# Heritage Financial Corp: Form 10-Q for the period ended Sep 30, 2024

- Company: [Heritage Financial Corp](/companies/hfwa.md) (CIK 1046025)
- Form: 10-Q
- Filed: 2024-11-06
- Accepted by EDGAR: Nov 6, 2024, 16:23 ET
- Period: 2024-09-30
- Accession: 0001046025-24-000179
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1046025/000104602524000179/hfwa-20240930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1046025/000104602524000179/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $4.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $11.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $31.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.33 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.90 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.33 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.91 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 34,658,674 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 35,002,375 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $43.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $2.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $23.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2024-01-01 to 2024-09-30 | $18.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-09-30 | $175.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-09-30 | $7.15bn | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $6.28bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $874.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 65,840 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, 2024. 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, 2023 audited Consolidated Financial Statements, and the accompanying Notes included in our 2023 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 Quarterly Report on Form 10-Q relates primarily to the Bank’s operations.

Our business consists primarily of commercial lending and deposit relationships with small- and 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, consumer loans and residential real estate loans on single family properties located primarily in our markets.

Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, comprised primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits and borrowings. 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 more 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 gains or losses on sale of investment securities, 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."

### Results of Operations

### Net Income Overview

#### Comparison of the quarter ended September 30, 2024 to the comparable quarter in the prior year

Net income decreased $6.8 million, or 37.3%, to $11.4 million, or $0.33 per diluted common share, for the three months ended September 30, 2024, compared to $18.2 million, or $0.51 per diluted common share, for the same period in 2023.

The decrease in net income was primarily due to a $9.0 million increase in interest expense from higher funding costs and a pre-tax loss of $6.9 million on the sale of investment securities in connection with management's strategic repositioning of the Company's balance sheet during the three months ended September 30, 2024,

The decline in net income was partially offset by a $6.4 million increase in income due to increased yields earned on interest earning assets as a result of higher market interest rates and a $1.7 million decrease in noninterest expense due to management's expense management initiatives which included a reduction in full-time equivalent employees ("FTE") to 749 at September 30, 2024 compared to 821 at September 30, 2023 and technology-related contract renewals and terminations.

*Comparison of the nine months ended September 30, 2024 to the comparable period in the prior year.*

Net income decreased $24.2 million, or 43.6%, to $31.3 million, or $0.90 per diluted common share, for the nine months ended September 30, 2024 compared to $55.5 million, or $1.57 per diluted common share, for the same period in 2023.

The decrease in net income was due primarily to a $36.2 million increase in interest expense from higher funding costs and a pre-tax loss of $18.8 million on the sale of investment securities incurred during the nine months ended September 30, 2024 in connection with management's strategic repositioning of the Company's balance sheet. The Company sold investment securities with an amortized cost of $260.8 million and an estimated weighted average book yield of 2.27% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05% during the nine months ended September 30, 2024. The remaining proceeds from investment sales were invested in loans.

The decline in net income was partially offset by a $20.5 million increase in interest income due to an increase in yields earned on interest earning assets as a result of higher market interest rates and a decrease in noninterest expense of $5.1 million due to management's expense management initiatives, which included a reduction in FTE and technology-related contract renewals and terminations.

### Net Interest Income and Margin Overview

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

#### Comparison of the quarter ended September 30, 2024 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, 2024 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2023 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans receivable, net (2)(3) | $4,555,090 | $64,138 | 5.60% | $4,201,554 | $56,119 | 5.30% | $353,536 | $8,019 | 0.30% |
| Taxable securities | 1,604,529 | 13,472 | 3.34 | 1,931,649 | 14,590 | 3.00 | (327,120) | (1,118) | 0.34 |
| Nontaxable securities (3) | 17,482 | 159 | 3.62 | 60,654 | 448 | 2.93 | (43,172) | (289) | 0.69 |
| Interest earning deposits | 150,384 | 2,048 | 5.42 | 169,186 | 2,310 | 5.42 | (18,802) | (262) | — |
| Total interest earning assets | 6,327,485 | 79,817 | 5.02% | 6,363,043 | 73,467 | 4.58% | (35,558) | 6,350 | 0.44% |
| Noninterest earning assets | 855,436 |  |  | 849,689 |  |  | 5,747 |  |  |
| Total assets | $7,182,921 |  |  | $7,212,732 |  |  | $(29,811) |  |  |
| **Interest Bearing Liabilities:** |  |  |  |  |  |  |  |  |  |
| Certificates of deposit | $906,743 | $10,052 | 4.41% | $553,015 | $4,585 | 3.29% | $353,728 | $5,467 | 1.12% |
| Savings accounts | 445,926 | 220 | 0.20 | 523,882 | 172 | 0.13 | (77,956) | 48 | 0.07 |
| Interest bearing demand and money market accounts | 2,644,827 | 9,984 | 1.50 | 2,764,251 | 7,120 | 1.02 | (119,424) | 2,864 | 0.48 |
| Total interest bearing deposits | 3,997,496 | 20,256 | 2.02 | 3,841,148 | 11,877 | 1.23 | 156,348 | 8,379 | 0.79 |
| Junior subordinated debentures | 21,946 | 541 | 9.81 | 21,649 | 540 | 9.90 | 297 | 1 | (0.09) |
| Securities sold under agreement to repurchase | — | — | — | 31,729 | 38 | 0.48 | (31,729) | (38) | (0.48) |
| Borrowings | 452,364 | 6,062 | 5.33 | 451,032 | 5,394 | 4.74 | 1,332 | 668 | 0.59 |
| Total interest bearing liabilities | 4,471,806 | 26,859 | 2.39% | 4,345,558 | 17,849 | 1.63% | 126,248 | 9,010 | 0.76% |
| Noninterest bearing demand deposits | 1,677,984 |  |  | 1,859,374 |  |  | (181,390) |  |  |
| Other noninterest bearing liabilities | 175,332 |  |  | 186,306 |  |  | (10,974) |  |  |
| Stockholders’ equity | 857,799 |  |  | 821,494 |  |  | 36,305 |  |  |
| Total liabilities and stock-holders’ equity | $7,182,921 |  |  | $7,212,732 |  |  | $(29,811) |  |  |
| Net interest income and spread |  | $52,958 | 2.63% |  | $55,618 | 2.95% |  | $(2,660) | (0.32)% |
| Net interest margin |  |  | 3.33% |  |  | 3.47% |  |  | (0.14)% |

(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 $938,000 and $940,000 for the three months ended September 30, 2024 and 2023, 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, 2024 compared to the same period in 2023, 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 |
| --- | ---: | ---: | ---: |
| Loans receivable, net | $4,878 | $3,141 | $8,019 |
| Taxable securities | (2,637) | 1,519 | (1,118) |
| Nontaxable securities | (375) | 86 | (289) |
| Interest earning deposits | (256) | (6) | (262) |
| Total interest income | $1,610 | $4,740 | $6,350 |
| **Interest Bearing Liabilities:** |  |  |  |
| Certificates of deposit | $3,580 | $1,887 | $5,467 |
| Savings accounts | (29) | 77 | 48 |
| Interest bearing demand and money market accounts | (320) | 3,184 | 2,864 |
| Total interest bearing deposits | 3,231 | 5,148 | 8,379 |
| Junior subordinated debentures | 7 | (6) | 1 |
| Securities sold under agreement to repurchase | (19) | (19) | (38) |
| Borrowings | 16 | 652 | 668 |
| Total interest expense | $3,235 | $5,775 | $9,010 |
| Net interest income | $(1,625) | $(1,035) | $(2,660) |

Net interest income decreased $2.7 million, or 4.8%, to $53.0 million for the three months ended September 30, 2024, compared to $55.6 million for the same period in 2023 due primarily to a $9.0 million increase in total interest expense, offset partially by a $6.4 million increase in total interest income.

Total interest income increased to $79.8 million for the three months ended September 30, 2024, compared to $73.5 million for the same period in 2023. The increase was primarily due to a $8.0 million increase in interest income on loans receivable, net, offset partially by a $1.4 million decrease in interest income on investment securities during the three months ended September 30, 2024 as compared to the same period in 2023. Interest income on loans receivable, net, increased due to increases in both the average yield earned on and the average outstanding balance of those assets. The yield earned on loans receivable, net, increased 30 basis points to 5.60% and the average balance of loans receivable, net, increased $353.5 million to $4.56 billion during the three months ended September 30, 2024, as compared to the same period in 2023.

Interest income on investment securities decreased $1.4 million due to a decrease in the average balance of investment securities, offset partially by an increase in the yield earned on these securities due primarily to rising interest rates and sales of lower yielding securities. The yield on taxable securities increased 34 basis points to 3.34% and average balances decreased $327.1 million to $1.60 billion during the three months ended September 30, 2024 compared to 3.00% and average balances of $1.93 billion during the same period in 2023.

Total interest expense increased to $26.9 million during the three months ended September 30, 2024 compared to $17.8 million for the same period in 2023. The increase was due primarily to a $8.4 million increase in interest expense on interest bearing deposits and a $0.7 million increase in interest expense on borrowings during the three months ended September 30, 2024, as compared to the same period in 2023. The increase in interest expense on interest bearing deposits was due primarily to a 79 basis point increase in the average rate to 2.02% for the three months ended September 30, 2024, as compared to 1.23% for the same period in 2023 due to competitive rate pressures, and to a lesser extent, a $353.7 million increase in the average balance of certificates of deposit which are generally at higher rates than other deposit products.

Net interest margin decreased 14 basis points to 3.33% for the three months ended September 30, 2024 compared to 3.47% for the same period in 2023.

#### Comparison of nine months ended September 30, 2024 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, 2024 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2023 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans receivable, net (2)(3) | $4,425,234 | $182,608 | 5.51% | $4,129,429 | $160,192 | 5.19% | $295,805 | $22,416 | 0.32% |
| Taxable securities | 1,699,995 | 42,462 | 3.34 | 1,975,818 | 44,021 | 2.98 | (275,823) | (1,559) | 0.36 |

40

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2024 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate(1) | 2023 Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate | Change Average Balance(1) | Interest Earned/ Paid | Average Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Nontaxable securities (3) | 19,193 | 505 | 3.51 | 71,702 | 1,554 | 2.90 | (52,509) | (1,049) | 0.61 |
| Interest earning deposits | 126,970 | 5,177 | 5.45 | 114,753 | 4,436 | 5.17 | 12,217 | 741 | 0.28 |
| Total interest earning assets | 6,271,392 | 230,752 | 4.91% | 6,291,702 | 210,203 | 4.47% | (20,310) | 20,549 | 0.44% |
| Noninterest earning assets | 856,198 |  |  | 848,035 |  |  | 8,163 |  |  |
| Total assets | $7,127,590 |  |  | $7,139,737 |  |  | $(12,147) |  |  |
| **Interest Bearing Liabilities:** |  |  |  |  |  |  |  |  |  |
| Certificates of Deposit | $826,575 | $26,852 | 4.34% | $442,301 | $8,292 | 2.51% | $384,274 | $18,560 | 1.83% |
| Savings accounts | 457,989 | 640 | 0.19 | 558,467 | 471 | 0.11 | (100,478) | 169 | 0.08 |
| Interest bearing demand and money market accounts | 2,643,478 | 27,605 | 1.39 | 2,791,695 | 16,249 | 0.78 | (148,217) | 11,356 | 0.61 |
| Total interest bearing deposits | 3,928,042 | 55,097 | 1.87 | 3,792,463 | 25,012 | 0.88 | 135,579 | 30,085 | 0.99 |
| Junior subordinated debentures | 21,874 | 1,627 | 9.94 | 21,576 | 1,521 | 9.43 | 298 | 106 | 0.51 |
| Securities sold under agreement to repurchase | — | — | — | 38,187 | 148 | 0.52 | (38,187) | (148) | (0.52) |
| Borrowings | 484,300 | 18,427 | 5.08 | 339,296 | 12,238 | 4.82% | 145,004 | 6,189 | 0.26 |
| Total interest bearing liabilities | 4,434,216 | 75,151 | 2.26% | 4,191,522 | 38,919 | 1.24% | 242,694 | 36,232 | 1.02% |
| Noninterest bearing demand deposits | 1,657,867 |  |  | 1,942,134 |  |  | (284,267) |  |  |
| Other noninterest bearing liabilities | 186,081 |  |  | 186,469 |  |  | (388) |  |  |
| Stockholders’ equity | 849,426 |  |  | 819,612 |  |  | 29,814 |  |  |
| Total liabilities and stock-holders’ equity | $7,127,590 |  |  | $7,139,737 |  |  | $(12,147) |  |  |
| Net interest income and spread |  | $155,601 | 2.65% |  | $171,284 | 3.23% |  | $(15,683) | (0.58)% |
| Net interest margin |  |  | 3.31% |  |  | 3.64% |  |  | (0.33)% |

(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 $2.7 million and $2.4 million for the nine months ended September 30, 2024 and 2023, 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, 2024 compared to the same period in 2023, 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 |
| --- | ---: | ---: | ---: |
| Loans receivable, net | $11,862 | $10,554 | $22,416 |
| Taxable securities | (6,543) | 4,984 | (1,559) |
| Nontaxable securities | (1,327) | 278 | (1,049) |
| Interest earning deposits | 489 | 252 | 741 |
| Total interest income | $4,481 | $16,068 | $20,549 |
| **Interest Bearing Liabilities:** |  |  |  |
| Certificates of deposit | $10,067 | $8,493 | $18,560 |
| Savings accounts | (97) | 266 | 169 |
| Interest bearing demand and money market accounts | (906) | 12,262 | 11,356 |
| Total interest bearing deposits | 9,064 | 21,021 | 30,085 |
| Junior subordinated debentures | 21 | 85 | 106 |
| Securities sold under agreement to repurchase | (74) | (74) | (148) |

41

*(Dollars in thousands)*

|  | Increase (Decrease) Due to Changes In: Volume | Yield/Rate | Total |
| --- | ---: | ---: | ---: |
| Borrowings | 5,484 | 705 | 6,189 |
| Total interest expense | $14,495 | $21,737 | $36,232 |
| Net interest income | $(10,014) | $(5,669) | $(15,683) |

Net interest income decreased $15.7 million, or 9.2%, to $155.6 million for the nine months ended September 30, 2024, as compared to $171.3 million for the same period in 2023, due primarily to an increase in total interest expense offset partially by an increase in total interest income.

Total interest income increased $20.5 million, or 9.8%, to $230.8 million for the nine months ended September 30, 2024, compared to $210.2 million for the same period in 2023. The increase was primarily due to a $22.4 million increase in interest income on loans receivable, net, and a $0.7 million increase in interest income on interest earning deposits, offset partially by a $2.6 million decrease in interest income on investment securities during the nine months ended September 30, 2024 as compared to the same period in 2023. Interest income on loans receivable, net, and interest earning deposits increased due to increases in both the average yield earned on and the average outstanding balance of those assets. The yield earned on loans receivable, net increased 32 basis points to 5.51% and the average balance of loans receivable, net, increased $295.8 million to $4.43 billion during the nine months ended September 30, 2024, as compared to the same period in 2023. Similarly, the yield earned on interest earning deposits increased 28 basis points to 5.45% and the average balance of those deposits increased $12.2 million to $127.0 million during nine months ended September 30, 2024, as compared to the same period in 2023.

Interest income on investment securities decreased $2.6 million due to a decrease in the average balance of investment securities, offset partially by an increase in the yield earned on these securities due primarily to rising interest rates and sales of lower yielding securities. The yield on taxable securities increased 36 basis points to 3.34% and average balances decreased $275.8 million to $1.70 billion during the nine months ended September 30, 2024 compared to 2.98% and average balances of $1.98 billion during the same period in 2023.

Total interest expense increased $36.2 million, or 93.1%, to $75.2 million during the nine months ended September 30, 2024, compared to $38.9 million for the same period in 2023. The increase was due primarily to a $30.1 million increase in interest expense on interest bearing deposits and a $6.2 million increase in interest expense on borrowings during the nine months ended September 30, 2024, as compared to the same period in 2023. The increase in interest expense on deposits was due primarily to a 99 basis point increase in the average rate of interest bearing deposits to 1.87% for the nine months ended September 30, 2024, as compared to 0.88% for the same period in 2023, due to competitive rate pressures, and to a lesser extent, a $384.3 million increase in the average balance of certificates of deposit which are generally at higher rates than other deposit products. The increase of interest expense on borrowings was due primarily to a $145.0 million increase in average balances.

Net interest margin decreased 33 basis points to 3.31% for the nine months ended September 30, 2024, compared to 3.64% for the same period in 2023.

### Provision for Credit Losses Overview

The aggregate of the provision for (reversal of) credit losses on loans and on unfunded commitments is presented on the unaudited Condensed Consolidated Statements of Income as the 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, 2024 to the comparable quarter in the prior year

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

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Provision for (reversal of) credit losses on loans | $2,705 | $(635) | $3,340 | 526.0% |
| Reversal of provision for credit losses on unfunded commitments | (266) | (243) | (23) | (9.5) |
| Provision for credit losses | $2,439 | $(878) | $3,317 | 377.8% |

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 and is impacted by quarterly charge-offs and recoveries. The provision for credit losses on loans was $2.7 million during the three months ended September 30, 2024 and was primarily driven by $2.5 million in net charge-offs recognized and loan growth during the quarter. The net charge-offs of $2.5 million resulted primarily from one owner-occupied commercial real estate loan that migrated to nonaccrual status during the quarter. This loan was rated Substandard at the time of the charge-off and has been managed by our Special Assets Departments since December 2022.

Future assessments of the expected credit losses will be impacted not only by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but also by an updated assessment of qualitative factors, as well as consideration of any 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, 2024 was due primarily to a decrease in the unfunded exposure on construction loans.

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 in connection with the payoff of one nonaccrual loan. 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.

#### Comparison of the nine months ended September 30, 2024 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, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Provision for credit losses on loans | $5,879 | $3,066 | $2,813 | 91.7% |
| Reversal of provision for credit losses on unfunded commitments | (780) | (210) | (570) | 271.4 |
| Provision for credit losses | $5,099 | $2,856 | $2,243 | 78.5% |

The $5.9 million provision for credit losses on loans during the nine months ended September 30, 2024 was due primarily to $2.5 million in net charge-offs and an increase in loans receivable as well as a change in mix of loans. The $780,000 reversal of provision for credit losses on unfunded commitments during the nine months ended September 30, 2024 was due primarily to a $110.4 million decrease in the unfunded exposure on construction loans which reduced the unfunded exposure and secondarily due to an increase in loan utilization rates.

The $3.1 million provision for credit losses recognized 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 recognized 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.

### Noninterest Income Overview

#### Comparison of the three months ended September 30, 2024 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, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Service charges and other fees | $2,788 | $2,856 | $(68) | (2.4)% |
| Card revenue | 2,134 | 2,273 | (139) | (6.1) |
| Loss on sale of investment securities, net | (6,945) | (1,940) | (5,005) | 258.0 |
| Gain on sale of loans, net | — | 157 | (157) | (100.0) |
| Interest rate swap fees | — | 62 | (62) | (100.0) |
| Bank owned life insurance income | 860 | 734 | 126 | 17.2 |
| Gain on sale of other assets, net | 1,480 | — | 1,480 | 100.0 |
| Other income | 1,520 | 2,129 | (609) | (28.6) |
| Total noninterest income | $1,837 | $6,271 | $(4,434) | (70.7)% |

Noninterest income decreased $4.4 million from the same period in 2023, due primarily to a $6.9 million pre-tax loss on the sale of investment securities during the three months ended September 30, 2024, as compared to a $1.9 million pre-tax loss on the sale of investment securities recognized in the same period in 2023, both as part of the Company's strategic balance sheet repositioning efforts. Other income declined due to a $610,000 gain on sale of the Ellensburg, WA branch deposits recognized during the three months ended September 30, 2023. The decrease was partially offset by an increase in gain on sale of other assets, net which was due to a $1.5 million gain on the sale of an administrative building recognized during the three months ended September 30, 2024.

#### Comparison of nine months ended September 30, 2024 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, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Service charges and other fees | $8,393 | $8,162 | $231 | 2.8% |
| Card revenue | 5,903 | 6,396 | (493) | (7.7) |
| Loss on sale of investment securities, net | (18,839) | (2,226) | (16,613) | 746.3 |
| Gain on sale of loans, net | 26 | 307 | (281) | (91.5) |
| Interest rate swap fees | 52 | 230 | (178) | (77.4) |
| Bank owned life insurance income | 2,711 | 2,280 | 431 | 18.9 |
| Gain on sale of other assets, net | 1,529 | 2 | 1,527 | 76,350.0 |
| Other income | 4,408 | 6,659 | (2,251) | (33.8) |
| Total noninterest income | $4,183 | $21,810 | $(17,627) | (80.8)% |

Noninterest income decreased $17.6 million, or 80.8%, during the nine months ended September 30, 2024 compared to the same period in 2023, due primarily to a pre-tax loss on sale of investment securities of $18.8 million recognized during the nine months ended September 30, 2024 as a result of the sale of investment securities with an amortized cost of $260.8 million in connection with the Company's strategic balance sheet repositioning efforts. Other income decreased due primarily to a one-time $1.6 million gain on sale of Visa Inc. Class B common stock and a $610,000 gain on the sale of the Ellensburg, WA branch deposits recognized during the nine months ended September 30, 2023. Card revenue declined modestly due to a reduction in card activity as non-maturity deposit balances have declined. The decrease was partially offset by an increase in gain on sale of other assets, net which was due to a $1.5 million gain on the sale of an administrative building recognized during the nine months ended September 30, 2024.

### Noninterest Expense Overview

#### Comparison of three months ended September 30, 2024 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, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Compensation and employee benefits | $24,367 | $25,008 | $(641) | (2.6)% |
| Occupancy and equipment | 4,850 | 4,814 | 36 | 0.7 |
| Data processing | 3,915 | 4,116 | (201) | (4.9) |
| Marketing | 128 | 389 | (261) | (67.1) |
| Professional services | 490 | 582 | (92) | (15.8) |
| State/municipal business and use taxes | 1,249 | 1,088 | 161 | 14.8 |
| Federal deposit insurance premium | 824 | 818 | 6 | 0.7 |
| Amortization of intangible assets | 399 | 595 | (196) | (32.9) |
| Other expense | 3,068 | 3,560 | (492) | (13.8) |
| Total noninterest expense | $39,290 | $40,970 | $(1,680) | (4.1)% |

Noninterest expense decreased $1.7 million, or 4.1%, during the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a decrease in compensation and employee benefits expense as a result of a reduction in full-time equivalent employees to 749 at September 30, 2024 from 821 at September 30, 2023, in connection with expense management initiatives. These expense management initiatives also impacted data processing expense, which decreased primarily due to a decline in ongoing costs resulting from prior technology-related contract renewals and terminations and decreased marketing and other expense.

#### Comparison of the nine months ended September 30, 2024 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, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Compensation and employee benefits | $74,291 | $75,325 | $(1,034) | (1.4)% |
| Occupancy and equipment | 14,547 | 14,372 | 175 | 1.2 |
| Data processing | 10,732 | 12,427 | (1,695) | (13.6) |
| Marketing | 583 | 1,232 | (649) | (52.7) |
| Professional services | 1,852 | 1,961 | (109) | (5.6) |
| State/municipal business and use taxes | 3,709 | 3,150 | 559 | 17.7 |
| Federal deposit insurance premium | 2,431 | 2,465 | (34) | (1.4) |
| Amortization of intangible assets | 1,241 | 1,841 | (600) | (32.6) |
| Other expense | 9,370 | 11,127 | (1,757) | (15.8) |
| Total noninterest expense | $118,756 | $123,900 | $(5,144) | (4.2)% |

Noninterest expense decreased $5.1 million, or 4.2%, during the nine months ended September 30, 2024 compared to the same period in 2023 due primarily to a decrease in data processing and other expense. Data processing expense decreased primarily due to a decline in ongoing costs resulting from technology-related contract renewals and terminations. Other expense decreased primarily due to a decline in customer deposit loss expense and employee related expense, which included additional expenses related to calling efforts for the newly added teams, as well as a general increase in operating costs incurred during the nine months ended September 30, 2023. Amortization of intangible assets decreased due to the full amortization of the core deposit intangible from one acquisition. Compensation and employee benefits expense decreased due primarily to a decline in the average number of full-time equivalent employees as a result of expense management initiatives during the nine months ended September 30, 2024. This was offset partially by an increase in state/municipal business and use tax expense due primarily to an increase in gross revenue.

### Income Tax Expense Overview

#### Comparison of the three months ended September 30, 2024 to the comparable period in the prior year

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

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $13,066 | $21,797 | $(8,731) | (40.1)% |
| Income tax expense | $1,643 | $3,578 | $(1,935) | (54.1)% |
| Effective income tax rate | 12.6% | 16.4% | (3.8)% | (23.2)% |

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 BOLI and LIHTC investments during the three months ended September 30, 2024 compared to the same period in 2023.

*Comparison of the nine months ended September 30, 2024 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, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $35,929 | $66,338 | $(30,409) | (45.8)% |
| Income tax expense | $4,599 | $10,816 | $(6,217) | (57.5)% |
| Effective income tax rate | 12.8% | 16.3% | (3.5)% | (21.5)% |

45

Income tax expense and the effective income tax rate both decreased due primarily to lower estimated pre-tax income during the nine months ended September 30, 2024 compared to the same period in 2023 which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in BOLI and LIHTC investments.

### Financial Condition Overview

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

*(Dollars in thousands)*

| Assets | September 30, 2024 | December 31, 2023 $% | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $175,572 | $224,973 | $(49,401) | (22.0)% |
| Investment securities available for sale, at fair value, net | 852,779 | 1,134,353 | (281,574) | (24.8) |
| Investment securities held to maturity, at amortized cost, net | 719,400 | 739,442 | (20,042) | (2.7) |
| Loans receivable, net | 4,628,088 | 4,287,628 | 340,460 | 7.9 |
| Premises and equipment, net | 72,500 | 74,899 | (2,399) | (3.2) |
| Federal Home Loan Bank stock, at cost | 16,993 | 4,186 | 12,807 | 305.9 |
| Bank owned life insurance | 127,248 | 125,655 | 1,593 | 1.3 |
| Accrued interest receivable | 20,102 | 19,518 | 584 | 3.0 |
| Prepaid expenses and other assets | 296,190 | 318,571 | (22,381) | (7.0) |
| Other intangible assets, net | 3,552 | 4,793 | (1,241) | (25.9) |
| Goodwill | 240,939 | 240,939 | — | — |
| Total assets | $7,153,363 | $7,174,957 | $(21,594) | (0.3)% |
| **Liabilities and Stockholders' Equity** |  |  |  |  |
| Total deposits | $5,708,492 | $5,599,872 | $108,620 | 1.9% |
| Borrowings | 382,000 | 500,000 | (118,000) | (23.6) |
| Junior subordinated debentures | 21,985 | 21,765 | 220 | 1.0 |
| Accrued expenses and other liabilities | 166,372 | 200,059 | (33,687) | (16.8) |
| Total liabilities | 6,278,849 | 6,321,696 | (42,847) | (0.7) |
| Common stock | 534,917 | 549,748 | (14,831) | (2.7) |
| Retained earnings | 383,127 | 375,989 | 7,138 | 1.9 |
| Accumulated other comprehensive loss, net | (43,530) | (72,476) | 28,946 | 39.9 |
| Total stockholders' equity | 874,514 | 853,261 | 21,253 | 2.5 |
| Total liabilities and stockholders' equity | $7,153,363 | $7,174,957 | $(21,594) | (0.3)% |

Total assets decreased due primarily to sales of investment securities available for sale as part of the Company's strategic balance sheet repositioning discussed above, and a decline in cash and cash equivalents. The decrease was offset partially by an increase in loans receivable, net due to loan growth. Total liabilities and stockholders' equity decreased due primarily to a decrease in borrowings, accrued expenses and other liabilities, offset partially by an increase in deposits due to deposit growth and an increase in stockholders' equity due to a decline in accumulated other comprehensive loss, net.

### 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 complement 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, 2024 Balance | % of Total | December 31, 2023 Balance | % of Total | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. government and agency securities | $13,054 | 0.8% | $13,750 | 0.7% | $(696) | (5.1)% |
| Municipal securities | 61,263 | 3.9 | 79,525 | 4.2 | (18,262) | (23.0) |
| Residential CMO and MBS(1) | 427,048 | 27.2 | 512,049 | 27.3 | (85,001) | (16.6) |
| Commercial CMO and MBS(1) | 328,861 | 20.9 | 504,258 | 27.0 | (175,397) | (34.8) |
| Corporate obligations | 11,706 | 0.7 | 7,613 | 0.4 | 4,093 | 53.8 |
| Other asset-backed securities | 10,847 | 0.7 | 17,158 | 0.9 | (6,311) | (36.8) |
| Total | $852,779 | 54.2% | $1,134,353 | 60.5% | $(281,574) | (24.8)% |
| **Investment securities held to maturity, at amortized cost:** |  |  |  |  |  |  |
| U.S. government and agency securities | $151,181 | 9.6% | $151,075 | 8.1% | $106 | 0.1% |
| Residential CMO and MBS(1) | 249,589 | 15.9 | 267,204 | 14.3 | (17,615) | (6.6) |
| Commercial CMO and MBS(1) | 318,630 | 20.3 | 321,163 | 17.1 | (2,533) | (0.8) |
| Total | $719,400 | 45.8% | $739,442 | 39.5% | $(20,042) | (2.7)% |
| Total investment securities | $1,572,179 | 100.0% | $1,873,795 | 100.0% | $(301,616) | (16.1)% |

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

Total investment securities decreased $301.6 million, or 16.1%, to $1.57 billion at September 30, 2024 from $1.87 billion at December 31, 2023, due primarily to the sale of investment securities with an amortized cost of $260.8 million at a pre-tax loss of $18.8 million during the nine months ended September 30, 2024, and offset partially by investment purchases of $33.1 million as part of the Company's strategic balance sheet repositioning discussed above. Additionally, there were investment maturities and repayments of $111.5 million during the nine months ended September 30, 2024.

### 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, 2024 Amortized Cost | % of Loans Receivable | December 31, 2023 Amortized Cost | % of Loans Receivable | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $824,134 | 17.6% | $718,291 | 16.6% | $105,843 | 14.7% |
| Owner-occupied CRE | 987,084 | 21.1 | 958,620 | 22.1 | 28,464 | 3.0 |
| Non-owner occupied CRE | 1,835,609 | 39.3 | 1,697,574 | 39.1 | 138,035 | 8.1 |
| Total commercial business | 3,646,827 | 78.0 | 3,374,485 | 77.8 | 272,342 | 8.1 |
| Residential real estate | 408,982 | 8.7 | 375,342 | 8.7 | 33,640 | 9.0 |
| Real estate construction and land development: |  |  |  |  |  |  |
| Residential | 79,325 | 1.7 | 78,610 | 1.8 | 715 | 0.9 |
| Commercial and multifamily | 378,322 | 8.1 | 335,819 | 7.7 | 42,503 | 12.7 |
| Total real estate construction and land development | 457,647 | 9.8 | 414,429 | 9.5 | 43,218 | 10.4 |

47

*(Dollars in thousands)*

|  | September 30, 2024 Amortized Cost | % of Loans Receivable | December 31, 2023 Amortized Cost | % of Loans Receivable | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consumer | 166,023 | 3.5 | 171,371 | 4.0 | (5,348) | (3.1) |
| Total | $4,679,479 | 100.0% | $4,335,627 | 100.0% | $343,852 | 7.9% |

Loans receivable increased $343.9 million, or 7.9%, to $4.68 billion at September 30, 2024 from $4.34 billion at December 31, 2023. New loans funded in the nine months ended September 30, 2024 totaled $445.3 million and loan prepayments were $132.4 million.

Non-owner occupied CRE loans increased $138.0 million, or 8.1%, due primarily to new loan production of $98.1 million during the nine months ended September 30, 2024 and advances on outstanding commitments. Commercial and industrial loans increased $105.8 million, or 14.7%, due primarily to new loan production of $176.2 million during the nine months ended September 30, 2024, offset by pay downs on outstanding balances. Commercial and multifamily construction loans increased $42.5 million, or 12.7%, due primarily to advances on outstanding commitments. Residential real estate loans increased $33.6 million, or 9.0%, due primarily to loan purchases during the nine months ended September 30, 2024.

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, 2024 Amortized Cost | % of CRE Loans | December 31, 2023 Amortized Cost | % of CRE Loans | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Office | $554,449 | 19.6% | $555,822 | 20.9% | $(1,373) | (0.2)% |
| Industrial | 467,926 | 16.6 | 418,651 | 15.8 | 49,275 | 11.8 |
| Multi-family | 412,201 | 14.6 | 305,499 | 11.5 | 106,702 | 34.9 |
| Retail store / shopping center | 298,010 | 10.6 | 285,926 | 10.8 | 12,084 | 4.2 |
| Mini-storage | 162,075 | 5.7 | 171,778 | 6.5 | (9,703) | (5.6) |
| Mixed use property | 156,161 | 5.5 | 154,674 | 5.8 | 1,487 | 1.0 |
| Motel / hotel | 154,091 | 5.5 | 142,172 | 5.4 | 11,919 | 8.4 |
| Warehouse | 139,575 | 4.9 | 149,176 | 5.6 | (9,601) | (6.4) |
| Single purpose | 115,810 | 4.1 | 123,344 | 4.6 | (7,534) | (6.1) |
| Recreational / school | 69,117 | 2.4 | 67,791 | 2.6 | 1,326 | 2.0 |
| Other | 293,278 | 10.5 | 281,361 | 10.5 | 11,917 | 4.2 |
| Total | $2,822,693 | 100.0% | $2,656,194 | 100.0% | $166,499 | 6.3% |

Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans, totaling $554.4 million, or 19.6% of total CRE loans, at September 30, 2024. Of this total, $282.4 million, or 50.9%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile than non-owner occupied CRE loans as there is less tenant rollover risk and they generally have guarantees from the company occupying the space as well as the owners of the company. Multi-family loans increased $106.7 million to $412.2 million or 14.6% of total CRE loans, due primarily to completion of $69.4 million in commercial constructions converting to term CRE loans. The average loan balance of CRE loans was $1.3 million at September 30, 2024.

#### Loans classified as nonaccrual and nonperforming assets

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

*(Dollars in thousands)*

| Nonaccrual loans: (1) | September 30, 2024 | December 31, 2023 $% | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial business | $4,301 | $4,468 | $(167) | (3.7)% |
| Total nonaccrual loans | 4,301 | 4,468 | (167) | (3.7) |

48

|  | September 30, 2024 | December 31, 2023 $% | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Accruing loans past due 90 days or more | $5,347 | $1,293 | $4,054 | 313.5% |
| Total nonperforming loans | 9,648 | 5,761 | 3,887 | 67.5 |
| Other real estate owned | — | — | — | — |
| Total nonperforming assets | $9,648 | $5,761 | $3,887 | 67.5% |
| Credit quality ratios: |  |  |  |  |
| Nonaccrual loans to loans receivable | 0.09% | 0.10% | (0.01) | (10.0) |
| Nonperforming loans to loans receivable | 0.21 | 0.13 | 0.08 | 61.5 |
| Nonperforming assets to total assets | 0.13 | 0.08 | 0.05 | 62.5 |

(1) At September 30, 2024 and December 31, 2023, $1.2 million and $3.2 million, respectively, of nonaccrual loans, were guaranteed by government agencies.

Nonaccrual loans decreased $167,000 to $4.3 million at September 30, 2024 as compared to $4.5 million at December 31, 2023 Additions during the nine months ended September 30, 2024 were due primarily to one $5.0 million owner occupied CRE loan of which $2.5 million was charged off. Payoffs during the nine months ended September 30, 2024 were due primarily to the payoff of one commercial and industrial loan relationship. The following table provides the changes in nonaccrual loans during the nine months ended September 30, 2024:

*(Dollars in thousands)*

|  |  |
| --- | ---: |
| Balance, beginning of period | $4,468 |
| Additions | 6,132 |
| Net principal payments, sales and transfers to accruing status | (925) |
| Payoffs | (2,601) |
| Charge-offs | (2,773) |
| Balance, end of period | $4,301 |

### 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, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| ACL on loans at the end of period | $51,391 | $46,947 | $4,444 |
| Credit quality ratios: |  |  |  |
| ACL on loans to loans receivable | 1.10% | 1.10% | —% |
| ACL on loans to nonaccrual loans | 1,194.86 | 1,531.71 | (336.85) |
| Net charge-offs (recoveries) | $2,487 | $(895) | $3,382 |
| Average balance of loans receivable, net during the period(1) | 4,425,234 | 4,129,429 | 295,805 |
| Net charge-offs (recoveries) on loans to average loans receivable, net(2) | 0.08% | (0.03)% | 0.11% |

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

(2) Annualized.

The ACL on loans increased $3.4 million, or 7.1%, to $51.4 million at September 30, 2024, compared to $48.0 million at December 31, 2023, due primarily to an increase in loans receivable, net and the change in mix of loans. The following table presents the ACL on loans by loan portfolio segment at the dates indicated:

*(Dollars in thousands)*

|  | September 30, 2024 ACL on Loans | ACL as a % of Loans in Loan Category | % of Loans in Loan Category to Total Loans | December 31, 2023 ACL on Loans | ACL as a % of Loans in Loan Category | % of Loans in Loan Category to Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial business | $37,167 | 1.02% | 78.0% | $31,303 | 0.93% | 77.8% |
| Residential real estate | 3,604 | 0.88 | 8.7 | 3,473 | 0.93 | 8.7 |
| Real estate construction and land development | 8,465 | 1.85 | 9.8 | 10,876 | 2.62 | 9.5 |
| Consumer | 2,155 | 1.30 | 3.5 | 2,347 | 1.37 | 4.0 |
| Total ACL on loans | $51,391 | 1.10% | 100.0% | $47,999 | 1.11% | 100.0% |

### Deposits Overview

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

*(Dollars in thousands)*

|  | September 30, 2024 Balance | % of Total Deposits | December 31, 2023 Balance | % of Total Deposits | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Noninterest demand deposits | $1,682,219 | 29.5% | $1,715,847 | 30.6% | $(33,628) | (2.0)% |
| Interest bearing demand deposits | 1,489,316 | 26.1 | 1,608,745 | 28.7 | (119,429) | (7.4) |
| Money market accounts | 1,148,720 | 20.1 | 1,094,351 | 19.5 | 54,369 | 5.0 |
| Savings accounts | 442,677 | 7.8 | 487,956 | 8.7 | (45,279) | (9.3) |
| Total non-maturity deposits | 4,762,932 | 83.5 | 4,906,899 | 87.5 | (143,967) | (2.9) |
| Certificates of deposit | 945,560 | 16.5 | 692,973 | 12.5 | 252,587 | 36.4 |
| Total deposits | $5,708,492 | 100.0% | $5,599,872 | 100.0% | $108,620 | 1.9% |

Total deposits increased $108.6 million, or 1.9%, to $5.71 billion at September 30, 2024, compared to $5.60 billion at December 31, 2023. Certificates of deposit increased $252.6 million, or 36.4%, to $945.6 million from $693.0 million and money market accounts increased $54.4 million, or 5.0%, to $1.15 billion from $1.09 billion primarily due to transfers from lower yielding non-maturity deposit accounts as customers moved balances to higher yielding accounts.

### 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, 2024, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.35 billion. The Bank had $282.0 million FHLB advances outstanding at September 30, 2024, and no FHLB advances outstanding at December 31, 2023. 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. All FHLB advances at September 30, 2024 are short-term and mature in less than one year.

The Bank maintains a credit facility with the FRB through the Discount Window with available borrowing capacity of $287.7 million at September 30, 2024. The Bank had $100.0 million in BTFP borrowings outstanding at September 30, 2024, and $500.0 million at December 31, 2023. The remaining BTFP borrowings of $100.0 million mature in January 2025.

In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and the related 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 were $22.0 million as of September 30, 2024, and $21.8 million as of December 31, 2023, net of unaccreted discount.

The Bank maintains available unsecured federal funds lines with four correspondent banks totaling $145.0 million, with no outstanding borrowings at September 30, 2024.

### Stockholders' Equity Overview

Total stockholders' equity increased $21.3 million, or 2.5%, to $874.5 million at September 30, 2024, compared to $853.3 million at December 31, 2023, due primarily to $31.3 million of net income recognized for the nine months ended September 30, 2024 and a $28.9 million decrease in accumulated other comprehensive loss, net, offset partially by $24.2 million in dividends paid to common shareholders and $18.1 million in common stock repurchases. The Company’s stockholders' equity to assets ratio was 12.2% at September 30, 2024, compared to 11.9% at December 31, 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 23, 2024, the Company’s Board of Directors declared a regular quarterly dividend of $0.23 per common share payable on November 20, 2024 to shareholders of record on November 6, 2024.

On April 24, 2024, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares or 1,734,492 shares, in total, under the new stock repurchase program. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds and other factors, including opportunities to deploy the Company's capital. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any prior notice. The new stock repurchase program superseded the previous stock repurchase program authorized in March 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares.

### 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 and the Company's results of operations. Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Management believes that, as of September 30, 2024, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of September 30, 2024 and December 31, 2023, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.

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

*(Dollars in thousands)*

| September 30, 2024 Total capital ratio | Actual |  | Adequately Capitalized |  | Well-Capitalized (1) |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Company | $747,694 | 13.6% | $440,140 | 8.0% | $550,175 | 10.0% |
| Bank | 742,092 | 13.5 | 439,736 | 8.0 | 549,669 | 10.0 |
| Tier 1 capital ratio |  |  |  |  |  |  |
| Company | 697,408 | 12.7 | 330,105 | 6.0 | 440,140 | 8.0 |
| Bank | 691,806 | 12.6 | 329,802 | 6.0 | 439,736 | 8.0 |
| Common equity Tier 1 capital ratio |  |  |  |  |  |  |
| Company | 675,423 | 12.3 | 247,579 | 4.5 | 357,614 | 6.5 |
| Bank | 691,806 | 12.6 | 247,351 | 4.5 | 357,285 | 6.5 |
| Leverage ratio |  |  |  |  |  |  |
| Company | 697,408 | 9.9 | 280,769 | 4.0 | 350,961 | 5.0 |
| Bank | 691,806 | 9.9 | 280,578 | 4.0 | 350,722 | 5.0 |

51

*(Dollars in thousands)*

| December 31, 2023 Total capital ratio | Actual |  | Adequately Capitalized |  | Well-Capitalized (1) |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Company | $750,945 | 14.1% | $425,084 | 8.0% | $531,355 | 10.0% |
| Bank | 732,379 | 13.8 | 424,808 | 8.0 | 531,009 | 10.0 |
| Tier 1 capital ratio |  |  |  |  |  |  |
| Company | 704,839 | 13.3 | 318,813 | 6.0 | 425,084 | 8.0 |
| Bank | 686,273 | 12.9 | 318,606 | 6.0 | 424,808 | 8.0 |
| Common equity Tier 1 capital ratio |  |  |  |  |  |  |
| Company | 683,074 | 12.9 | 239,110 | 4.5 | 345,381 | 6.5 |
| Bank | 686,273 | 12.9 | 238,954 | 4.5 | 345,156 | 6.5 |
| Leverage ratio |  |  |  |  |  |  |
| Company | 704,839 | 10.0 | 281,673 | 4.0 | 352,092 | 5.0 |
| Bank | 686,273 | 9.8 | 281,539 | 4.0 | 351,923 | 5.0 |

(1) The ratios to meet the requirements to be deemed “well-capitalized” under prompt corrective action regulations are only applicable to the Bank. However, the Company manages its capital position as if the requirements apply to the consolidated Company and has presented the ratios as if they also applied on a consolidated basis.

As of both September 30, 2024 and December 31, 2023, the capital measures reflected the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that provided banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.

### 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 focus on acquiring 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 Company's total deposits as a secondary source for funding. The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $2.24 billion, or 39.3% of total deposits, at September 30, 2024 and $2.10 billion or 37.5% of total deposits, at December 31, 2023. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. At September 30, 2024, we had $135.0 million in brokered deposits, or 2.36% of total deposits, compared to $115.0 million, or 2.05% of total deposits, at December 31, 2023. 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)*

| On-balance sheet liquidity | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Cash and cash equivalents | 175,572 | 224,973 |
| Unencumbered investment securities available for sale (1) | 848,224 | 756,258 |
| Total on-balance sheet liquidity | $1,023,796 | $981,231 |
| Off-balance sheet liquidity |  |  |
| FRB borrowing availability | $287,739 | $319,492 |
| FHLB borrowing availability (2) | 1,068,085 | 1,417,518 |

52

*(Dollars in thousands)*

|  | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Fed funds line borrowing availability with correspondent banks | 145,000 | 145,000 |
| Total off-balance sheet liquidity | $1,500,824 | $1,882,010 |
| Total available liquidity | $2,524,620 | $2,863,241 |

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

(2) Includes FHLB borrowing availability of $1.35 billion at September 30, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.17 billion.

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 2023 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 2023 Annual 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, 2024.

## Market risk

As filed, 5,658 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 Company engages, such as collecting 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.

Our Asset/Liability Management Committee is responsible for developing, monitoring and reviewing asset/liability processes, interest rate risk exposures, strategies and tactics and reporting to the Board of Directors' Risk and Technology Committee. It is the responsibility of the Board of Directors to establish policies and interest rate limits, and to review and approve these policies and interest rate limits annually. It is the responsibility of management to execute the approved policies, develop and implement risk management strategies and to report to the Board of Directors on a regular basis. We maintain an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk. The policy guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. These guidelines establish limits for interest rate risk sensitivity.

#### Net interest income simulation

We use an income simulation model as the primary tool 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 repricing on investment securities, loans, and borrowings. In order to measure the interest rate risk sensitivity as of September 30, 2024, this simulation model uses a “static balance sheet” assumption, meaning the size and mix of the balance sheet remains the same as maturing cash flows from assets and liabilities are reinvested into the same categories at the current level of interest rates. The simulation also assumes an instantaneous and sustained uniform change in market interest rates at all maturities.

The following table summarizes the estimated effect on net interest income over a 12 month period measured against a flat rate (no interest rate change) scenario for the periods indicated:

*(Dollars in thousands)*

| Change in Interest Rates (Basis Points) | September 30, 2024 $ Change in Net Interest Income | % Change in Net Interest Income | December 31, 2023 $ Change in Net Interest Income | % Change in Net Interest Income |
| --- | ---: | ---: | ---: | ---: |
| +300(shock) | $(5,371) | (2.4)% | $(6,343) | (2.8)% |
| +200(shock) | 1,722 | 0.8 | 1,438 | 0.6 |
| +100(shock) | 1,723 | 0.8 | 1,644 | 0.7 |
| +0(flat) | — | — | — | — |

53

*(Dollars in thousands)*

| Change in Interest Rates (Basis Points) | September 30, 2024 $ Change in Net Interest Income | % Change in Net Interest Income | December 31, 2023 $ Change in Net Interest Income | % Change in Net Interest Income |
| --- | ---: | ---: | ---: | ---: |
| -100(shock) | 972 | 0.4 | 1,861 | 0.8 |
| -200(shock) | (698) | (0.3) | 1,549 | 0.7 |
| -300(shock) | (5,198) | (2.3) | (1,233) | (0.6) |

The Company’s balance sheet sensitivity to changes in market rates shows a somewhat neutral position in all rate scenarios, meaning results in comparable up and down scenarios are significantly different. The small changes in the sensitivity of the balance sheet compared to December 31, 2023, seen in the larger -300(shock) scenario is due primarily to balance sheet changes that include a reduction in short-term wholesale funding and a reduction in fixed rate securities.

The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of interest rate deviations. In addition, the simulation results noted above contain various assumptions such as a static balance sheet, and that deposit interest rates change as market interest rates change. Therefore, they do not reflect likely actual results, but serve as estimates of interest rate risk.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding table. For example, although certain of the Company’s assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates. Further, the interest rates on certain of the Company’s asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in the preceding tables. A change in U.S. Treasury rates accompanied by a change in the shape of the treasury yield curve could also result in different estimations from those presented herein. Accordingly, the results in the preceding table should not be relied upon as indicative of actual results in the event of changing market interest rates.

## Controls and procedures

As filed, 1,467 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 Exchange Act was carried out under the supervision and with the participation of the Company’s Chief Executive Officer (principal executive officer), Chief Financial Officer (principal financial officer) and the Company’s management 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, 2024 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange 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 Exchange Act) that occurred during the three months ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Nov 6, 2024.
Source: SEC EDGAR, the filing index for accession 0001046025-24-000179. Last ingested by Listed: Nov 6, 2026, 14:11 ET. No prices; not investment advice.