# Heritage Financial Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Heritage Financial Corp](/companies/hfwa.md) (CIK 1046025)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 8, 2023, 17:58 ET
- Period: 2023-09-30
- Accession: 0001046025-23-000197
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1046025/000104602523000197/hfwa-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1046025/000104602523000197/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $17.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $38.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $3.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $10.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $18.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $55.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.51 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.57 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.52 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.58 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 35,115,165 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 35,305,456 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $78.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $9.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $23.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $6.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $220.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $7.15bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $6.34bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $813.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,207 characters.

*The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three and nine months ended September 30, 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 Cautionary Note Regarding Forward-Looking Statements included herein and the December 31, 2022 audited Consolidated Financial Statements, and the accompanying Notes included in our 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.

Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, comprised primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits and borrowings. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates including 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 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 consist primarily of third-party service providers such as auditors, consultants and lawyers.

Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from inflation and the governmental actions taken to address this issue. Net income is also impacted by growth of operations through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."

### Recent Developments

Since March 2022, inflationary pressures have resulted in higher costs for consumers and businesses. To address inflation, the Federal Open Market Committee (“FOMC”) has taken steps to tighten monetary policy through a cumulative 525 basis point increase to the federal funds rate from March 2022 through September 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 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, overall 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 September 30, 2023, our average deposit account size, calculated by dividing period-end deposits by the population of accounts with balances, was approximately $52,000. 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 continues to focus on serving its customers and communities, maintaining the well-being of its employees, and executing its strategic initiatives. The Company continues to monitor the economic environment and makes changes as appropriate.

### Results of Operations

### Net Income Overview

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

Net income decreased $2.8 million, or 13.2%, to $18.2 million, or $0.51 per diluted common share, for the three months ended September 30, 2023, compared to $21.0 million, or $0.59 per diluted common share, for the same period in 2022.

The decrease in net income was due primarily to a decrease in net interest income of $3.7 million, a decrease in noninterest income of $1.2 million and an increase in noninterest expense of $1.8 million.

The decrease in net income was partially offset by a $2.8 million decrease in provision for credit losses, reflect a $878,000 reversal of provision for credit losses for the three months ended September 30, 2023 compared to a $1.9 million provision for credit losses for the same period in 2022.

*Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year.*

Net income decreased $3.8 million, or 6.4%, to $55.5 million, or $1.57 per diluted common share, for the nine months ended September 30, 2023 compared to $59.3 million, or $1.67 per diluted common share, for the same period in 2022. The decrease was due primarily to an increase in noninterest expense of $13.3 million and a $5.7 million increase in the provision for credit losses reflecting a $2.9 million provision for credit losses for the nine months ended September 30, 2023, compared to a $2.8 million reversal of provision for credit losses for the same period in 2022. The decrease in net income was partially offset by an increase in net interest income of $15.0 million, or 9.6%.

### 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 2023 and 2022. The following table provides the federal funds target rate history and changes from each period since December 31, 2021:

| Change Date December 31, 2021 | Rate (%) 0.00% - 0.25% | Rate Change (%) 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 4, 2023 | 5.00% - 5.25% | 0.25% |
| July 27, 2023 | 5.25% - 5.50% | 0.25% |

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

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

*(Dollars in thousands)*

| Interest Earning Assets: | Three Months Ended September 30, 2023 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2022 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans receivable, net (2)(3) | $4,201,554 | $56,119 | 5.30% | $3,859,839 | $43,847 | 4.51% | $341,715 | $12,272 | 0.79% |
| Taxable securities | 1,931,649 | 14,590 | 3.00 | 1,868,900 | 12,362 | 2.62 | 62,749 | 2,228 | 0.38 |
| Nontaxable securities (3) | 60,654 | 448 | 2.93 | 133,022 | 892 | 2.66 | (72,368) | (444) | 0.27 |
| Interest earning deposits | 169,186 | 2,310 | 5.42 | 730,600 | 4,009 | 2.18 | (561,414) | (1,699) | 3.24 |
| Total interest earning assets | 6,363,043 | 73,467 | 4.58% | 6,592,361 | 61,110 | 3.68% | (229,318) | 12,357 | 0.90% |
| Noninterest earning assets | 849,689 |  |  | 775,375 |  |  | 74,314 |  |  |
| Total assets | $7,212,732 |  |  | $7,367,736 |  |  | $(155,004) |  |  |
| **Interest Bearing Liabilities:** |  |  |  |  |  |  |  |  |  |
| Certificates of Deposit | $553,015 | $4,585 | 3.29% | $297,786 | $290 | 0.39% | $255,229 | $4,295 | 2.90% |
| Savings accounts | 523,882 | 172 | 0.13 | 654,697 | 99 | 0.06 | (130,815) | 73 | 0.07 |
| Interest bearing demand and money market accounts | 2,764,251 | 7,120 | 1.02 | 3,065,007 | 1,089 | 0.14 | (300,756) | 6,031 | 0.88 |
| Total interest bearing deposits | 3,841,148 | 11,877 | 1.23 | 4,017,490 | 1,478 | 0.15 | (176,342) | 10,399 | 1.08 |
| Junior subordinated debentures | 21,649 | 540 | 9.90 | 21,356 | 312 | 5.80 | 293 | 228 | 4.10 |
| Securities sold under agreement to repurchase | 31,729 | 38 | 0.48 | 42,959 | 34 | 0.31 | (11,230) | 4 | 0.17 |
| Borrowings | 451,032 | 5,394 | 4.74 | — | — | — | 451,032 | 5,394 | 4.74 |
| Total interest bearing liabilities | 4,345,558 | 17,849 | 1.63% | 4,081,805 | 1,824 | 0.18% | 263,753 | 16,025 | 1.45% |
| Noninterest bearing demand deposits | 1,859,374 |  |  | 2,356,688 |  |  | (497,314) |  |  |

36

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2022 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Other noninterest bearing liabilities | 186,306 |  |  | 118,191 |  |  | 68,115 |  |  |
| Stockholders’ equity | 821,494 |  |  | 811,052 |  |  | 10,442 |  |  |
| Total liabilities and stock-holders’ equity | $7,212,732 |  |  | $7,367,736 |  |  | $(155,004) |  |  |
| Net interest income and spread |  | $55,618 | 2.95% |  | $59,286 | 3.50% |  | $(3,668) | (0.55)% |
| Net interest margin |  |  | 3.47% |  |  | 3.57% |  |  | (0.10)% |

(1) Average balances are calculated using daily balances. Average yield/rate is annualized.

(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $940,000 and $857,000 for the three months ended September 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 September 30, 2023 compared to the same period in 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 rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:

*(Dollars in thousands)*

| Interest Earning Assets: | Increase (Decrease) Due to Changes In: Volume | Yield/Rate | Total | % Change |
| --- | ---: | ---: | ---: | ---: |
| Loans receivable, net | $4,110 | $8,162 | $12,272 | 28.0% |
| Taxable securities | 426 | 1,802 | 2,228 | 18.0 |
| Nontaxable securities | (527) | 83 | (444) | (49.8) |
| Interest earning deposits | (4,643) | 2,944 | (1,699) | (42.4) |
| Total interest income | $(634) | $12,991 | $12,357 | 20.2% |
| **Interest Bearing Liabilities:** |  |  |  |  |
| Certificates of deposit | $441 | $3,854 | $4,295 | 1,481.0% |
| Savings accounts | (23) | 96 | 73 | 73.7 |
| Interest bearing demand and money market accounts | (117) | 6,148 | 6,031 | 553.8 |
| Total interest bearing deposits | 301 | 10,098 | 10,399 | 703.6 |
| Junior subordinated debentures | 4 | 224 | 228 | 73.1 |
| Securities sold under agreement to repurchase | (11) | 15 | 4 | 11.8 |
| Borrowings | 5,394 | — | 5,394 | 100.0 |
| Total interest expense | $5,688 | $10,337 | $16,025 | 878.6% |
| Net interest income | $(6,322) | $2,654 | $(3,668) | (6.2)% |

Net interest income decreased $3.7 million, or 6.2%, to $55.6 million for the three months ended September 30, 2023 as compared to $59.3 million for the same period in 2022 due primarily to a $16.0 million increase in total interest expense offset partially by a $12.4 million increase in total interest income.

Total interest expense increased to $17.8 million during the three months ended September 30, 2023 compared to $1.8 million for the same period in 2022 due primarily to a 108 basis point increase in the cost of interest bearing deposits to 1.23% for the three months ended September 30, 2023, as compared to 0.15% for the same period in 2022 due to competitive rate pressures and the addition of interest expense on borrowings during the three months ended September 30, 2023 as compared to no interest expense on borrowings during the same period in 2022.

Total interest income increased to $73.5 million for the three months ended September 30, 2023, compared to $61.1 million for the same period in 2022 primarily due to a 90 basis point increase to the yield on interest earning assets to 4.58% for the three months ended September 30, 2023, as compared to 3.68% for the same period in 2022 due to an increase in market interest rates.

Net interest margin decreased ten basis points to 3.47% for the three months ended September 30, 2023 compared to 3.57% for the same period in 2022.

#### Comparison of nine months ended September 30, 2023 to the comparable period in the prior year

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

*(Dollars in thousands)*

| Interest Earning Assets: | Nine Months Ended September 30, 2023 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2022 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans receivable, net (2)(3) | $4,129,429 | $160,192 | 5.19% | $3,815,387 | $125,762 | 4.41% | $314,042 | $34,430 | 0.78% |
| Taxable securities | 1,975,818 | 44,021 | 2.98 | 1,532,450 | 25,972 | 2.27 | 443,368 | 18,049 | 0.71 |
| Nontaxable securities (3) | 71,702 | 1,554 | 2.90 | 138,904 | 2,645 | 2.55 | (67,202) | (1,091) | 0.35 |
| Interest earning deposits | 114,753 | 4,436 | 5.17 | 1,146,183 | 7,057 | 0.82 | (1,031,430) | (2,621) | 4.35 |
| Total interest earning assets | 6,291,702 | 210,203 | 4.47% | 6,632,924 | 161,436 | 3.25% | (341,222) | 48,767 | 1.22% |
| Noninterest earning assets | 848,035 |  |  | 762,877 |  |  | 85,158 |  |  |
| Total assets | $7,139,737 |  |  | $7,395,801 |  |  | $(256,064) |  |  |
| **Interest Bearing Liabilities:** |  |  |  |  |  |  |  |  |  |
| Certificates of Deposit | $442,301 | $8,292 | 2.51% | $318,547 | $952 | 0.40% | $123,754 | $7,340 | 2.11% |
| Savings accounts | 558,467 | 471 | 0.11 | 651,292 | 274 | 0.06 | (92,825) | 197 | 0.05 |
| Interest bearing demand and money market accounts | 2,791,695 | 16,249 | 0.78 | 3,066,229 | 3,089 | 0.13 | (274,534) | 13,160 | 0.65 |
| Total interest bearing deposits | 3,792,463 | 25,012 | 0.88 | 4,036,068 | 4,315 | 0.14 | (243,605) | 20,697 | 0.74 |
| Junior subordinated debentures | 21,576 | 1,521 | 9.43 | 21,286 | 745 | 4.68 | 290 | 776 | 4.75 |
| Securities sold under agreement to repurchase | 38,187 | 148 | 0.52 | 47,057 | 98 | 0.28 | (8,870) | 50 | 0.24 |
| Borrowings | 339,296 | 12,238 | 4.82 | — | — | —% | 339,296 | 12,238 | 4.82 |
| Total interest bearing liabilities | 4,191,522 | 38,919 | 1.24% | 4,104,411 | 5,158 | 0.17% | 87,111 | 33,761 | 1.07% |
| Noninterest bearing demand deposits | 1,942,134 |  |  | 2,355,285 |  |  | (413,151) |  |  |
| Other noninterest bearing liabilities | 186,469 |  |  | 113,534 |  |  | 72,935 |  |  |
| Stockholders’ equity | 819,612 |  |  | 822,571 |  |  | (2,959) |  |  |
| Total liabilities and stock-holders’ equity | $7,139,737 |  |  | $7,395,801 |  |  | $(256,064) |  |  |
| Net interest income and spread |  | $171,284 | 3.23% |  | $156,278 | 3.08% |  | $15,006 | 0.15% |
| Net interest margin |  |  | 3.64% |  |  | 3.15% |  |  | 0.49% |

(1) Average balances are calculated using daily balances. Average yield/rate is annualized.

(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $2.4 million and $6.7 million for the nine months ended September 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 nine months ended September 30, 2023 compared to the same period in 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 rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:

*(Dollars in thousands)*

| Interest Earning Assets: | Increase (Decrease) Due to Changes In: Volume | Yield/Rate | Total | % Change |
| --- | ---: | ---: | ---: | ---: |
| Loans receivable, net | $10,932 | $23,498 | $34,430 | 27.4% |
| Taxable securities | 8,646 | 9,403 | 18,049 | 69.5 |
| Nontaxable securities | (1,417) | 326 | (1,091) | (41.2) |
| Interest earning deposits | (11,234) | 8,613 | (2,621) | (37.1) |
| Total interest income | $6,927 | $41,840 | $48,767 | 30.2% |
| **Interest Bearing Liabilities:** |  |  |  |  |
| Certificates of deposit | $504 | $6,836 | $7,340 | 771.0% |

38

*(Dollars in thousands)*

|  | Increase (Decrease) Due to Changes In: Volume | Yield/Rate | Total | % Change |
| --- | ---: | ---: | ---: | ---: |
| Savings accounts | (44) | 241 | 197 | 71.9 |
| Interest bearing demand and money market accounts | (301) | 13,461 | 13,160 | 426.0 |
| Total interest bearing deposits | 159 | 20,538 | 20,697 | 479.7 |
| Junior subordinated debentures | 10 | 766 | 776 | 104.2 |
| Securities sold under agreement to repurchase | (21) | 71 | 50 | 51.0 |
| Borrowings | 12,238 | — | 12,238 | 100.0 |
| Total interest expense | $12,386 | $21,375 | $33,761 | 654.5% |
| Net interest income | $(5,459) | $20,465 | $15,006 | 9.6% |

Net interest income increased $15.0 million, or 9.6%, to $171.3 million for the nine months ended September 30, 2023 as compared to $156.3 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 $48.8 million, or 30.2%, to $210.2 million for the nine months ended September 30, 2023, compared to $161.4 million for the same period in 2022. The increase was the result of a 122 basis point increase on the yield on interest earning assets to 4.47% for the nine months ended September 30, 2023, as compared to 3.25% for the same period in 2022, due to an increase in market interest rates as well as change in the mix of total interest earning assets into higher yielding assets.

Total interest expense increased $33.8 million, or 654.5%, to $38.9 million during the nine months ended September 30, 2023 compared to $5.2 million for the same period in 2022 due primarily to a 74 basis point increase in cost of interest bearing deposits to 0.88% for the nine months ended September 30, 2023, as compared to 0.14% for the same period in 2022, due to competitive rate pressures as well as the addition of interest expense on borrowings during the nine months ended September 30, 2023 as compared to no interest expense on borrowings during the same period in 2022.

Net interest margin increased 49 basis points to 3.64% for the nine months ended September 30, 2023 compared to 3.15% for the same period in 2022.

### 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 (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 the quarter ended September 30, 2023 to the comparable quarter in the prior year

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

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| (Reversal of) provision for credit losses on loans | $(635) | $1,919 | $(2,554) | 133.1% |
| (Reversal of) provision for credit losses on unfunded commitments | (243) | 26 | (269) | 1034.6 |
| (Reversal of) provision for credit losses | $(878) | $1,945 | $(2,823) | 145.1% |

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 reversal of provision for credit losses on loans was $635,000 during the three months ended September 30, 2023 due primarily to net recoveries of $1.2 million primarily due to the payoff of a nonaccrual loan. Future assessments of the expected credit losses will not only be impacted by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended September 30, 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.

The $1.9 million provision for credit losses on loans recognized during the three months ended September 30, 2022 was due primarily to growth in loans receivable offset partially by a reduction to the ACL on loans individually evaluated for losses.

#### Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year

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

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Provision for (reversal of) credit losses on loans | $3,066 | $(1,252) | $4,318 | (344.9)% |
| Reversal of provision for credit losses on unfunded commitments | (210) | (1,584) | 1,374 | (86.7) |
| Provision for (reversal of) credit losses | $2,856 | $(2,836) | $5,692 | (200.7)% |

The $3.1 million provision for credit losses on loans during the nine months ended September 30, 2023 was due primarily to an increase in loans receivable as well as a change in mix of loans offset partially by net recoveries of 895,000. The $210,000 reversal of provision for credit losses on unfunded commitments recorded during the nine months ended September 30, 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.

The $1.3 million reversal of provision for credit losses on loans recognized during the nine months ended September 30, 2022 was due primarily to a reduction of loans individually evaluated for losses and their related ACL. The $1.6 million reversal of provision for credit losses on unfunded commitments recognized during the nine months ended September 30, 2022 was due primarily to higher loan utilization rates.

### Noninterest Income Overview

#### Comparison of the three months ended September 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:

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Service charges and other fees | $2,856 | $2,688 | $168 | 6.3% |
| Card revenue | 2,273 | 2,365 | (92) | (3.9) |
| Loss on sale of investment securities, net | (1,940) | — | (1,940) | 100.0 |
| Gain on sale of loans, net | 157 | 133 | 24 | 18.0 |
| Interest rate swap fees | 62 | 78 | (16) | (20.5) |
| Bank owned life insurance income | 734 | 723 | 11 | 1.5 |
| Gain on sale of other assets, net | — | 265 | (265) | (100.0) |
| Other income | 2,129 | 1,201 | 928 | 77.3 |
| Total noninterest income | $6,271 | $7,453 | $(1,182) | (15.9)% |

Noninterest income decreased $1.2 million, or 15.9%, during the three months ended September 30, 2023 compared to the same period in 2022 due primarily to a $1.9 million loss on sale of investment securities available for sale partially offset by a $610,000 gain on sale of the Ellensburg branch and related deposits included in other income.

#### Comparison of nine months ended September 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:

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Service charges and other fees | $8,162 | $7,739 | $423 | 5.5% |
| Card revenue | 6,396 | 6,774 | (378) | (5.6) |
| Loss on sale of investment securities, net | (2,226) | — | (2,226) | (100.0) |
| Gain on sale of loans, net | 307 | 593 | (286) | (48.2) |

40

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Interest rate swap fees | 230 | 383 | (153) | (39.9) |
| Bank owned life insurance income | 2,280 | 3,182 | (902) | (28.3) |
| Gain on sale of other assets, net | 2 | 469 | (467) | (99.6) |
| Other income | 6,659 | 3,867 | 2,792 | 72.2 |
| Total noninterest income | $21,810 | $23,007 | $(1,197) | (5.2)% |

Noninterest income decreased $1.2 million, or 5.2%, during the nine months ended September 30, 2023 compared to the same period in 2022. A loss on sale of investment securities of $2.2 million was recognized during the nine months ended September 30, 2023 as a result of the sale of $67.9 million of investment securities available for sale. Other income increased due primarily to a one-time $1.6 million gain on sale of Visa Inc. Class B common stock recognized and a $610,000 gain on sale of the Ellensburg branch and related deposits during the nine months ended September 30, 2023. Bank owned life insurance income decreased due primarily to a $1.0 million death benefit recognized during the nine months ended September 30, 2022.

### Noninterest Expense Overview

#### Comparison of three months ended September 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:

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Compensation and employee benefits | $25,008 | $24,206 | $802 | 3.3% |
| Occupancy and equipment | 4,814 | 4,422 | 392 | 8.9 |
| Data processing | 4,366 | 4,185 | 181 | 4.3 |
| Marketing | 389 | 358 | 31 | 8.7 |
| Professional services | 582 | 639 | (57) | (8.9) |
| State/municipal business and use tax | 1,088 | 963 | 125 | 13.0 |
| Federal deposit insurance premium | 818 | 500 | 318 | 63.6 |
| Amortization of intangible assets | 595 | 671 | (76) | (11.3) |
| Other expense | 3,310 | 3,203 | 107 | 3.3 |
| Total noninterest expense | $40,970 | $39,147 | $1,823 | 4.7% |

Noninterest expense increased $1.8 million, or 4.7%, during the three months ended September 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 our recent 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.

#### Comparison of the nine months ended September 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:

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Compensation and employee benefits | $75,325 | $67,236 | $8,089 | 12.0% |
| Occupancy and equipment | 14,372 | 12,924 | 1,448 | 11.2 |
| Data processing | 13,208 | 12,431 | 777 | 6.3 |
| Marketing | 1,232 | 968 | 264 | 27.3 |

41

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Professional services | 1,961 | 1,867 | 94 | 5.0 |
| State/municipal business and use tax | 3,150 | 2,626 | 524 | 20.0 |
| Federal deposit insurance premium | 2,465 | 1,525 | 940 | 61.6 |
| Amortization of intangible assets | 1,841 | 2,079 | (238) | (11.4) |
| Other expense | 10,346 | 8,918 | 1,428 | 16.0 |
| Total noninterest expense | $123,900 | $110,574 | $13,326 | 12.1% |

Noninterest expense increased $13.3 million, or 12.1%, during the nine months ended September 30, 2023 compared to the same period in 2022 due primarily to an increase in compensation and employee benefits resulting from a 5.9% increase in the average 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 our recent 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 general increase in operating costs.

### Income Tax Expense Overview

#### Comparison of the three months ended September 30, 2023 to the comparable period in the prior year

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

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $21,797 | $25,647 | $(3,850) | (15.0)% |
| Income tax expense | $3,578 | $4,657 | $(1,079) | (23.2)% |
| Effective income tax rate | 16.4% | 18.2% | (1.8)% | (9.9)% |

Income tax expense and the effective income tax rate both decreased due primarily to lower estimated pre-tax income which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and investments in low-income housing tax credits during the three months ended September 30, 2023 compared to the same period in 2022.

*Comparison of the nine months ended September 30, 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:

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $66,338 | $71,547 | $(5,209) | (7.3)% |
| Income tax expense | $10,816 | $12,216 | $(1,400) | (11.5)% |
| Effective income tax rate | 16.3% | 17.1% | (0.8)% | (4.7)% |

Income tax expense and the effective income rate both decreased due primarily to lower estimated pre-tax income during the nine months ended September 30, 2023 compared to the same period in 2022 which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and investments in low-income housing tax credits.

### Financial Condition Overview

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

*(Dollars in thousands)*

| Assets | September 30, 2023 | December 31, 2022 $% | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $220,503 | $103,590 | $116,913 | 112.9% |
| Investment securities available for sale, at fair value, net | 1,147,547 | 1,331,443 | (183,896) | (13.8) |
| Investment securities held to maturity, at amortized cost, net | 746,845 | 766,396 | (19,551) | (2.6) |
| Loans held for sale | 263 | — | 263 | 100.0 |
| Loans receivable, net | 4,219,911 | 4,007,872 | 212,039 | 5.3 |
| Premises and equipment, net | 76,436 | 76,930 | (494) | (0.6) |
| Federal Home Loan Bank stock, at cost | 8,373 | 8,916 | (543) | (6.1) |
| Bank owned life insurance | 123,639 | 122,059 | 1,580 | 1.3 |
| Accrued interest receivable | 18,794 | 18,547 | 247 | 1.3 |
| Prepaid expenses and other assets | 341,952 | 296,181 | 45,771 | 15.5 |
| Other intangible assets, net | 5,386 | 7,227 | (1,841) | (25.5) |
| Goodwill | 240,939 | 240,939 | — | — |
| Total assets | $7,150,588 | $6,980,100 | $170,488 | 2.4% |
| **Liabilities and Stockholders' Equity** |  |  |  |  |
| Deposits | $5,635,187 | $5,907,420 | $(272,233) | (4.6)% |
| Deposits held for sale | — | 17,420 | (17,420) | (100.0) |
| Total deposits | 5,635,187 | 5,924,840 | (289,653) | (4.9) |
| Borrowings | 450,000 | — | 450,000 | 100.0 |
| Junior subordinated debentures | 21,692 | 21,473 | 219 | 1.0 |
| Securities sold under agreement to repurchase | 23,158 | 46,597 | (23,439) | (50.3) |
| Accrued expenses and other liabilities | 207,005 | 189,297 | 17,708 | 9.4 |
| Total liabilities | 6,337,042 | 6,182,207 | 154,835 | 2.5 |
| Common stock | 548,652 | 552,397 | (3,745) | (0.7) |
| Retained earnings | 377,522 | 345,346 | 32,176 | 9.3 |
| Accumulated other comprehensive loss, net | (112,628) | (99,850) | (12,778) | (12.8) |
| Total stockholders' equity | 813,546 | 797,893 | 15,653 | 2.0 |
| Total liabilities and stockholders' equity | $7,150,588 | $6,980,100 | $170,488 | 2.4% |

Total assets increased due primarily to an increase in loans receivable, net due to loan growth and an increase in cash and cash equivalents, offset partially by a decrease in investment securities. Total liabilities and stockholders' equity increased due primarily to an increase in borrowings offset partially by a decrease in deposits.

### 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.

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

*(Dollars in thousands)*

*Investment securities available for sale, at fair value:*

|  | September 30, 2023 Balance | % of Total | December 31, 2022 Balance | % of Total | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. government and agency securities | $20,424 | 1.1% | $63,859 | 3.0% | $(43,435) | (68.0)% |
| Municipal securities | 106,805 | 5.6 | 153,026 | 7.3 | (46,221) | (30.2) |
| Residential CMO and MBS(1) | 401,181 | 21.2 | 424,386 | 20.2 | (23,205) | (5.5) |
| Commercial CMO and MBS(1) | 597,213 | 31.5 | 664,421 | 31.8 | (67,208) | (10.1) |
| Corporate obligations | 3,780 | 0.2 | 3,834 | 0.2 | (54) | (1.4) |
| Other asset-backed securities | 18,144 | 1.0 | 21,917 | 1.0 | (3,773) | (17.2) |
| Total | $1,147,547 | 60.6% | $1,331,443 | 63.5% | $(183,896) | (13.8)% |
| **Investment securities held to maturity, at amortized cost:** |  |  |  |  |  |  |
| U.S. government and agency securities | $151,040 | 8.0% | $150,936 | 7.2% | $104 | 0.07% |
| Residential CMO and MBS(1) | 273,609 | 14.4 | 290,318 | 13.8 | (16,709) | (5.8) |
| Commercial CMO and MBS(1) | 322,196 | 17.0 | 325,142 | 15.5 | (2,946) | (0.9) |
| Total | $746,845 | 39.4% | $766,396 | 36.5% | $(19,551) | (2.6)% |
| Total investment securities | $1,894,392 | 100.0% | $2,097,839 | 100.0% | $(203,447) | (9.7)% |

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

Total investment securities decreased $203.4 million, or 9.7%, to $1.89 billion at September 30, 2023 from $2.10 billion at December 31, 2022 due primarily to maturities and prepayments of $154.0 million and sales of $67.9 million, partially offset by purchases of $37.7 million.

### Loan Portfolio Overview

#### Changes by loan type

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

*(Dollars in thousands)*

| Commercial business: | September 30, 2023 Amortized Cost | % of Loans Receivable | December 31, 2022 Amortized Cost | % of Loans Receivable | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $691,318 | 16.2% | $693,568 | 17.1% | $(2,250) | (0.3)% |
| Owner-occupied CRE | 953,779 | 22.4 | 937,040 | 23.1 | 16,739 | 1.8 |
| Non-owner occupied CRE | 1,690,099 | 39.5 | 1,586,632 | 39.2 | 103,467 | 6.5 |
| Total commercial business | 3,335,196 | 78.1 | 3,217,240 | 79.4 | 117,956 | 3.7 |
| Residential real estate | 377,448 | 8.8 | 343,631 | 8.5 | 33,817 | 9.8 |
| Real estate construction and land development: |  |  |  |  |  |  |
| Residential | 70,804 | 1.7 | 80,074 | 2.0 | (9,270) | (11.6) |
| Commercial and multifamily | 310,024 | 7.3 | 214,038 | 5.3 | 95,986 | 44.8 |
| Total real estate construction and land development | 380,828 | 9.0 | 294,112 | 7.3 | 86,716 | 29.5 |
| Consumer | 173,386 | 4.1 | 195,875 | 4.8 | (22,489) | (11.5) |
| Total | $4,266,858 | 100.0% | $4,050,858 | 100.0% | $216,000 | 5.3% |

44

Loans receivable increased $216.0 million, or 5.3%, to $4.27 billion at September 30, 2023 from $4.05 billion at December 31, 2022 primarily due to new loan growth. New loans funded during the nine months ended September 30, 2023 were $370.2 million.

Owner-occupied CRE and non-owner occupied CRE loans increased by $120.2 million to $2.64 billion at September 30, 2023, compared to $2.52 billion at December 31, 2022. The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:

*(Dollars in thousands)*

*Owner occupied and non-owner occupied CRE loans by collateral type:*

|  | September 30, 2023 Amortized Cost | % of CRE Loans | December 31, 2022 Amortized Cost | % of CRE Loans | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Office | $566,916 | 21.4% | $579,762 | 22.9% | $(12,846) | (2.2)% |
| Industrial | 415,243 | 15.7 | 366,947 | 14.6 | 48,296 | 13.2 |
| Retail store / shopping center | 287,746 | 10.9 | 291,799 | 11.6 | (4,053) | (1.4) |
| Multi-family | 286,091 | 10.8 | 256,661 | 10.2 | 29,430 | 11.5 |
| Mini-storage | 158,475 | 6.0 | 148,580 | 5.9 | 9,895 | 6.7 |
| Mixed use property | 152,979 | 5.8 | 154,793 | 6.1 | (1,814) | (1.2) |
| Warehouse | 152,055 | 5.8 | 147,443 | 5.8 | 4,612 | 3.1 |
| Motel / hotel | 141,731 | 5.4 | 129,352 | 5.1 | 12,379 | 9.6 |
| Single purpose | 122,819 | 4.6 | 112,924 | 4.5 | 9,895 | 8.8 |
| Recreational / school | 68,469 | 2.6 | 70,565 | 2.8 | (2,096) | (3.0) |
| Other | 291,354 | 11.0 | 264,846 | 10.5 | 26,508 | 10.0 |
| Total | $2,643,878 | 100.0% | $2,523,672 | 100.0% | $120,206 | 4.8% |

Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans totaling $566.9 million, or 21.4% of the total owner-occupied CRE and non-owner occupied CRE, at September 30, 2023. Of this total, $283.7 million, or 50.0%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile as there is less tenant rollover risk and generally have guarantees from the company occupying the space as well as the owners of the company. The average loan balance of owner-occupied CRE and non-owner occupied CRE was $1.2 million at September 30, 2023.

Commercial and multifamily construction loans increased $96.0 million or 44.8% due to new loan originations and advances on outstanding loans. New commitments for commercial and multifamily construction loans were $209.5 million during the nine months ended September 30, 2023.

Consumer loans decreased $22.5 million primarily due to a $33.1 million decline in indirect loans outstanding as the Bank ceased originating indirect auto loan originations in 2020.

#### Loans classified as nonaccrual and performing modified loans and nonperforming assets

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

*(Dollars in thousands)*

| Nonaccrual loans: (1) | September 30, 2023 | December 31, 2022 $% | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial business | $3,065 | $5,869 | $(2,804) | (47.8)% |
| Real estate construction and land development | — | 37 | (37) | (100.0) |
| Total nonaccrual loans | 3,065 | 5,906 | (2,841) | (48.1) |
| Other real estate owned | — | — | — | — |
| Accruing loans past due 90 days or more | $2,158 | $1,615 | $543 | 33.6% |
| Total nonperforming assets | $5,223 | $7,521 | $(2,298) | (30.6)% |
| Credit quality ratios: |  |  |  |  |
| Nonaccrual loans to loans receivable | 0.07% | 0.15% | (0.08)% | (53.3)% |
| Nonperforming loans to loans receivable | 0.12 | 0.19 | (0.07) | (36.8) |
| Nonperforming assets to total assets | 0.07 | 0.11 | (0.04) | (36.4) |

45

| Modified loans:(2) | September 30, 2023 December 31, 2022 Change $% |
| --- | ---: |
| Commercial business | $9,471 |
| Real estate construction and land development | 3,452 |
| Consumer | 45 |
| Total performing modified loans | $12,968 |

(1) At both September 30, 2023 and December 31, 2022, $1.5 million of nonaccrual loans, were guaranteed by government agencies.

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

The following table provides the changes in nonaccrual loans during the nine months ended September 30, 2023:

*(Dollars in thousands)*

|  |  |
| --- | ---: |
| Balance, beginning of period | $5,906 |
| Additions | 908 |
| Net principal payments, sales and transfers to accruing status | (1,175) |
| Payoffs | (2,574) |
| Balance, end of period | $3,065 |

Nonaccrual loans decreased $2.8 million, or 48.1%, due primarily to ongoing collection efforts including the payoff of a commercial business loan for $1.6 million which also included a recovery of $1.1 million recognized during the three months ended September 30, 2023.

### Allowance for Credit Losses on Loans Overview

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

*(Dollars in thousands)*

|  | At or For the Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| ACL on loans at the end of period | $46,947 | $42,089 | $4,858 | 11.5% |
| Credit quality ratios: |  |  |  |  |
| ACL on loans to loans receivable | 1.10% | 1.05% | 0.05 | 4.8 |
| ACL on loans to nonaccrual loans | 1,531.71 | 675.15 | 856.56 | 126.9 |
| Net recoveries | $(895) | $(980) | $85 | (8.7) |
| Average balance of loans receivable, net during the period(1) | 4,129,429 | 3,815,387 | 314,042 | 8.2 |
| Net recoveries on loans to average loans receivable, net(2) | (0.03)% | (0.03)% | —% | —% |

(1) Average balance of loans receivable, net includes loans held for sale.

(2) Annualized.

The ACL on loans increased $4.0 million, or 9.2%, to $46.9 million at September 30, 2023 from $43.0 million at December 31, 2022 due primarily to an increase in loans receivable, net as well as a change in mix of loans.

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

*(Dollars in thousands)*

|  | September 30, 2023 ACL on Loans | ACL as a % of Loans in Loan Category | % of Loans in Loan Category to Total Loans | December 31, 2022 ACL on Loans | ACL as a % of Loans in Loan Category | % of Loans in Loan Category to Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial business | $31,105 | 0.93% | 78.1% | $30,718 | 0.95% | 79.4% |
| Residential real estate | 3,549 | 0.94 | 8.8 | 2,872 | 0.84 | 8.5 |
| Real estate construction and land development | 9,959 | 2.62 | 9.0 | 7,063 | 2.40 | 7.3 |

46

*(Dollars in thousands)*

|  | September 30, 2023 ACL on Loans | ACL as a % of Loans in Loan Category | % of Loans in Loan Category to Total Loans | December 31, 2022 ACL on Loans | ACL as a % of Loans in Loan Category | % of Loans in Loan Category to Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consumer | 2,334 | 1.35 | 4.1 | 2,333 | 1.19 | 4.8 |
| Total ACL on loans | $46,947 | 1.10% | 100.0% | $42,986 | 1.06% | 100.0% |

### Deposits Overview

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

*(Dollars in thousands)*

|  | September 30, 2023 Balance (1) | % of Total Deposits | December 31, 2022 Balance (1) | % of Total Deposits | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Noninterest demand deposits | $1,789,293 | 31.7% | $2,099,464 | 35.5% | $(310,171) | (14.8)% |
| Interest bearing demand deposits | 1,630,007 | 28.9 | 1,830,727 | 30.9 | (200,720) | (11.0) |
| Money market accounts | 1,081,253 | 19.2 | 1,063,243 | 17.9 | 18,010 | 1.7 |
| Savings accounts | 506,028 | 9.0 | 623,833 | 10.5 | (117,805) | (18.9) |
| Total non-maturity deposits | 5,006,581 | 88.8 | 5,617,267 | 94.8 | (610,686) | (10.9) |
| Certificates of deposit | 628,606 | 11.2 | 307,573 | 5.2 | 321,033 | 104.4 |
| Total deposits | $5,635,187 | 100.0% | $5,924,840 | 100.0% | $(289,653) | (4.9)% |

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

Total deposits decreased $289.7 million, or 4.9%, to $5.64 billion at September 30, 2023, compared to $5.92 billion at December 31, 2022 due primarily to an overall reduction in market liquidity, as well as interest rate sensitive clients moving a portion of their non-operating deposits to higher yielding accounts. Certificate of deposits increased due to increasing rates which, attracted customers to this deposit type as well as the addition of $107.5 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 in September 2022. During the three months ended September 30, 2023, $13.8 million in deposits were sold as part of the closing of the Ellensburg branch sale, which included $13.6 million of non-maturity deposits. At December 31, 2022, $17.4 million in deposits were classified as held for sale.

### 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 September 30, 2023, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.20 billion. The Bank had no FHLB advances outstanding at both September 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 $823.1 million as of September 30, 2023. The Bank had $450.0 million in BTFP borrowings outstanding at September 30, 2023. The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities. The advance rate on the collateral is at par value. The average rate on borrowings from the BTFP was 4.74%. The Bank 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 September 30, 2023 and December 31, 2022, the Company had securities sold under agreements to repurchase of $23.2 million and $46.6 million, respectively.

In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and junior subordinated debentures as part of a prior acquisition. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital. The junior subordinated debentures outstanding as of September 30, 2023 and December 31, 2022 were $21.7 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 September 30, 2023.

### Stockholders' Equity Overview

The Company’s stockholders' equity to assets ratio was 11.4% at September 30, 2023 and December 31, 2022. Total stockholders' equity increased $15.7 million, or 2.0%, to $813.5 million at September 30, 2023 from $797.9 million at December 31, 2022. The increase was due primarily to $55.5 million in net income recognized, offset partially by $23.3 million in cash dividends declared, an increase of $12.8 million in accumulated other comprehensive loss as a result of declining fair values of investment securities available for sale, and $6.9 million for the repurchase of the Company's common stock during the nine months ended September 30, 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 October 18, 2023, the Company’s board of directors declared a regular quarterly dividend of $0.22 per common share payable on November 15, 2023 to shareholders of record on November 1, 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. 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 September 30, 2023, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of September 30, 2023 and December 31, 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 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 September 30, 2023 | December 31, 2022 | Bank September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Common equity Tier 1 capital ratio | 12.9% | 12.8% | 12.9% | 12.9% |
| Leverage ratio | 9.9 | 9.7 | 9.7 | 9.4 |
| Tier 1 capital ratio | 13.3 | 13.2 | 12.9 | 12.9 |
| Total capital ratio | 14.1 | 14.0 | 13.8 | 13.7 |
| Capital conservation buffer | 6.1 | 6.0 | 5.8 | 5.7 |

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

### 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, and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. Our liquidity policy permits the purchase of brokered deposits in an amount not to exceed 15% of the Bank's total deposits as a secondary source for funding. At September 30, 2023, we had $107.5 million in brokered deposits, which constituted 1.91% of 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 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:

*(Dollars in thousands)*

|  | September 30, 2023 | December 31 2022 |
| --- | ---: | ---: |
| FRB borrowing availability | $823,117 | $46,827 |
| FHLB borrowing availability(1) | 1,202,172 | 1,226,234 |
| Unencumbered investment securities available for sale(2) | 779,871 | 1,323,947 |
| Cash and cash equivalents | 220,503 | 103,590 |
| Fed funds line borrowing availability with correspondent banks | 145,000 | 215,000 |
| Total sources of liquidity | 3,170,663 | 2,915,598 |
| Less: Borrowings outstanding | (450,000) | — |
| Total available liquidity | $2,720,663 | $2,915,598 |

(1) Includes FHLB borrowing availability of $1.20 billion at September 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 capital resources since the information disclosed in our 2022 Annual Form 10-K. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

### Critical Accounting Estimates

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

## Market risk

As filed, 4,646 characters.

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through our exposure to market interest rates, equity prices and credit spreads. Our 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 to changes in interest rates. Among the factors considered are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and repricing periods. The risk committee of the Board of Directors oversees market risk management, including the monitoring of risk measures and limits and policy guidelines, for the amount of interest rate risk 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.

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:

*(Dollars in thousands)*

*Modeled increase in market interest rates of 100 basis points*

|  | September 30, 2023 Amount | % Change in Net Interest Income | December 31, 2022 Amount | % Change in Net Interest Income |
| --- | ---: | ---: | ---: | ---: |
| Increase in net interest income in Year 1 | $2,420 | 1.1% | $5,113 | 2.0% |
| Increase in net interest income in Year 2 | 4,104 | 1.6 | 11,147 | 4.1 |
| Modeled increase in market interest rates of 200 basis points |  |  |  |  |
| Increase in net interest income in Year 1 | 3,184 | 1.4 | 8,181 | 3.2 |
| Increase in net interest income in Year 2 | 6,266 | 2.4 | 19,889 | 7.3 |
| Modeled decrease in market interest rates of 100 basis points |  |  |  |  |
| Increase (decrease) in net interest income in Year 1 | 3,125 | 1.4 | (5,433) | (2.1) |
| Decrease in net interest income in Year 2 | 318 | 0.1 | (10,534) | (3.9) |
| Modeled decrease in market interest rates of 200 basis points |  |  |  |  |
| Increase (decrease) in net interest income in Year 1 | 2,812 | 1.2 | (16,840) | (6.6) |
| Decrease in net interest income in Year 2 | $(4,113) | (1.6)% | $(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.

## Controls and procedures

As filed, 1,431 characters.

#### (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 September 30, 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 was (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

#### (b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001046025-23-000197. Last ingested by Listed: Nov 6, 2026, 14:11 ET. No prices; not investment advice.