June 30, 2022 compared to an unrealized gain at December 31, 2021 as a result of an increase in market rates during the six months ended June 30, 2022.$15.0 million.

~~Table of Content~~

Loan Portfolio Overview

Changes by loan type

The ~~Bank~~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:


		June 30, 2022				December 31, 2021									June 30, 2023				December 31, 2022				Change
		Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		Change		% Change			Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		$		%
		(Dollars in thousands)													(Dollars in thousands)
Commercial business:	Commercial business:													Commercial business:
Commercial and industrial	Commercial and industrial	$	698,828	18.0	%	$	621,567	16.3	%	$	77,261	12.4	%	Commercial and industrial	$	708,021	16.7	%	$	692,100	17.1	%	$	15,921	2.3	%
SBA PPP	SBA PPP	11,334		0.3		145,840		3.8		(134,506)		(92.2)		SBA PPP	567		—		1,468		—		(901)		(61.4)
Owner-occupied CRE	Owner-occupied CRE	950,699		24.6		931,150		24.4		19,549		2.1		Owner-occupied CRE	958,912		22.6		937,040		23.1		21,872		2.3
Non-owner occupied CRE	Non-owner occupied CRE	1,515,796		39.1		1,493,099		39.2		22,697		1.5		Non-owner occupied CRE	1,644,490		38.6		1,586,632		39.2		57,858		3.6
Total commercial business	Total commercial business	3,176,657		82.0		3,191,656		83.7		(14,999)		(0.5)		Total commercial business	3,311,990		77.9		3,217,240		79.4		94,750		2.9
Residential real estate	Residential real estate	265,382		6.9		164,582		4.3		100,800		61.2		Residential real estate	375,659		8.8		343,631		8.5		32,028		9.3
Real estate construction and land development:	Real estate construction and land development:													Real estate construction and land development:
Residential	Residential	90,546		2.3		85,547		2.2		4,999		5.8		Residential	78,660		1.9		80,074		2.0		(1,414)		(1.8)
Commercial and multifamily	Commercial and multifamily	128,060		3.3		141,336		3.7		(13,276)		(9.4)		Commercial and multifamily	307,041		7.2		214,038		5.3		93,003		43.5
Total real estate construction and land development	Total real estate construction and land development	218,606		5.6		226,883		5.9		(8,277)		(3.6)		Total real estate construction and land development	385,701		9.1		294,112		7.3		91,589		31.1
Consumer	Consumer	213,419		5.5		232,541		6.1		(19,122)		(8.2)		Consumer	177,994		4.2		195,875		4.8		(17,881)		(9.1)
Total	Total	$	3,874,064	100.0	%	$	3,815,662	100.0	%	$	58,402	1.5	%	Total	$	4,251,344	100.0	%	$	4,050,858	100.0	%	$	200,486	4.9	%

Table of Contents

Loans receivable increased $200.5 million, or 4.9%, to $4.25 billion at June 30, 2023 from $4.05 billion at December 31, 2022 primarily due ~~primarily~~ to ~~higher~~new loan growth. New loans funded during the six months ended June 30, 2023 were $271.7 million. The largest increase in the loan portfolio occurred in commercial and ~~industrial~~multifamily construction loans, which increased $93.0 million or 43.5% due to new loan ~~demand including an increases usage~~originations and advances on outstanding loans. New commitments for commercial and multifamily construction loans were $134.8 million during the six months ended June 30, 2023.

Owner-occupied CRE and non-owner occupied CRE loans increased by $79.7 million to $2.60 billion at June 30, 2023, compared to $2.52 billion at December 31, 2022. The following table provides information about our owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:


	June 30, 2023				December 31, 2022				Change
	Amortized Cost		% of CRE Loans		Amortized Cost		% of CRE Loans		$	%
	(Dollars in thousands)
Owner occupied and non-owner occupied CRE loans by collateral type:
Office	569,183		21.9	%	579,762		22.9	%	(10,579)	(1.8)	%
Industrial	411,842		15.9	%	366,947		14.6	%	44,895	12.2	%
Retail store / shopping center	295,187		11.3	%	291,799		11.6	%	3,388	1.2	%
Multi-family	258,574		9.9	%	256,661		10.2	%	1,913	0.7	%
Mixed use property	151,100		5.8	%	154,793		6.1	%	(3,693)	(2.4)	%
Motel / hotel	141,000		5.4	%	129,352		5.1	%	11,648	9.0	%
Single purpose	111,813		4.3	%	112,924		4.5	%	(1,111)	(1.0)	%
Warehouse	157,925		6.1	%	147,443		5.8	%	10,482	7.1	%
Mini-storage	159,626		6.1	%	148,580		5.9	%	11,046	7.4	%
Recreational / school	67,934		2.6	%	70,565		2.8	%	(2,631)	(3.7)	%
Other	279,218		10.7	%	264,846		10.5	%	14,372	5.4	%
Total	$	2,603,402	100.0	%	$	2,523,672	100.0	%	79,730	3.2	%

Office loans were the largest segment of ~~lines~~owner-occupied and non-owner occupied CRE loans at $569.2 million, representing 21.9% of ~~credit~~the total owner-occupied CRE and ~~an increase in residential real estate~~non-owner occupied CRE, at June 30, 2023. Of this total, $283.7 million, or 49.8%, were owner-occupied CRE loans. Owner-occupied CRE loans ~~including $69.5~~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. The average loan balance of owner-occupied CRE and non-owner occupied CRE was $1.1 million ~~of purchased residential real estate loans offset partially by repayments of SBA PPP loans.~~ at June 30, 2023.

Loans classified as nonaccrual and performing ~~TDR~~modified loans and nonperforming assets

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


		June 30, 2022			December 31, 2021			Change			% Change			June 30, 2023			December 31, 2022			Change			% Change
		(Dollars in thousands)												(Dollars in thousands)
Nonaccrual loans: (1)	Nonaccrual loans: (1)												Nonaccrual loans: (1)
Commercial business	Commercial business	$	10,475		$	23,107		$	(12,632)		(54.7)	%	Commercial business	$	4,630		$	5,869		$	(1,239)		(21.1)	%
Residential real estate		—			47			(47)			(100.0)

Real estate construction and land development	Real estate construction and land development	—			571			(571)			(100.0)		Real estate construction and land development	—			37			(37)			(100.0)
Consumer		—			29			(29)			(100.0)

Total nonaccrual loans	Total nonaccrual loans	10,475			23,754			(13,279)			(55.9)		Total nonaccrual loans	4,630			5,906			(1,276)			(21.6)
Other real estate owned	Other real estate owned	—			—			—			n/a		Other real estate owned	—			—			—			n/a
Total nonperforming assets	Total nonperforming assets	$	10,475		$	23,754		$	(13,279)		(55.9)	%	Total nonperforming assets	$	4,630		$	5,906		$	(1,276)		(21.6)	%

Accruing loans past due 90 days or more	Accruing loans past due 90 days or more	$	2,036		$	293		$	1,743		594.9	%	Accruing loans past due 90 days or more	$	2,274		$	1,615		$	659		40.8	%

Credit quality ratios:	Credit quality ratios:												Credit quality ratios:
Nonaccrual loans to loans receivable	Nonaccrual loans to loans receivable	0.27		%	0.62		%	(0.35)		%	(56.5)	%	Nonaccrual loans to loans receivable	0.11		%	0.15		%	(0.04)		%	(26.7)	%
Nonaccrual loans to total assets													Nonaccrual loans to total assets	0.07			0.08			(0.01)			(12.5)

Nonaccrual loans to total assets		0.14			0.32			(0.18)			(56.3)
Performing TDR loans: (1)
Commercial business		$	62,316		$	57,142		$	5,174		9.1	%
Residential real estate		178			358			(180)			(50.3)
Real estate construction and land development		450			450			—			—

4245

Table of ~~Content~~Contents

June 30,
2022 December 31, 2021 Change % Change
(Dollars in thousands)
Consumer 750 1,160 (410) (35.3)
Total performing TDR loans $ 63,694 $ 59,110 $ 4,584 7.8 %

June 30,
2023

December 31, 2022

Change

% Change

(Dollars in thousands)

Modified loans: (2)

Commercial business

5,899

Consumer

Total performing modified loans

8,912

(1) At June 30, ~~2022~~2023 and December 31, ~~2021, $2.0~~2022, $1.3 million and ~~$1.4~~$1.5 million of nonaccrual ~~loans, respectively, and $2.3 million and $1.6 million of performing TDR~~ loans, respectively, were guaranteed by government agencies.

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

The following table provides the changes in nonaccrual loans during the six months ended June 30, ~~2022:~~2023:




	(In thousands)
Balance, beginning of period	$	~~23,754~~5,906
Additions	~~720~~468
Net principal payments, sales and transfers to accruing status	~~(9,768)~~(1,094)
Payoffs	~~(4,060)~~(650)
Charge-offs	~~(171)~~—

Balance, end of period	$	~~10,475~~4,630

Nonaccrual loans decreased ~~$13.3~~$1.3 million, or ~~55.9%~~21.6%, due primarily to ongoing collection efforts, including the partial payoff of two large commercial and industrial loan relationships, the payoff of one non-owner occupied CRE relationship, and the transfer of four commercial business loan relationships totaling $6.7 million back to accruing status. The Bank also sold a pool of 14 nonaccrual loans totaling $1.0 million during the period ending March 31, 2022.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 Six Months Ended June 30,												At or For the Six Months Ended June 30,						Change
		2022			2021			Change			% Change			2023			2022			$			%
		(Dollars in thousands)												(Dollars in thousands)
ACL on loans at the end of period	ACL on loans at the end of period	$	39,696		$	51,562		$	(11,866)		(23.0)	%	ACL on loans at the end of period	$	46,408		$	39,696		$	6,712		16.9	%

Credit quality ratios:	Credit quality ratios:												Credit quality ratios:
ACL on loans to loans receivable	ACL on loans to loans receivable	1.02		%	1.11		%	(0.09)		%	(8.1)	%	ACL on loans to loans receivable	1.09		%	1.02		%	0.07			6.9
ACL on loans to loans receivable, excluding SBA PPP loans (1)		1.03			1.15			(0.12)			(10.4)
ACL on loans to nonaccrual loans	ACL on loans to nonaccrual loans	378.96		%	178.33		%	200.63		%	112.5	%	ACL on loans to nonaccrual loans	1002.33			378.96			623.37			164.5

Net recoveries		(506)			(333)			(173)			52.0
Average loans receivable, net during the period (2)		3,792,792			4,446,442			(653,650)			(14.7)
Net recoveries on loans to average loans receivable, net (3)		(0.03)		%	(0.02)		%	(0.01)		%	50.0	%
Net recoveries (charge-offs)													Net recoveries (charge-offs)	$	279		$	(506)		$	785		(155.1)
Average balance of loans receivable, net during the period(1)													Average balance of loans receivable, net during the period(1)	4,092,769			3,792,792			299,977			7.9
Net charge-offs (recoveries) on loans to average loans receivable, net(2)													Net charge-offs (recoveries) on loans to average loans receivable, net(2)	0.01		%	(0.03)		%	0.04		%	133.3	%

(1)~~The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. See "Reconciliations of Non-GAAP Measures" section below.~~

~~(2)~~ Average ~~loan~~balance of loans receivable, net includes loans held for sale.

~~(3)~~(2) Annualized.

The ACL on loans ~~decreased~~increased $3.4 million, or 8.0%, to $46.4 million at ~~during the six months ended~~ June 30, 2023 from $43.0 million at December 31, 2022 due primarily to ~~a reduction of~~an increase in loans ~~individually evaluated for losses and~~receivable, net as well as a ~~result, their related ACL.~~

~~Table~~change in mix of ~~Content~~loans.

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


		June 30, 2022				December 31, 2021									June 30, 2023						December 31, 2022
		ACL on loans		% of Total (1)		ACL on loans		% of Total (1)		Change		% Change			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)													(Dollars in thousands)
Commercial business	Commercial business	$	31,707	82.0	%	$	33,049	83.7	%	$	(1,342)	(4.1)	%	Commercial business	$	31,273	0.94	%	77.9	%	$	30,718	0.95	%	79.4	%
Residential real estate	Residential real estate	2,137		6.9		1,409		4.3		728		51.7		Residential real estate	2,865		0.76		8.8		2,872		0.84		8.5
Real estate construction and land development	Real estate construction and land development	3,284		5.6		5,276		5.9		(1,992)		(37.8)		Real estate construction and land development	9,685		2.51		9.1		7,063		2.40		7.3
Consumer		2,568		5.5		2,627		6.1		(59)		(2.2)
Total ACL on loans		$	39,696	100.0	%	$	42,361	100.0	%	$	(2,665)	(6.3)	%

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


	June 30, 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)
Consumer	2,585		1.45		4.2		2,333		1.19		4.8
Total ACL on loans	$	46,408	1.09	%	100.0	%	$	42,986	1.06	%	100.0	%

Deposits Overview

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


		June 30, 2022				December 31, 2021									June 30, 2023				December 31, 2022				Change
		Balance		% of Total		Balance		% of Total		Change		% Change			Balance (1)		% of Total Deposits		Balance		% of Total Deposits		$		%
		(Dollars in thousands)													(Dollars in thousands)
Noninterest demand deposits	Noninterest demand deposits	$	2,325,139	36.7	%	$	2,343,909	36.7	%	$	(18,770)	(0.8)	%	Noninterest demand deposits	$	1,857,492	33.2	%	$	2,099,464	35.5	%	$	(241,972)	(11.5)	%
Interest bearing demand deposits	Interest bearing demand deposits	1,977,527		31.3		1,946,605		30.4		30,922		1.6		Interest bearing demand deposits	1,618,539		28.9		1,830,727		30.9		(212,188)		(11.6)
Money market accounts	Money market accounts	1,062,178		16.8		1,120,174		17.5		(57,996)		(5.2)		Money market accounts	1,143,284		20.4		1,063,243		17.9		80,041		7.5
Savings accounts	Savings accounts	654,577		10.3		640,763		10.0		13,814		2.2		Savings accounts	535,065		9.6		623,833		10.5		(88,768)		(14.2)
Total non-maturity deposits	Total non-maturity deposits	6,019,421		95.1		6,051,451		94.6		(32,030)		(0.5)		Total non-maturity deposits	5,154,380		92.1		5,617,267		94.8		(462,887)		(8.2)
Certificates of deposit	Certificates of deposit	310,769		4.9		342,839		5.4		(32,070)		(9.4)		Certificates of deposit	441,163		7.9		307,573		5.2		133,590		43.4
Total deposits	Total deposits	$	6,330,190	100.0	%	$	6,394,290	100.0	%	$	(64,100)	(1.0)	%	Total deposits	$	5,595,543	100.0	%	$	5,924,840	100.0	%	$	(329,297)	(5.6)	%

(1) Deposit balances include deposits held for sale of $15.9 million and $17.4 million at June 30, 2023 and December 31, 2022, respectively.

Total deposits decreased $329.3 million, or 5.6%, to $5.60 billion at June 30, 2023, compared to $5.92 billion due primarily to an overall reduction in market liquidity, as well as interest rate sensitive clients moving a portion of their non-operating deposits. Money market accounts increased $80.0 million due to an increase in public deposits. Certificate of deposits increased due to increasing rates which, attracted customers to this deposit type as well as the addition of $44.7 million in brokered deposits.

The Bank entered into a purchase and sale agreement with a third party to sell and transfer certain assets, deposits and other liabilities of its branch in Ellensburg, WA during the three months ended September 30, 2022. As a result of entering into this purchase and sale agreement, approximately $15.9 million and $17.4 million in deposits were classified as held for sale as of June 30, 2023 and December 31, 2022, respectively. The sale is expected to be completed during the three months ended September 30, 2023.

Borrowings Overview

The 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 June 30, 2023, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.22 billion. The Bank had no FHLB advances outstanding at both June 30, 2023 and December 31, 2022. 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 FRB through both the Discount Window and BTFP with available borrowing capacity of $859.7 million as of June 30, 2023. The Bank had $450.0 million in BTFP borrowings outstanding at June 30, 2023. During the three months ended June 30, 2023, the Company transferred all borrowings to the BTFP due to advantageous terms and conditions. The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities. The advance rate on the collateral is at par value. The average rate on borrowings from the BTFP was 4.72% as compared to an average rate of 5.15% for FHLB borrowings during the three months ended June 30, 2023. The Bank had no FRB borrowings outstanding at December 31, 2022. All advances are secured by investment securities.

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 June 30, 2023 and December 31, 2022, the Company had securities sold under agreements to repurchase of $38.2 million and $46.6 million, respectively.

Table of Contents

In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and junior subordinated debentures as part of a prior acquisition. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital. The junior subordinated debentures outstanding as of June 30, 2023 and December 31, 2022 were $21.6 million and $21.5 million, respectively, net of unaccreted discount.

The Bank maintains available unsecured federal funds lines with five correspondent banks totaling $145.0 million, with no outstanding borrowings at June 30, 2023.

Stockholders' Equity Overview

The Company’s stockholders' equity to assets ratio was ~~11.0%~~11.5% and ~~11.5%~~11.4% at June 30, ~~2022~~2023 and December 31, ~~2021, respectively, and decreased~~2022. Total stockholders' equity increased $21.8 million, or 2.7%, to $819.7 million at June 30, 2023 from $797.9 million at December 31, 2022. The increase was due primarily to ~~a decrease~~$37.3 million in ~~AOCI~~net income recognized, offset partially by $15.6 million in cash dividends declared and $4.4 million for the repurchase of ~~$71.2 million following increases in market interest rates~~the Company's common stock during the six months ended June 30, 2022, which negatively impacted the fair value of our investment securities available for sale. AOCI has no effect on our regulatory capital ratios as the Company opted to exclude it from our common equity tier 1 capital calculations as set forth below.2023.

The Company has historically paid cash dividends to its common shareholders. Payments of 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 our ability to 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 July ~~20, 2022,~~19, 2023, the Company’s board of directors declared a regular quarterly dividend of ~~$0.21~~$0.22 per common share payable on August ~~17, 2022~~16, 2023 to shareholders of record on August ~~3, 2022.~~2, 2023.

Regulatory Requirements Overview

The Company is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. ~~Heritage~~The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the 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 June 30, ~~2022,~~2023, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of June 30, ~~2022~~2023 and December 31, ~~2021,~~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 events since that notification

~~Table of Content~~

that management believes have changed the Bank's categories. The following table presents the actual capital ratios of the Company and the Bank at the periods indicated:

Company Heritage Bank
June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021
Common equity Tier 1 capital to risk-weighted assets 13.2 % 13.5 % 13.4 % 13.8 %
Tier 1 leverage capital to average assets 8.9 8.7 8.8 8.6
Tier 1 capital to risk-weighted assets 13.6 13.9 13.4 13.8
Total capital to risk-weighted assets 14.4 14.8 14.1 14.7
Capital conservation buffer 6.4 6.8 6.1 6.7


	Company				Bank
	June 30, 2023		December 31, 2022		June 30, 2023		December 31, 2022
Common equity Tier 1 capital ratio	12.8	%	12.8	%	12.8	%	12.9	%
Leverage ratio	9.9		9.7		9.6		9.4
Tier 1 capital ratio	13.2		13.2		12.8		12.9
Total capital ratio	14.1		14.0		13.7		13.7
Capital conservation buffer	6.1		6.0		5.7		5.7

As of both June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that ~~allow~~allowed the Bank the option to delay for two years until December 31, 2021 an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.

Liquidity and Capital Resources

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 availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has been to acquire non-maturity deposits from our retail accounts, ~~acquire~~and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. ~~We may also acquire~~Our liquidity policy permits the purchase of brokered deposits ~~when~~in an amount not to exceed 15% of the ~~cost~~Bank's total deposits as a secondary source for funding. At June 30, 2023, we had $44.7 million in brokered deposits, which constituted 0.80% of ~~funds is advantageous to other funding sources.~~total 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

Table of Contents

lending activities and match the maturity of repricing intervals of assets. 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 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.

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


	June 30, 2023		December 31, 2022
	(Dollars in thousands)
FRB borrowing availability	859,730		$	46,827
FHLB borrowing availability(1)	1,216,990		$	1,226,234
Unencumbered investment securities available for sale(2)	872,109		$	1,323,947
Cash and cash equivalents	108,378		103,590
Fed funds line borrowing availability with correspondent banks	145,000		215,000
Total sources of liquidity	3,202,207		2,915,598
Less: Borrowings outstanding	(450,000)		—
Total liquidity	$	2,752,207	$	2,915,598

(1) Includes FHLB borrowing availability of $1.22 billion at June 30, 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.

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

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 ~~liquidity and~~ capital resources since the information disclosed in our ~~2021~~2022 Annual Form 10-K. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

Critical Accounting ~~Policies~~Estimates

Our critical accounting ~~policies~~estimates are described in detail in the "Critical Accounting ~~Policies"~~Estimates" section within Item 7 of our ~~2021~~2022 Annual Form the Form 10-K. The SEC defines "critical accounting ~~policies"~~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 ~~policies~~estimates include estimates of ~~the ACL on investment securities,~~ the ACL on loans, the ACL on unfunded commitments and goodwill. There have been no material changes in these ~~policies~~estimates during the six months ended June 30, ~~2022.~~

~~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 comparative information to assess trends in the Company’s performance and asset quality and to facilitate comparison of 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 the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of ASU 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the

~~Table of Content~~

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 are anticipated to substantially decrease within a short time frame.

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
(Dollars in thousands)
Loan yield, excluding SBA PPP Loans and Incremental Accretion on Acquired Loans, annualized:
Interest and fees on loans (GAAP) $ 40,890 $ 50,750 $ 81,915 $ 100,274
Exclude interest and fees on SBA PPP loans (1,782) (10,003) (4,863) (19,139)
Exclude incremental accretion on acquired loans (270) (495) (854) (1,570)
Adjusted interest and fees on loans (non-GAAP) $ 38,838 $ 40,252 $ 76,198 $ 79,565
Average loans receivable, net (GAAP) $ 3,812,045 $ 4,402,868 $ 3,792,792 $ 4,446,442
Exclude average SBA PPP loans (34,090) (777,156) (71,633) (804,500)
Adjusted average loans receivable, net (non-GAAP) $ 3,777,955 $ 3,625,712 $ 3,721,159 $ 3,641,942
Loan yield, annualized (GAAP) 4.30 % 4.62 % 4.36 % 4.55 %
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans, annualized (non-GAAP) 4.12 % 4.45 % 4.13 % 4.41 %

The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans is significant to the loan portfolio, and since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for SBA PPP loans.

June 30,
2022 December 31,
2021
(Dollars in thousands)
ACL on Loans to Loans Receivable, excluding SBA PPP Loans:
Allowance for credit losses on loans (GAAP) $ 39,696 $ 42,361
Loans receivable (GAAP) $ 3,874,064 $ 3,815,662
Exclude SBA PPP loans (11,334) (145,840)
Loans receivable, excluding SBA PPP (non-GAAP) $ 3,862,730 $ 3,669,822
ACL on loans to loans receivable (GAAP) 1.02 % 1.11 %
ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 1.03 % 1.15 %
2023.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

InMarket 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 ~~opinion, there has not been a material change in our~~exposure to market interest rates, equity prices and credit spreads. Our primary market risk is interest rate risk, which is the risk of loss of net interest income or net interest margin resulting from changes in market interest rates. Interest rate risk results primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on our assets and the interest paid on our liabilities. Management regularly reviews our exposure ~~since~~to changes in interest rates. Among the ~~information disclosed~~factors considered are changes in ~~our 2021 Annual Form 10-K.~~ 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 and its effect on net interest income and capital.

Neither we, nor the 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 derivative instruments. Moreover, neither we, 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.

Table of Contents

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:


	June 30, 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	$	3,489	1.5	%	$	5,113	2.0	%
Increase in net interest income in Year 2	4,281		1.7		11,147		4.1
Modeled increase in market interest rates of 200 basis points
Increase in net interest income in Year 1	5,227		2.3		8,181		3.2
Increase in net interest income in Year 2	6,896		2.8		19,889		7.3
Modeled decrease in market interest rates of 100 basis points
Increase (decrease) in net interest income in Year 1	3,970		1.7		(5,433)		(2.1)
Decrease in net interest income in Year 2	(1,297)		(0.5)		(10,534)		(3.9)
Modeled decrease in market interest rates of 200 basis points
Increase (decrease) in net interest income in Year 1	2,285		1.0		(16,840)		(6.6)
Decrease in net interest income in Year 2	$	(8,649)	(3.5)	%	$	(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 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. 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 June 30, ~~2022 are~~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.

~~Table of Content~~

(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 three months ended June 30, ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Neither the Company nor the Bank 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 Item 1A of the Company’s ~~2021~~2022 Annual Form 10-K.

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 during the three months ended June 30, ~~2022:~~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)
April 1, 2022— April 30, 2022 — $ — 9,967,332 657,745
May 1, 2022— May 31, 2022 404 24.85 9,967,332 657,745
June 1, 2022— June 30, 2022 20,776 24.61 9,986,863 638,214
Total 21,180 $ 24.62


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)
April 1, 2023—April 30, 2023	69,223	$	18.25	10,144,441	480,636
May 1, 2023— May 31, 2023	24,727	16.51		10,169,168	455,909
June 1, 2023—June 30, 2023	4,508	17.60		10,169,168	455,909
Total	98,458	$	17.78

(1)Of the common shares repurchased by the Company between April1, ~~2022~~2023 and June 30, ~~2022, 1,649~~2023, a total of 4,508 shares represented the cancellation of stock to pay withholding taxes on vested restricted stock ~~awards or units.~~units and were not repurchased pursuant to the publicly announced stock repurchase program.

(2)On March 12, 2020 the Company's Board of Directors ~~authorized~~announced the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan. The repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares, unless terminated sooner by the board of directors. The repurchase program may be suspended or discontinued at any time by the Company’s board of directors.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

A.None

B.None

C.None. During the three months ended June 30, 2023, there were no Rule 10b5‑1 trading arrangements (as defined in Item 408(a) of Regulation S-K) or non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K) adopted or terminated by any director or officer (as defined in Rule 16a‑1(f) under the Exchange Act) of the Company.

ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

10.1*

Heritage Financial Corporation 2023 Omnibus Equity Plan

DEF 14A

4.4

03/22/2023

10.2*

Form of Restricted Stock Unit Award Agreement under the Heritage Financial Corporation 2023 Omnibus Equity Plan

S-8

4.5

05/8/2023

10.3*

Form of Performance-Based Restricted Stock Unit Award Agreement under the Heritage Financial Corporation 2023 Omnibus Equity Plan

S-8

4.6

05/8/2023

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)

4751

Table of ~~Content~~Contents

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document~~ ~~(1)~~

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

104

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

*Indicates management contract or compensatory plan or arrangement.

(1) Filed herewith.

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:
August ~~9, 2022~~4, 2023						/S/ JEFFREY J. DEUEL
						Jeffrey J. Deuel
						President and Chief Executive Officer
Date:
August ~~9, 2022~~4, 2023						/S/ DONALD J. HINSON
						Donald J. Hinson
						Executive Vice President and Chief Financial Officer

4852


			Fair Value at June 30, 2022
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	1,054	$	969	$	—	$	—	$	969
Owner-occupied CRE	613		186		—		—		186











Total assets measured at fair value on a nonrecurring basis	$	1,667	$	1,155	$	—	$	—	$	1,155


			Fair Value at December 31, 2021
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	1,911	$	1,049	$	—	$	—	$	1,049
Owner-occupied CRE	613		189		—		—		189

Total commercial business	2,524		1,238		—		—		1,238


	Three Months Ended
	June 30, 2022		June 30, 2021

Loan yield (GAAP)	4.30	%	4.62	%
Exclude impact from SBA PPP loans	(0.15)		(0.12)
Exclude impact from incremental accretion on acquired loans	(0.03)		(0.05)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1)	4.12	%	4.45	%