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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024 or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-29480

HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Washington |  | 91-1857900
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
201 Fifth Avenue SW, | Olympia | WA |  | 98501
(Address of principal executive offices) |  | (Zip Code)

(360) 943-1500
(Registrant’s telephone number, including area code)

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

Title of each class | Trading symbol | Name of each exchange on which registered
Common stock, no par value | HFWA | The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer | ☐ | Accelerated filer | ☒
| Non-accelerated filer | ☐ | Smaller reporting company | ☐
|  |  | Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
As of October 29, 2024, there were 34,153,539 shares of the registrant's common stock, no par value per share, outstanding.

Table of Contents
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 2024
TABLE OF CONTENTS

|  |  | Page
GLOSSARY OF ACRONYMS, ABBREVIATIONS AND TERMS | 3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | 3
PART I. | FINANCIAL INFORMATION | 6
ITEM 1. | FINANCIAL STATEMENTS | 6
| CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF SE PTEMBER 30, 2024 AND DECEMBER 31, 2023 | 6
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NIN E MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 | 7
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND NIN E MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 | 9
| CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND NIN E MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 | 10
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 | 12
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | 14
| NOTE 1. | DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS | 14
| NOTE 2. | INVESTMENT SECURITIES | 15
| NOTE 3. | LOANS RECEIVABLE | 18
| NOTE 4. | ALLOWANCE FOR CREDIT LOSSES ON LOANS | 28
| NOTE 5. | GOODWILL AND OTHER INTANGIBLE ASSETS | 30
| NOTE 6. | DERIVATIVE FINANCIAL INSTRUMENTS | 31
| NOTE 7. | STOCKHOLDERS’ EQUITY | 31
| NOTE 8. | FAIR VALUE MEASUREMENTS | 32
| NOTE 9. | INCOME TAXES | 36
| NOTE 10. | COMMITMENTS AND CONTINGENCIES | 37
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 37
| OVERVIEW | 37
| RESULTS OF OPERATIONS | 38
|  | NET INCOME OVERVIEW | 38
|  | NET INTEREST INCOME AND MARGIN OVERVIEW | 39
|  | PROVISION FOR CREDIT LOSSES OVERVIEW | 42
|  | NONINTEREST INCOME OVERVIEW | 43
|  | NONINTEREST EXPENSE OVERVIEW | 44
|  | INCOME TAX EXPENSE OVERVIEW | 45
| FINANCIAL CONDITION OVERVIEW | 46
|  | INVESTMENT ACTIVITIES OVERVIEW | 46
|  | LOAN PORTFOLIO OVERVIEW | 47
|  | ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW | 49
|  | DEPOSITS OVERVIEW | 50
|  | BORROWINGS OVERVIEW | 50
|  | STOCKHOLDERS' EQUITY OVERVIEW | 51
| REGULATORY REQUIREMENTS OVERVIEW | 51
| LIQUIDITY AND CAPITAL RESOURCES | 52
| CRITICAL ACCOUNTING ESTIMATES | 53
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 53
ITEM 4. | CONTROLS AND PROCEDURES | 54

2

Table of Contents

PART II. | OTHER INFORMATION | 54
ITEM 1. | LEGAL PROCEEDINGS | 54
ITEM 1A. | RISK FACTORS | 54
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 54
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 55
ITEM 4. | MINE SAFETY DISCLOSURES | 55
ITEM 5. | OTHER INFORMATION | 55
ITEM 6. | EXHIBITS | 55
| SIGNATURES | 56

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

2023 Annual Form 10-K | Company's Annual Report on Form 10-K for the year ended December 31, 2023
ACL | Allowance for Credit Losses
AOCI | Accumulated Other Comprehensive Income (loss), net
ASU | Accounting Standards Update
Bank | Heritage Bank
BOLI | Bank Owned Life Insurance
BTFP | Bank Term Funding Program
CECL | Current Expected Credit Loss
CMO | Collateralized Mortgage Obligations
CRA | Community Reinvestment Act
CRE | Commercial Real Estate
Exchange Act | Securities Exchange Act of 1934, as amended
FASB | Financial Accounting Standards Board
FDIC | Federal Deposit Insurance Corporation
Federal Reserve | Board of Governors of the Federal Reserve System
FHLB | Federal Home Loan Bank of Des Moines
FRB | Federal Reserve Bank of San Francisco
GAAP | U.S. Generally Accepted Accounting Principles
LIBOR | London Interbank Offering Rate
LIHTC | Low-Income Housing Tax Credit
MBS | Mortgage-Backed Securities
SEC | Securities and Exchange Commission
SM | Special Mention
SS | Substandard

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These statements relate to our financial condition, results of operations, beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance or business. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements whether as a result of new information, future events or otherwise. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could
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cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating results and stock price performance. These risks include, but are not limited to:
•potential adverse impacts to economic conditions nationally or in our local market areas, other markets where we have lending relationships, or other aspects of our business operations or financial markets including, without limitation, as a result of credit quality deterioration, pronounced and sustained reductions in real estate market values, employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth;
•changes in interest rates which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;
•the level and impact of inflation and the current and future monetary policies of the Federal Reserve in response thereto;
•the impact of bank failures or adverse developments at other banks and related negative publicity about the banking industry in general on investor and depositor sentiment regarding the stability and liquidity of banks; legislative or regulatory changes that adversely affect our business, including changes in banking, securities, and tax law, regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of the upcoming 2024 presidential election;
•credit and interest rate risks associated with our business, customers, borrowings, repayment, investment, and deposit practices;
•fluctuations in deposits and deposit concentrations;
•liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;
•fluctuations in the value of our investment securities;
•credit risks and risks from concentrations (by type of geographic area and industry) within our loan portfolio;
•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions for our business, including as a result of sophisticated attacks using artificial intelligence and similar tools;
•rapid technological change in the financial services industry;
•increased competition in the financial services industry from non-banks such as credit unions and Fintech companies, including digital asset service providers;
•our ability to adapt successfully to technological changes to compete effectively in the marketplace, including as a result of competition from other commercial banks, mortgage banking firms, credit unions, securities brokerage firms, insurance companies, and financial technology companies;
•the credit risks of lending activities, including changes in the level and trend of loan delinquencies write-offs and changes in our ACL on loans and provision for credit losses on loans that may be affected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;
•the impact of continuing elevated inflation and the current and future monetary policies of the Federal Reserve in response thereto;
•the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
•the impact of repricing and competitors' pricing initiatives on loan and deposit products;
•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;
•the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in a number of bank failures;
•the extensive regulatory framework that applies to us;
•results of examinations by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;
•the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets;
•the concentration of large deposits from certain clients, who have balances above current FDIC insurance limits;
•our ability to attract and retain deposits;
•the overall health of local and national real estate markets;
•the level of nonperforming assets on our balance sheet;
•effects of critical accounting policies and judgments, including the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
•the commencement, outcome and costs of litigation and other legal proceedings and regulatory actions against us or to which we may become subject, including settlements and judgments;
•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business and the businesses of our clients;
•the composition of our executive management team and our ability to attract and retain key personnel;
•our ability to control operating costs and expenses;
•the effectiveness of our risk management framework;
•difficulties in reducing risk associated with our loans;
•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
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•our ability to implement our business strategies and manage our growth;
•future goodwill impairment due to changes in our business, market conditions, or other factors;
•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;
•risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar;
•changes in consumer spending, borrowing and savings habits;
•our ability to pay dividends on our common stock;
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services;
•our success at managing the risks involved in the foregoing items; and
•other factors described in our 2023 Annual Form 10-K, this Quarterly Report on Form 10-Q and other documents filed with or furnished to the SEC, which are available on our website at www.hf-wa.com and on the SEC's website at www.sec.gov.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollars in thousands, except share data)

| September 30, 2024 |  | December 31, 2023
ASSETS |  |  |
Cash on hand and in banks | $ | 78,068 |  |  | $ | 55,851 |
Interest earning deposits | 97,504 |  |  | 169,122 |
Cash and cash equivalents | 175,572 |  |  | 224,973 |
Investment securities available for sale, at fair value, net (amortized cost of $909,023 and $1,227,787, respectively) | 852,779 |  |  | 1,134,353 |
Investment securities held to maturity, at amortized cost, net (fair value of $661,696 and $662,450, respectively) | 719,400 |  |  | 739,442 |
Total investment securities | 1,572,179 |  |  | 1,873,795 |
Loans receivable | 4,679,479 |  |  | 4,335,627 |
Allowance for credit losses on loans | (51,391) |  |  | (47,999) |
Loans receivable, net | 4,628,088 |  |  | 4,287,628 |
Premises and equipment, net | 72,500 |  |  | 74,899 |
Federal Home Loan Bank stock, at cost | 16,993 |  |  | 4,186 |
Bank owned life insurance | 127,248 |  |  | 125,655 |
Accrued interest receivable | 20,102 |  |  | 19,518 |
Prepaid expenses and other assets | 296,190 |  |  | 318,571 |
Other intangible assets, net | 3,552 |  |  | 4,793 |
Goodwill | 240,939 |  |  | 240,939 |
Total assets | $ | 7,153,363 |  |  | $ | 7,174,957 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |
Non-interest bearing deposits | $ | 1,682,219 |  |  | $ | 1,715,847 |
Interest bearing deposits | 4,026,273 |  |  | 3,884,025 |
Total deposits | 5,708,492 |  |  | 5,599,872 |
Borrowings | 382,000 |  |  | 500,000 |
Junior subordinated debentures | 21,985 |  |  | 21,765 |
Accrued expenses and other liabilities | 166,372 |  |  | 200,059 |
Total liabilities | 6,278,849 |  |  | 6,321,696 |
Commitments and contingencies (Note 11) |  |  |
Stockholders’ equity: |  |  |
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively | — |  |  | — |
Common stock, no par value, 50,000,000 shares authorized; 34,153,539 and 34,906,233 shares issued and outstanding, respectively | 534,917 |  |  | 549,748 |
Retained earnings | 383,127 |  |  | 375,989 |
Accumulated other comprehensive loss, net | (43,530) |  |  | (72,476) |
Total stockholders’ equity | 874,514 |  |  | 853,261 |
Total liabilities and stockholders’ equity | $ | 7,153,363 |  |  | $ | 7,174,957 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except shares and per share data)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
INTEREST INCOME: |  |  |  |  |  |  |
Interest and fees on loans | $ | 64,138 |  |  | $ | 56,119 |  |  | $ | 182,608 |  |  | $ | 160,192 |
Taxable interest on investment securities | 13,472 |  |  | 14,590 |  |  | 42,462 |  |  | 44,021 |
Nontaxable interest on investment securities | 159 |  |  | 448 |  |  | 505 |  |  | 1,554 |
Interest on interest earning deposits | 2,048 |  |  | 2,310 |  |  | 5,177 |  |  | 4,436 |
Total interest income | 79,817 |  |  | 73,467 |  |  | 230,752 |  |  | 210,203 |
INTEREST EXPENSE: |  |  |  |  |  |  |
Deposits | 20,256 |  |  | 11,877 |  |  | 55,097 |  |  | 25,012 |
Junior subordinated debentures | 541 |  |  | 540 |  |  | 1,627 |  |  | 1,521 |
Securities sold under agreement to repurchase | — |  |  | 38 |  |  | — |  |  | 148 |
Borrowings | 6,062 |  |  | 5,394 |  |  | 18,427 |  |  | 12,238 |
Total interest expense | 26,859 |  |  | 17,849 |  |  | 75,151 |  |  | 38,919 |
Net interest income | 52,958 |  |  | 55,618 |  |  | 155,601 |  |  | 171,284 |
Provision for (reversal of) credit losses | 2,439 |  |  | (878) |  |  | 5,099 |  |  | 2,856 |
Net interest income after provision for (reversal of) credit losses | 50,519 |  |  | 56,496 |  |  | 150,502 |  |  | 168,428 |
NONINTEREST INCOME: |  |  |  |  |  |  |
Service charges and other fees | 2,788 |  |  | 2,856 |  |  | 8,393 |  |  | 8,162 |
Card revenue | 2,134 |  |  | 2,273 |  |  | 5,903 |  |  | 6,396 |
Loss on sale of investment securities, net | (6,945) |  |  | (1,940) |  |  | (18,839) |  |  | (2,226) |
Gain on sale of loans, net | — |  |  | 157 |  |  | 26 |  |  | 307 |
Interest rate swap fees | — |  |  | 62 |  |  | 52 |  |  | 230 |
Bank owned life insurance income | 860 |  |  | 734 |  |  | 2,711 |  |  | 2,280 |
Gain on sale of other assets, net | 1,480 |  |  | — |  |  | 1,529 |  |  | 2 |
Other income | 1,520 |  |  | 2,129 |  |  | 4,408 |  |  | 6,659 |
Total noninterest income | 1,837 |  |  | 6,271 |  |  | 4,183 |  |  | 21,810 |
NONINTEREST EXPENSE: |  |  |  |  |  |  |
Compensation and employee benefits | 24,367 |  |  | 25,008 |  |  | 74,291 |  |  | 75,325 |
Occupancy and equipment | 4,850 |  |  | 4,814 |  |  | 14,547 |  |  | 14,372 |
Data processing | 3,915 |  |  | 4,116 |  |  | 10,732 |  |  | 12,427 |
Marketing | 128 |  |  | 389 |  |  | 583 |  |  | 1,232 |
Professional services | 490 |  |  | 582 |  |  | 1,852 |  |  | 1,961 |
State/municipal business and use taxes | 1,249 |  |  | 1,088 |  |  | 3,709 |  |  | 3,150 |
Federal deposit insurance premium | 824 |  |  | 818 |  |  | 2,431 |  |  | 2,465 |
Amortization of intangible assets | 399 |  |  | 595 |  |  | 1,241 |  |  | 1,841 |
Other expense | 3,068 |  |  | 3,560 |  |  | 9,370 |  |  | 11,127 |
Total noninterest expense | 39,290 |  |  | 40,970 |  |  | 118,756 |  |  | 123,900 |
Income before income taxes | 13,066 |  |  | 21,797 |  |  | 35,929 |  |  | 66,338 |
Income tax expense | 1,643 |  |  | 3,578 |  |  | 4,599 |  |  | 10,816 |
Net income | $ | 11,423 |  |  | $ | 18,219 |  |  | $ | 31,330 |  |  | $ | 55,522 |

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| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
Basic earnings per share | $ | 0.33 |  |  | $ | 0.52 |  |  | $ | 0.91 |  |  | $ | 1.58 |
Diluted earnings per share | $ | 0.33 |  |  | $ | 0.51 |  |  | $ | 0.90 |  |  | $ | 1.57 |
Dividends declared per share | $ | 0.23 |  |  | $ | 0.22 |  |  | $ | 0.69 |  |  | $ | 0.66 |
Average number of basic shares outstanding | 34,322,069 |  |  | 35,022,676 |  |  | 34,584,851 |  |  | 35,062,760 |
Average number of diluted shares outstanding | 34,658,674 |  |  | 35,115,165 |  |  | 35,002,375 |  |  | 35,305,456 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
Net Income | $ | 11,423 |  |  | $ | 18,219 |  |  | $ | 31,330 |  |  | $ | 55,522 |
Change in fair value of investment securities available for sale, net of tax of $6,146, $(4,673), $3,884, and $(4,258) respectively | 21,627 |  |  | (16,627) |  |  | 14,466 |  |  | (14,332) |
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(18), $(17), $(53), and $(51) respectively | (64) |  |  | (60) |  |  | (190) |  |  | (183) |
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax benefit of $1,537, $426, $4,169, and $489 respectively | 5,408 |  |  | 1,514 |  |  | 14,670 |  |  | 1,737 |
Other comprehensive income (loss) | 26,971 |  |  | (15,173) |  |  | 28,946 |  |  | (12,778) |
Comprehensive income | $ | 38,394 |  |  | $ | 3,046 |  |  | $ | 60,276 |  |  | $ | 42,744 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except shares and per share data)

| Three Months Ended September 30, 2024
| Number of common shares |  | Common stock |  | Retained earnings |  | AOCI |  | Total stockholders’ equity
Balance at June 30, 2024 | 34,496,197 |  |  | $ | 541,294 |  |  | $ | 379,714 |  |  | $ | (70,501) |  |  | $ | 850,507 |
Restricted stock units vested | 5,723 |  |  |  |  |  |  |  |  | — |
Stock-based compensation expense |  |  | 1,153 |  |  |  |  |  |  | 1,153 |
Common stock repurchased | (348,381) |  |  | (7,530) |  |  |  |  |  |  | (7,530) |
Net income |  |  |  |  | 11,423 |  |  |  |  | 11,423 |
Other comprehensive income, net of tax |  |  |  |  |  |  | 26,971 |  |  | 26,971 |
Cash dividends declared on common stock ($0.23 per share) |  |  |  |  | (8,010) |  |  |  |  | (8,010) |
Balance at September 30, 2024 | 34,153,539 |  |  | $ | 534,917 |  |  | $ | 383,127 |  |  | $ | (43,530) |  |  | $ | 874,514 |

| Nine Months Ended September 30, 2024
| Number of common shares |  | Common stock |  | Retained earnings |  | AOCI |  | Total stockholders’ equity
Balance at December 31, 2023 | 34,906,233 |  |  | $ | 549,748 |  |  | $ | 375,989 |  |  | $ | (72,476) |  |  | $ | 853,261 |
Restricted stock units vested | 165,418 |  |  |  |  |  |  |  |  | — |
Stock-based compensation expense |  |  | 3,223 |  |  |  |  |  |  | 3,223 |
Common stock repurchased | (918,112) |  |  | (18,054) |  |  |  |  |  |  | (18,054) |
Net income |  |  |  |  | 31,330 |  |  |  |  | 31,330 |
Other comprehensive income, net of tax |  |  |  |  |  |  | 28,946 |  |  | 28,946 |
Cash dividends declared on common stock ($0.69 per share) |  |  |  |  | (24,192) |  |  |  |  | (24,192) |
Balance at September 30, 2024 | 34,153,539 |  |  | $ | 534,917 |  |  | $ | 383,127 |  |  | $ | (43,530) |  |  | $ | 874,514 |

| Three Months Ended September 30, 2023
| Number of common shares |  | Common stock |  | Retained earnings |  | AOCI |  | Total stockholders’ equity
Balance at June 30, 2023 | 35,047,800 |  |  | $ | 550,103 |  |  | $ | 367,085 |  |  | $ | (97,455) |  |  | $ | 819,733 |
Restricted stock units vested | 1,730 |  |  |  |  |  |  |  |  | — |
Stock-based compensation expense |  |  | 1,120 |  |  |  |  |  |  | 1,120 |
Common stock repurchased | (148,454) |  |  | (2,571) |  |  |  |  |  |  | (2,571) |
Net income |  |  |  |  | 18,219 |  |  |  |  | 18,219 |
Other comprehensive loss, net of tax |  |  |  |  |  |  | (15,173) |  |  | (15,173) |
Cash dividends declared on common stock ($0.22 per share) |  |  |  |  | (7,782) |  |  |  |  | (7,782) |
Balance at September 30, 2023 | 34,901,076 |  |  | $ | 548,652 |  |  | $ | 377,522 |  |  | $ | (112,628) |  |  | $ | 813,546 |

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| Nine Months Ended September 30, 2023
| Number of common shares |  | Common stock |  | Retained earnings |  | AOCI |  | Total stockholders’ equity
Balance at December 31, 2022 | 35,106,697 |  |  | $ | 552,397 |  |  | $ | 345,346 |  |  | $ | (99,850) |  |  | $ | 797,893 |
Restricted stock units vested | 156,370 |  |  |  |  |  |  |  |  | — |
Stock-based compensation expense |  |  | 3,204 |  |  |  |  |  |  | 3,204 |
Common stock repurchased | (361,991) |  |  | (6,949) |  |  |  |  |  |  | (6,949) |
Net income |  |  |  |  | 55,522 |  |  |  |  | 55,522 |
Other comprehensive loss, net of tax |  |  |  |  |  |  | (12,778) |  |  | (12,778) |
Cash dividends declared on common stock ($0.66 per share) |  |  |  |  | (23,346) |  |  |  |  | (23,346) |
Balance at September 30, 2023 | 34,901,076 |  |  | $ | 548,652 |  |  | $ | 377,522 |  |  | $ | (112,628) |  |  | $ | 813,546 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

| Nine Months Ended September 30,
| 2024 |  | 2023
Cash flows from operating activities: |  |  |
Net income | $ | 31,330 |  |  | $ | 55,522 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Depreciation, amortization and accretion | 1,136 |  |  | 2,370 |
Provision for credit losses | 5,099 |  |  | 2,856 |
Stock-based compensation expense | 3,223 |  |  | 3,204 |
Amortization of intangible assets | 1,241 |  |  | 1,841 |
Origination of mortgage loans held for sale | (1,318) |  |  | (13,685) |
Proceeds from sale of mortgage loans held for sale | 1,344 |  |  | 13,729 |
Bank owned life insurance income | (2,711) |  |  | (2,280) |
Gain on sale of mortgage loans held for sale, net | (26) |  |  | (307) |
Loss on sale of investment securities available for sale, net | 18,839 |  |  | 2,226 |
Gain on sale of premises and equipment | (1,480) |  |  | — |
Gain on sale of branch | — |  |  | (610) |
Other | (12,813) |  |  | 13,698 |
Net cash provided by operating activities | 43,864 |  |  | 78,564 |
Cash flows from investing activities: |  |  |
Loan originations and purchases, net of payments | (342,880) |  |  | (212,222) |
Maturities and repayments of investment securities available for sale | 92,146 |  |  | 135,084 |
Maturities and repayments of investment securities held to maturity | 19,393 |  |  | 18,876 |
Purchase of investment securities available for sale | (33,132) |  |  | (37,724) |
Purchase of premises and equipment | (2,657) |  |  | (9,250) |
Purchase of bank owned life insurance | (39) |  |  | — |
Proceeds from bank owned life insurance death benefit | 1,157 |  |  | — |
Purchases of Federal Home Loan Bank stock | (58,829) |  |  | (45,588) |
Proceeds from sales of investment securities available for sale | 241,968 |  |  | 67,900 |
Proceeds from redemption of Federal Home Loan Bank stock | 46,022 |  |  | 46,131 |
Proceeds from sales of assets held for sale | 7,459 |  |  | — |
Proceeds from sales of premises and equipment | 50 |  |  | 2 |
Capital contributions to LIHTC investments | (12,568) |  |  | (32,517) |
Net cash paid related to branch divestiture | — |  |  | (13,826) |
Net cash used by investing activities | (41,910) |  |  | (83,134) |
Cash flows from financing activities: |  |  |
Net increase (decrease) in deposits | 108,620 |  |  | (274,988) |
Proceeds from borrowings | 1,319,710 |  |  | 1,789,700 |
Repayment of borrowings | (1,437,710) |  |  | (1,339,700) |
Common stock cash dividends paid | (23,921) |  |  | (23,141) |
Net decrease in securities sold under agreement to repurchase | — |  |  | (23,439) |
Repurchase of common stock | (18,054) |  |  | (6,949) |
Net cash (used) provided by financing activities | (51,355) |  |  | 121,483 |
Net (decrease) increase in cash and cash equivalents | (49,401) |  |  | 116,913 |
Cash and cash equivalents at beginning of period | 224,973 |  |  | 103,590 |
Cash and cash equivalents at end of period | $ | 175,572 |  |  | $ | 220,503 |

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| Nine Months Ended September 30,
| 2024 |  | 2023
Supplemental disclosures of cash flow information: |  |  |
Cash paid for interest | $ | 84,048 |  |  | $ | 29,921 |
Cash paid for income taxes, net of refunds | 1,345 |  |  | 1,634 |
Supplemental non-cash disclosures of cash flow information: |  |  |
Investment in LIHTC partnership and related funding commitment | 100 |  |  | 37,042 |
Right of use assets obtained in exchange for new operating lease liabilities | 3,214 |  |  | 6,663 |
Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued | — |  |  | 700 |
Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net | — |  |  | 5,074 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements
(a) Description of Business
The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 50 branch offices located throughout Washington state, the greater Portland, Oregon area, Eugene, Oregon and Boise, Idaho. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, consumer loans and originates home equity loans on residential properties primarily located in its market areas. The Bank's deposits are insured by the FDIC subject to limitations.
(b) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2023 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
The accompanying Condensed Consolidated Financial Statements presented for the year end December 31, 2023 were derived from audited financial statements and do not include all disclosures required by GAAP.
To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes the judgments, estimates and assumptions used in the preparation of the unaudited Condensed Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of the ACL on investment securities, management's estimate of the ACL on loans, management's estimate of the ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation. There have been reclassifications in certain prior year amounts in the unaudited Condensed Consolidated Statements of Income. Reclassifications had no effect on the prior year's net income or stockholders' equity.
(c) Significant Accounting Policies
The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the 2023 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies during the nine months ended September 30, 2024 from those contained in the 2023 Annual Form 10-K.
(d) Recently Issued or Adopted Accounting Pronouncements
FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, and ASU 2022-06 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, 2020. In December 2022, FASB amended this ASU and deferred the sunset date of Topic 848 from December 31, 2022, to December 31, 2024. The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. The Company’s instruments indexed to LIBOR have been transferred to another index.
FASB ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), was issued in February 2023. The amendments in this ASU permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the statement of operations as a component of income tax expense (benefit). The amendments also require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understand the investments that generate income tax credits and other income tax benefits from a tax credit program. The ASU
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is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The amendments in the ASU can be applied either on a modified retrospective or a retrospective basis. The Company had already applied proportional amortization to its LIHTC investments prior to January 1, 2024. The amendments in this ASU allow the Company to expand the use of proportional amortization to other types of qualifying tax credit investments. The Company has chosen not to expand the use of proportional amortization beyond its LIHTC investment portfolio. Thus, at this time, this ASU only impacts disclosure requirements.
FASB ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, was issued in December 2023. The amendments in this ASU require a public business entity to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all periods presented. The Company expects this ASU to only impact its disclosure requirements and does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.
(2)Investment Securities
The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.
There were no investment securities classified as trading at September 30, 2024 or December 31, 2023.
(a) Investment Securities by Classification, Type and Maturity
The following tables present the amortized cost and fair value of investment securities, and the corresponding amounts of gross unrealized and unrecognized gains and losses including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI, at the dates indicated:

| September 30, 2024
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
| (Dollars in thousands)
Investment securities available for sale: |  |  |  |  |  |  |
U.S. government and agency securities | $ | 14,939 |  |  | $ | — |  |  | $ | (1,885) |  |  | $ | 13,054 |
Municipal securities | 70,210 |  |  | 9 |  |  | (8,956) |  |  | 61,263 |
Residential CMO and MBS(1) | 455,633 |  |  | 2,560 |  |  | (31,145) |  |  | 427,048 |
Commercial CMO and MBS(1) | 345,751 |  |  | 205 |  |  | (17,095) |  |  | 328,861 |
Corporate obligations | 11,686 |  |  | 122 |  |  | (102) |  |  | 11,706 |
Other asset-backed securities | 10,804 |  |  | 51 |  |  | (8) |  |  | 10,847 |
Total | $ | 909,023 |  |  | $ | 2,947 |  |  | $ | (59,191) |  |  | $ | 852,779 |

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

| September 30, 2024
| Amortized Cost |  | Gross Unrecognized Gains |  | Gross Unrecognized Losses |  | Fair Value
| (Dollars in thousands)
Investment securities held to maturity: |  |  |  |  |  |  |
U.S. government and agency securities | $ | 151,181 |  |  | $ | — |  |  | $ | (23,108) |  |  | $ | 128,073 |
Residential CMO and MBS(1) | 249,589 |  |  | 333 |  |  | (9,056) |  |  | 240,866 |
Commercial CMO and MBS(1) | 318,630 |  |  | 12 |  |  | (25,885) |  |  | 292,757 |
Total | $ | 719,400 |  |  | $ | 345 |  |  | $ | (58,049) |  |  | $ | 661,696 |

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
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| December 31, 2023
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
| (Dollars in thousands)
Investment securities available for sale: |  |  |  |  |  |  |
U.S. government and agency securities | $ | 16,047 |  |  | $ | — |  |  | $ | (2,297) |  |  | $ | 13,750 |
Municipal securities | 92,231 |  |  | 9 |  |  | (12,715) |  |  | 79,525 |
Residential CMO and MBS(1) | 555,518 |  |  | 2,656 |  |  | (46,125) |  |  | 512,049 |
Commercial CMO and MBS(1) | 538,910 |  |  | 88 |  |  | (34,740) |  |  | 504,258 |
Corporate obligations | 7,745 |  |  | 2 |  |  | (134) |  |  | 7,613 |
Other asset-backed securities | 17,336 |  |  | 31 |  |  | (209) |  |  | 17,158 |
Total | $ | 1,227,787 |  |  | $ | 2,786 |  |  | $ | (96,220) |  |  | $ | 1,134,353 |

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

| December 31, 2023
| Amortized Cost |  | Gross Unrecognized Gains |  | Gross Unrecognized Losses |  | Fair Value
| (Dollars in thousands)
Investment securities held to maturity: |  |  |  |  |  |  |
U.S. government and agency securities | $ | 151,075 |  |  | $ | — |  |  | $ | (27,701) |  |  | $ | 123,374 |
Residential CMO and MBS(1) | 267,204 |  |  | — |  |  | (14,101) |  |  | 253,103 |
Commercial CMO and MBS(1) | 321,163 |  |  | — |  |  | (35,190) |  |  | 285,973 |
Total | $ | 739,442 |  |  | $ | — |  |  | $ | (76,992) |  |  | $ | 662,450 |

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
The following table presents the amortized cost and fair value of investment securities by contractual maturity at the date indicated. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

| September 30, 2024
| Securities Available for Sale |  | Securities Held to Maturity
| Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
| (Dollars in thousands)
Due in one year or less | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Due after one year through five years | 6,508 |  |  | 6,320 |  |  | — |  |  | — |
Due after five years through ten years | 36,916 |  |  | 34,635 |  |  | 93,285 |  |  | 81,365 |
Due after ten years | 53,411 |  |  | 45,068 |  |  | 57,896 |  |  | 46,708 |
Total investment securities due at a single maturity date | 96,835 |  |  | 86,023 |  |  | 151,181 |  |  | 128,073 |
MBS(1) | 812,188 |  |  | 766,756 |  |  | 568,219 |  |  | 533,623 |
Total investment securities | $ | 909,023 |  |  | $ | 852,779 |  |  | $ | 719,400 |  |  | $ | 661,696 |

(1) MBS, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.
There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at September 30, 2024 and December 31, 2023.
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(b) Unrealized Losses on Investment Securities Available for Sale
The following tables present the gross unrealized losses and fair value of the Company’s investment securities available for sale for which an ACL on investment securities available for sale has not been recorded, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at the dates indicated:

| September 30, 2024
| Less than 12 Months |  | 12 Months or Longer |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
| (Dollars in thousands)
U.S. government and agency securities | $ | — |  |  | $ | — |  |  | $ | 13,054 |  |  | $ | (1,885) |  |  | $ | 13,054 |  |  | $ | (1,885) |
Municipal securities | — |  |  | — |  |  | 56,744 |  |  | (8,956) |  |  | 56,744 |  |  | (8,956) |
Residential CMO and MBS(1) | 3,150 |  |  | (5) |  |  | 261,630 |  |  | (31,140) |  |  | 264,780 |  |  | (31,145) |
Commercial CMO and MBS(1) | 4,419 |  |  | (54) |  |  | 284,072 |  |  | (17,041) |  |  | 288,491 |  |  | (17,095) |
Corporate obligations | 3,864 |  |  | (47) |  |  | 3,945 |  |  | (55) |  |  | 7,809 |  |  | (102) |
Other asset-backed securities | 1,617 |  |  | (7) |  |  | 196 |  |  | (1) |  |  | 1,813 |  |  | (8) |
Total | $ | 13,050 |  |  | $ | (113) |  |  | $ | 619,641 |  |  | $ | (59,078) |  |  | $ | 632,691 |  |  | $ | (59,191) |

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

| December 31, 2023
| Less than 12 Months |  | 12 Months or Longer |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
| (Dollars in thousands)
U.S. government and agency securities | $ | — |  |  | $ | — |  |  | $ | 13,750 |  |  | $ | (2,297) |  |  | $ | 13,750 |  |  | $ | (2,297) |
Municipal securities | 3,548 |  |  | (18) |  |  | 71,458 |  |  | (12,697) |  |  | 75,006 |  |  | (12,715) |
Residential CMO and MBS(1) | — |  |  | — |  |  | 358,316 |  |  | (46,125) |  |  | 358,316 |  |  | (46,125) |
Commercial CMO and MBS(1) | 37,899 |  |  | (228) |  |  | 448,197 |  |  | (34,512) |  |  | 486,096 |  |  | (34,740) |
Corporate obligations | 911 |  |  | (20) |  |  | 3,887 |  |  | (114) |  |  | 4,798 |  |  | (134) |
Other asset-backed securities | 4,338 |  |  | (22) |  |  | 7,291 |  |  | (187) |  |  | 11,629 |  |  | (209) |
Total | $ | 46,696 |  |  | $ | (288) |  |  | $ | 902,899 |  |  | $ | (95,932) |  |  | $ | 949,595 |  |  | $ | (96,220) |

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
(c) ACL on Investment Securities
The Company evaluated investment securities available for sale as of September 30, 2024 and December 31, 2023, and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of either September 30, 2024 or December 31, 2023. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of September 30, 2024 and December 31, 2023.
The Company also evaluated investment securities held to maturity for current expected credit losses as of September 30, 2024 and December 31, 2023. There were no investment securities held to maturity classified as nonaccrual or past due as of September 30, 2024 and December 31, 2023, and all were issued by the U.S. government and its agencies and either explicitly or implicitly guaranteed by the U.S. government, highly rated by major credit rating agencies and had a long history of no credit losses. Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Therefore, no ACL on investment securities held to maturity was recorded as of September 30, 2024 or December 31, 2023.
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(d) Realized Gains and Losses
The following table presents the gross realized gains and losses on the sale of investment securities available for sale determined using the specific identification method for the dates indicated:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
| (Dollars in thousands)
Gross realized gains | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 36 |
Gross realized losses | (6,945) |  |  | (1,940) |  |  | (18,839) |  |  | (2,262) |
Net realized losses | $ | (6,945) |  |  | $ | (1,940) |  |  | $ | (18,839) |  |  | $ | (2,226) |

(e) Pledged Securities
The following table summarizes the amortized cost and fair value of investment securities that were pledged as collateral for the following obligations at the dates indicated:

| September 30, 2024 |  | December 31, 2023
| Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
| (Dollars in thousands)
State and local governments public deposits | $ | 232,915 |  |  | $ | 225,360 |  |  | $ | 238,060 |  |  | $ | 224,879 |
FRB | 437,490 |  |  | 391,119 |  |  | 845,098 |  |  | 742,197 |
Other securities pledged | 53,841 |  |  | 49,773 |  |  | 54,636 |  |  | 49,032 |
Total | $ | 724,246 |  |  | $ | 666,252 |  |  | $ | 1,137,794 |  |  | $ | 1,016,108 |

(f) Accrued Interest Receivable
Accrued interest receivable excluded from the amortized cost of investment securities available for sale totaled $3.0 million and $3.8 million at September 30, 2024 and December 31, 2023, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $2.2 million and $2.3 million at September 30, 2024 and December 31, 2023, respectively.
No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities during the nine months ended September 30, 2024 and 2023.
(3)Loans Receivable
The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Company's amortized cost of loans receivable as it was deemed insignificant. In addition to originating loans, the Company may also purchase loans through pool purchases, participation purchases and syndicated loan purchases.
(a) Loan Origination/Risk Management
The Company categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; real estate construction and land development; and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the 2023 Annual Form 10-K.
The Company has certain lending policies and guidelines in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and guidelines on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans. The Company also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel.
The amortized cost of loans receivable, net of ACL on loans, consisted of the following portfolio segments and classes at the dates indicated:
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| September 30, 2024 |  | December 31, 2023
| (Dollars in thousands)
Commercial business: |  |  |
Commercial and industrial | $ | 824,134 |  |  | $ | 718,291 |
Owner-occupied CRE | 987,084 |  |  | 958,620 |
Non-owner occupied CRE | 1,835,609 |  |  | 1,697,574 |
Total commercial business | 3,646,827 |  |  | 3,374,485 |
Residential real estate | 408,982 |  |  | 375,342 |
Real estate construction and land development: |  |  |
Residential | 79,325 |  |  | 78,610 |
Commercial and multifamily | 378,322 |  |  | 335,819 |
Total real estate construction and land development | 457,647 |  |  | 414,429 |
Consumer | 166,023 |  |  | 171,371 |
Loans receivable | 4,679,479 |  |  | 4,335,627 |
ACL on loans | (51,391) |  |  | (47,999) |
Loans receivable, net | $ | 4,628,088 |  |  | $ | 4,287,628 |
Balances included in the amortized cost of loans receivable: |  |  |
Unamortized net discount on acquired loans | $ | (1,182) |  |  | $ | (1,923) |
Unamortized net deferred fee | $ | (9,613) |  |  | $ | (11,063) |

(b) Concentrations of Credit
Most of the Company’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County, Washington to Lane County, Oregon, as well as in Yakima County, Washington and Ada County, Idaho. Additionally, the Company's loan portfolio is concentrated in commercial business loans, which include commercial and industrial, owner-occupied and nonowner-occupied CRE, and commercial and multifamily real estate construction and land development loans. Commercial business loans and commercial and multifamily real estate construction and land development loans are generally considered as having a more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.
(c) Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, (v) past due status, and (vi) the general economic conditions of the United States of America, and specifically the states of Washington, Oregon and Idaho.
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the 2023 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Company follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.
Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a Pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The SM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of any potential loss. The likelihood of loss for SM graded loans, however, is greater than Pass graded loans because there has been measurable credit deterioration. Loans with a SS grade have further credit deterioration and include both accrual loans and nonaccrual loans. For Doubtful and Loss graded loans, the Company is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value. There were no loans graded Doubtful or Loss as of September 30, 2024 and December 31, 2023.
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The following tables present the amortized cost of loans receivable by risk grade and origination year at the dates indicated:

| September 30, 2024
| Term Loans Amortized Cost Basis by Origination Year |  | Revolving Loans |  | Revolving Loans Converted(1) |  | Loans Receivable
| 2024 |  | 2023 |  | 2022 |  | 2021 |  | 2020 |  | Prior |  |  |
| (Dollars in thousands)
Commercial business:
Commercial and industrial
Pass | $ | 147,830 |  |  | $ | 133,134 |  |  | $ | 130,593 |  |  | $ | 56,034 |  |  | $ | 58,485 |  |  | $ | 89,182 |  |  | $ | 153,789 |  |  | $ | 556 |  |  | $ | 769,603 |
SM | — |  |  | — |  |  | 6,508 |  |  | 245 |  |  | 1,152 |  |  | 5,350 |  |  | 18,738 |  |  | — |  |  | 31,993 |
SS | — |  |  | 235 |  |  | 882 |  |  | 456 |  |  | 3,397 |  |  | 6,255 |  |  | 8,089 |  |  | 3,224 |  |  | 22,538 |
Total | 147,830 |  |  | 133,369 |  |  | 137,983 |  |  | 56,735 |  |  | 63,034 |  |  | 100,787 |  |  | 180,616 |  |  | 3,780 |  |  | 824,134 |
Owner-occupied CRE
Pass | 88,176 |  |  | 87,012 |  |  | 138,532 |  |  | 149,002 |  |  | 80,640 |  |  | 414,842 |  |  | — |  |  | — |  |  | 958,204 |
SM | — |  |  | — |  |  | — |  |  | 2,400 |  |  | 879 |  |  | 10,535 |  |  | — |  |  | — |  |  | 13,814 |
SS | — |  |  | — |  |  | — |  |  | 2,957 |  |  | 641 |  |  | 11,468 |  |  | — |  |  | — |  |  | 15,066 |
Total | 88,176 |  |  | 87,012 |  |  | 138,532 |  |  | 154,359 |  |  | 82,160 |  |  | 436,845 |  |  | — |  |  | — |  |  | 987,084 |
Non-owner occupied CRE
Pass | 94,285 |  |  | 173,846 |  |  | 318,395 |  |  | 242,336 |  |  | 154,332 |  |  | 801,586 |  |  | — |  |  | 105 |  |  | 1,784,885 |
SM | — |  |  | — |  |  | — |  |  | 8,035 |  |  | — |  |  | 33,245 |  |  | — |  |  | — |  |  | 41,280 |
SS | — |  |  | — |  |  | 588 |  |  | — |  |  | — |  |  | 8,856 |  |  | — |  |  | — |  |  | 9,444 |
Total | 94,285 |  |  | 173,846 |  |  | 318,983 |  |  | 250,371 |  |  | 154,332 |  |  | 843,687 |  |  | — |  |  | 105 |  |  | 1,835,609 |
Total commercial business
Pass | 330,291 |  |  | 393,992 |  |  | 587,520 |  |  | 447,372 |  |  | 293,457 |  |  | 1,305,610 |  |  | 153,789 |  |  | 661 |  |  | 3,512,692 |
SM | — |  |  | — |  |  | 6,508 |  |  | 10,680 |  |  | 2,031 |  |  | 49,130 |  |  | 18,738 |  |  | — |  |  | 87,087 |
SS | — |  |  | 235 |  |  | 1,470 |  |  | 3,413 |  |  | 4,038 |  |  | 26,579 |  |  | 8,089 |  |  | 3,224 |  |  | 47,048 |
Total | 330,291 |  |  | 394,227 |  |  | 595,498 |  |  | 461,465 |  |  | 299,526 |  |  | 1,381,319 |  |  | 180,616 |  |  | 3,885 |  |  | 3,646,827 |
Residential real estate
Pass | 34,334 |  |  | 52,628 |  |  | 137,906 |  |  | 133,643 |  |  | 22,050 |  |  | 27,479 |  |  | — |  |  | — |  |  | 408,040 |
SS | — |  |  | — |  |  | — |  |  | 788 |  |  | — |  |  | 154 |  |  | — |  |  | — |  |  | 942 |
Total | 34,334 |  |  | 52,628 |  |  | 137,906 |  |  | 134,431 |  |  | 22,050 |  |  | 27,633 |  |  | — |  |  | — |  |  | 408,982 |
Real estate construction and land development:
Residential
Pass | 26,604 |  |  | 35,564 |  |  | 8,425 |  |  | — |  |  | 1,001 |  |  | 980 |  |  | 1 |  |  | — |  |  | 72,575 |
SS | — |  |  | 1,000 |  |  | — |  |  | 5,750 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 6,750 |
Total | 26,604 |  |  | 36,564 |  |  | 8,425 |  |  | 5,750 |  |  | 1,001 |  |  | 980 |  |  | 1 |  |  | — |  |  | 79,325 |
Commercial and multifamily
Pass | 18,476 |  |  | 153,295 |  |  | 165,558 |  |  | 9,931 |  |  | — |  |  | 3,446 |  |  | — |  |  | — |  |  | 350,706 |
SM | — |  |  | — |  |  | 893 |  |  | — |  |  | 5,175 |  |  | 5,923 |  |  | — |  |  | — |  |  | 11,991 |
SS | — |  |  | — |  |  | — |  |  | 15,625 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 15,625 |
Total | 18,476 |  |  | 153,295 |  |  | 166,451 |  |  | 25,556 |  |  | 5,175 |  |  | 9,369 |  |  | — |  |  | — |  |  | 378,322 |
Total real estate construction and land development
Pass | 45,080 |  |  | 188,859 |  |  | 173,983 |  |  | 9,931 |  |  | 1,001 |  |  | 4,426 |  |  | 1 |  |  | — |  |  | 423,281 |
SM | — |  |  | — |  |  | 893 |  |  | — |  |  | 5,175 |  |  | 5,923 |  |  | — |  |  | — |  |  | 11,991 |
SS | — |  |  | 1,000 |  |  | — |  |  | 21,375 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 22,375 |
Total | 45,080 |  |  | 189,859 |  |  | 174,876 |  |  | 31,306 |  |  | 6,176 |  |  | 10,349 |  |  | 1 |  |  | — |  |  | 457,647 |
Consumer
Pass | 1,751 |  |  | 1,588 |  |  | 1,695 |  |  | 364 |  |  | 3,861 |  |  | 23,989 |  |  | 130,514 |  |  | 649 |  |  | 164,411 |
SS | — |  |  | — |  |  | 25 |  |  | — |  |  | 107 |  |  | 689 |  |  | 310 |  |  | 481 |  |  | 1,612 |
Total | 1,751 |  |  | 1,588 |  |  | 1,720 |  |  | 364 |  |  | 3,968 |  |  | 24,678 |  |  | 130,824 |  |  | 1,130 |  |  | 166,023 |

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Table of Contents

| September 30, 2024
| Term Loans Amortized Cost Basis by Origination Year |  | Revolving Loans |  | Revolving Loans Converted(1) |  | Loans Receivable
| 2024 |  | 2023 |  | 2022 |  | 2021 |  | 2020 |  | Prior |  |  |
| (Dollars in thousands)
Loans receivable
Pass | 411,456 |  |  | 637,067 |  |  | 901,104 |  |  | 591,310 |  |  | 320,369 |  |  | 1,361,504 |  |  | 284,304 |  |  | 1,310 |  |  | 4,508,424 |
SM | — |  |  | — |  |  | 7,401 |  |  | 10,680 |  |  | 7,206 |  |  | 55,053 |  |  | 18,738 |  |  | — |  |  | 99,078 |
SS | — |  |  | 1,235 |  |  | 1,495 |  |  | 25,576 |  |  | 4,145 |  |  | 27,422 |  |  | 8,399 |  |  | 3,705 |  |  | 71,977 |
Total | $ | 411,456 |  |  | $ | 638,302 |  |  | $ | 910,000 |  |  | $ | 627,566 |  |  | $ | 331,720 |  |  | $ | 1,443,979 |  |  | $ | 311,441 |  |  | $ | 5,015 |  |  | $ | 4,679,479 |

(1) Represents the loans receivable balance at September 30, 2024 which was converted from a revolving loan to a non-revolving amortizing loan during the nine months ended September 30, 2024.

| December 31, 2023
| Term Loans Amortized Cost Basis by Origination Year |  | Revolving Loans |  | Revolving Loans Converted(1) |  | Loans Receivable
| 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  |  |
| (Dollars in thousands)
Commercial business:
Commercial and industrial
Pass | $ | 120,973 |  |  | $ | 150,854 |  |  | $ | 74,231 |  |  | $ | 66,364 |  |  | $ | 40,307 |  |  | $ | 76,924 |  |  | $ | 141,740 |  |  | $ | 188 |  |  | $ | 671,581 |
SM | — |  |  | 2,495 |  |  | 104 |  |  | 292 |  |  | 4,556 |  |  | 1,458 |  |  | 9,124 |  |  | — |  |  | 18,029 |
SS | — |  |  | 1,215 |  |  | 2,734 |  |  | 3,548 |  |  | 1,076 |  |  | 7,875 |  |  | 12,168 |  |  | 65 |  |  | 28,681 |
Total | 120,973 |  |  | 154,564 |  |  | 77,069 |  |  | 70,204 |  |  | 45,939 |  |  | 86,257 |  |  | 163,032 |  |  | 253 |  |  | 718,291 |
Owner-occupied CRE
Pass | 90,775 |  |  | 138,505 |  |  | 159,490 |  |  | 82,296 |  |  | 146,869 |  |  | 299,609 |  |  | — |  |  | — |  |  | 917,544 |
SM | — |  |  | — |  |  | 2,219 |  |  | 2,775 |  |  | 705 |  |  | 16,266 |  |  | — |  |  | — |  |  | 21,965 |
SS | — |  |  | — |  |  | 4,908 |  |  | 654 |  |  | — |  |  | 13,549 |  |  | — |  |  | — |  |  | 19,111 |
Total | 90,775 |  |  | 138,505 |  |  | 166,617 |  |  | 85,725 |  |  | 147,574 |  |  | 329,424 |  |  | — |  |  | — |  |  | 958,620 |
Non-owner-occupied CRE
Pass | 153,239 |  |  | 260,431 |  |  | 216,811 |  |  | 157,424 |  |  | 239,928 |  |  | 628,489 |  |  | — |  |  | — |  |  | 1,656,322 |
SM | — |  |  | — |  |  | 8,172 |  |  | — |  |  | 570 |  |  | 19,300 |  |  | — |  |  | — |  |  | 28,042 |
SS | — |  |  | 598 |  |  | — |  |  | — |  |  | — |  |  | 12,612 |  |  | — |  |  | — |  |  | 13,210 |
Total | 153,239 |  |  | 261,029 |  |  | 224,983 |  |  | 157,424 |  |  | 240,498 |  |  | 660,401 |  |  | — |  |  | — |  |  | 1,697,574 |
Total commercial business
Pass | 364,987 |  |  | 549,790 |  |  | 450,532 |  |  | 306,084 |  |  | 427,104 |  |  | 1,005,022 |  |  | 141,740 |  |  | 188 |  |  | 3,245,447 |
SM | — |  |  | 2,495 |  |  | 10,495 |  |  | 3,067 |  |  | 5,831 |  |  | 37,024 |  |  | 9,124 |  |  | — |  |  | 68,036 |
SS | — |  |  | 1,813 |  |  | 7,642 |  |  | 4,202 |  |  | 1,076 |  |  | 34,036 |  |  | 12,168 |  |  | 65 |  |  | 61,002 |
Total | 364,987 |  |  | 554,098 |  |  | 468,669 |  |  | 313,353 |  |  | 434,011 |  |  | 1,076,082 |  |  | 163,032 |  |  | 253 |  |  | 3,374,485 |
Residential real estate
Pass | 36,321 |  |  | 141,201 |  |  | 141,430 |  |  | 24,108 |  |  | 15,022 |  |  | 16,297 |  |  | — |  |  | — |  |  | 374,379 |
SS | — |  |  | — |  |  | 801 |  |  | — |  |  | — |  |  | 162 |  |  | — |  |  | — |  |  | 963 |
Total | 36,321 |  |  | 141,201 |  |  | 142,231 |  |  | 24,108 |  |  | 15,022 |  |  | 16,459 |  |  | — |  |  | — |  |  | 375,342 |
Real estate construction and land development:
Residential
Pass | 41,663 |  |  | 24,760 |  |  | 1,050 |  |  | 1,289 |  |  | 804 |  |  | 719 |  |  | 1 |  |  | — |  |  | 70,286 |
SM | — |  |  | — |  |  | 2,139 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,139 |
SS | 1,000 |  |  | 319 |  |  | 4,866 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 6,185 |
Total | 42,663 |  |  | 25,079 |  |  | 8,055 |  |  | 1,289 |  |  | 804 |  |  | 719 |  |  | 1 |  |  | — |  |  | 78,610 |

21

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| December 31, 2023
| Term Loans Amortized Cost Basis by Origination Year |  | Revolving Loans |  | Revolving Loans Converted(1) |  | Loans Receivable
| 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  |  |
| (Dollars in thousands)
Commercial and multifamily
Pass | 42,499 |  |  | 187,827 |  |  | 91,460 |  |  | 337 |  |  | 749 |  |  | 3,145 |  |  | — |  |  | — |  |  | 326,017 |
SM | — |  |  | — |  |  | — |  |  | 3,777 |  |  | 5,660 |  |  | 365 |  |  | — |  |  | — |  |  | 9,802 |
SS | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total | 42,499 |  |  | 187,827 |  |  | 91,460 |  |  | 4,114 |  |  | 6,409 |  |  | 3,510 |  |  | — |  |  | — |  |  | 335,819 |
Total real estate construction and land development
Pass | 84,162 |  |  | 212,587 |  |  | 92,510 |  |  | 1,626 |  |  | 1,553 |  |  | 3,864 |  |  | 1 |  |  | — |  |  | 396,303 |
SM | — |  |  | — |  |  | 2,139 |  |  | 3,777 |  |  | 5,660 |  |  | 365 |  |  | — |  |  | — |  |  | 11,941 |
SS | 1,000 |  |  | 319 |  |  | 4,866 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 6,185 |
Total | 85,162 |  |  | 212,906 |  |  | 99,515 |  |  | 5,403 |  |  | 7,213 |  |  | 4,229 |  |  | 1 |  |  | — |  |  | 414,429 |
Consumer
Pass | 1,897 |  |  | 1,980 |  |  | 293 |  |  | 6,221 |  |  | 15,841 |  |  | 20,402 |  |  | 122,007 |  |  | 1,123 |  |  | 169,764 |
SS | — |  |  | — |  |  | — |  |  | 134 |  |  | 207 |  |  | 893 |  |  | 333 |  |  | 40 |  |  | 1,607 |
Total | 1,897 |  |  | 1,980 |  |  | 293 |  |  | 6,355 |  |  | 16,048 |  |  | 21,295 |  |  | 122,340 |  |  | 1,163 |  |  | 171,371 |
Loans receivable
Pass | 487,367 |  |  | 905,558 |  |  | 684,765 |  |  | 338,039 |  |  | 459,520 |  |  | 1,045,585 |  |  | 263,748 |  |  | 1,311 |  |  | 4,185,893 |
SM | — |  |  | 2,495 |  |  | 12,634 |  |  | 6,844 |  |  | 11,491 |  |  | 37,389 |  |  | 9,124 |  |  | — |  |  | 79,977 |
SS | 1,000 |  |  | 2,132 |  |  | 13,309 |  |  | 4,336 |  |  | 1,283 |  |  | 35,091 |  |  | 12,501 |  |  | 105 |  |  | 69,757 |
Total | $ | 488,367 |  |  | $ | 910,185 |  |  | $ | 710,708 |  |  | $ | 349,219 |  |  | $ | 472,294 |  |  | $ | 1,118,065 |  |  | $ | 285,373 |  |  | $ | 1,416 |  |  | $ | 4,335,627 |

(1) Represents the loans receivable balance at December 31, 2023 which was converted from a revolving loan to non-revolving amortizing loan during the year ended December 31, 2023.
The following tables present the gross charge-offs by loan class and origination year, for the periods indicated:

| Nine Months Ended September 30, 2024
| Current Period Gross Charge-offs by Origination Year |  | Revolving Loans |  |  |  | Total Gross Charge-Offs
| 2024 |  | 2023 |  | 2022 |  | 2021 |  | 2020 |  | Prior |  |  |  |
| (Dollars in thousands)
Commercial business | $ | — |  |  | $ | 313 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,636 |  |  | $ | — |  |  |  |  | $ | 2,949 |
Consumer | — |  |  | 6 |  |  | 22 |  |  | — |  |  | 11 |  |  | 139 |  |  | 268 |  |  |  |  | 446 |
Total | $ | — |  |  | $ | 319 |  |  | $ | 22 |  |  | $ | — |  |  | $ | 11 |  |  | $ | 2,775 |  |  | $ | 268 |  |  |  |  | $ | 3,395 |

| Nine Months Ended September 30, 2023
| Current Period Gross Charge-offs by Origination Year |  | Revolving Loans |  |  |  | Total Gross Charge-Offs
| 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  |  |  |
| (Dollars in thousands)
Commercial business | $ | — |  |  | $ | — |  |  | $ | 15 |  |  | $ | 61 |  |  | $ | — |  |  | $ | 100 |  |  | $ | — |  |  |  |  | $ | 176 |
Consumer | 7 |  |  | 10 |  |  | 12 |  |  | 21 |  |  | 54 |  |  | 122 |  |  | 194 |  |  |  |  | 420 |
Total | $ | 7 |  |  | $ | 10 |  |  | $ | 27 |  |  | $ | 82 |  |  | $ | 54 |  |  | $ | 222 |  |  | $ | 194 |  |  |  |  | $ | 596 |

(d) Nonaccrual Loans
The following tables present the amortized cost of nonaccrual loans at the dates indicated:

| September 30, 2024
| Nonaccrual without ACL |  | Nonaccrual with ACL |  | Total Nonaccrual
| (Dollars in thousands)
Commercial business: |  |  |  |  |
Commercial and industrial | $ | 1,134 |  |  | $ | 718 |  |  | $ | 1,852 |

22

Table of Contents

| September 30, 2024
| Nonaccrual without ACL |  | Nonaccrual with ACL |  | Total Nonaccrual
| (Dollars in thousands)
Owner-occupied CRE | 2,449 |  |  | — |  |  | 2,449 |
Total | $ | 3,583 |  |  | $ | 718 |  |  | $ | 4,301 |

| December 31, 2023
| Nonaccrual without ACL |  | Nonaccrual with ACL |  | Total Nonaccrual
| (Dollars in thousands)
Commercial business: |  |  |  |  |
Commercial and industrial | $ | 1,706 |  |  | $ | 2,557 |  |  | $ | 4,263 |
Owner-occupied CRE | — |  |  | 205 |  |  | 205 |
Total | $ | 1,706 |  |  | $ | 2,762 |  |  | $ | 4,468 |

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

| Three Months Ended September 30,
| 2024 |  | 2023
| Interest Income Reversed |  | Interest Income Recognized |  | Interest Income Reversed |  | Interest Income Recognized
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |
Commercial and industrial | $ | — |  |  | $ | 126 |  |  | $ | (10) |  |  | $ | 18 |
Owner-occupied CRE | (28) |  |  | — |  |  | — |  |  | — |
Total | $ | (28) |  |  | $ | 126 |  |  | $ | (10) |  |  | $ | 18 |

| Nine Months Ended September 30,
| 2024 |  | 2023
| Interest Income Reversed |  | Interest Income Recognized |  | Interest Income Reversed |  | Interest Income Recognized
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |
Commercial and industrial | $ | (27) |  |  | $ | 339 |  |  | $ | (24) |  |  | $ | 48 |
Owner-occupied CRE | (28) |  |  | 144 |  |  | — |  |  | — |
Total | $ | (55) |  |  | $ | 483 |  |  | $ | (24) |  |  | $ | 48 |

For the three and nine months ended September 30, 2024 and 2023, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.
(e) Past due loans
The Company performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The following tables present the amortized cost of past due loans at the dates indicated:

| September 30, 2024
| 30-89 Days |  | 90 Days or Greater |  | Total Past Due |  | Current |  | Loans Receivable
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 1,496 |  |  | $ | 6,132 |  |  | $ | 7,628 |  |  | $ | 816,506 |  |  | $ | 824,134 |
Owner-occupied CRE | — |  |  | — |  |  | — |  |  | 987,084 |  |  | 987,084 |

23

Table of Contents

| September 30, 2024
| 30-89 Days |  | 90 Days or Greater |  | Total Past Due |  | Current |  | Loans Receivable
| (Dollars in thousands)
Non-owner occupied CRE | — |  |  | — |  |  | — |  |  | 1,835,609 |  |  | 1,835,609 |
Total commercial business | 1,496 |  |  | 6,132 |  |  | 7,628 |  |  | 3,639,199 |  |  | 3,646,827 |
Residential real estate | — |  |  | — |  |  | — |  |  | 408,982 |  |  | 408,982 |
Real estate construction and land development:
Residential | — |  |  | — |  |  | — |  |  | 79,325 |  |  | 79,325 |
Commercial and multifamily | — |  |  | — |  |  | — |  |  | 378,322 |  |  | 378,322 |
Total real estate construction and land development | — |  |  | — |  |  | — |  |  | 457,647 |  |  | 457,647 |
Consumer | 461 |  |  | 352 |  |  | 813 |  |  | 165,210 |  |  | 166,023 |
Total | $ | 1,957 |  |  | $ | 6,484 |  |  | $ | 8,441 |  |  | $ | 4,671,038 |  |  | $ | 4,679,479 |

| December 31, 2023
| 30-89 Days |  | 90 Days or Greater |  | Total Past Due |  | Current |  | Loans Receivable
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 2,289 |  |  | $ | 3,857 |  |  | $ | 6,146 |  |  | $ | 712,145 |  |  | $ | 718,291 |
Owner-occupied CRE | — |  |  | 189 |  |  | 189 |  |  | 958,431 |  |  | 958,620 |
Non-owner occupied CRE | 1,489 |  |  | — |  |  | 1,489 |  |  | 1,696,085 |  |  | 1,697,574 |
Total commercial business | 3,778 |  |  | 4,046 |  |  | 7,824 |  |  | 3,366,661 |  |  | 3,374,485 |
Residential real estate | 162 |  |  | — |  |  | 162 |  |  | 375,180 |  |  | 375,342 |
Real estate construction and land development:
Residential | — |  |  | 319 |  |  | 319 |  |  | 78,291 |  |  | 78,610 |
Commercial and multifamily | — |  |  | — |  |  | — |  |  | 335,819 |  |  | 335,819 |
Total real estate construction and land development | — |  |  | 319 |  |  | 319 |  |  | 414,110 |  |  | 414,429 |
Consumer | 615 |  |  | 87 |  |  | 702 |  |  | 170,669 |  |  | 171,371 |
Total | $ | 4,555 |  |  | $ | 4,452 |  |  | $ | 9,007 |  |  | $ | 4,326,620 |  |  | $ | 4,335,627 |

Loans 90 days or more past due and still accruing interest were $5.3 million and $1.3 million as of September 30, 2024 and December 31, 2023, respectively. Loans 90 days past due and still accruing interest as of September 30, 2024 were comprised of $5.0 million in commercial and industrial loans $0.3 million in consumer loans.
(f) Collateral-dependent Loans
The following tables present the type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral at the dates indicated, with b alances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:

| September 30, 2024
| CRE |  | Farmland |  | Residential Real Estate |  | Equipment |  | Total
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | — |  |  | $ | 389 |  |  | $ | 613 |  |  | $ | — |  |  | $ | 1,002 |
Owner-occupied CRE | 2,449 |  |  | — |  |  | — |  |  | — |  |  | 2,449 |
Total | $ | 2,449 |  |  | $ | 389 |  |  | $ | 613 |  |  | $ | — |  |  | $ | 3,451 |

24

Table of Contents

| December 31, 2023
| CRE |  | Farmland |  | Residential Real Estate |  | Equipment |  | Total
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 260 |  |  | $ | 389 |  |  | $ | 621 |  |  | $ | 304 |  |  | $ | 1,574 |
Owner-occupied CRE | 189 |  |  | — |  |  | — |  |  | — |  |  | 189 |
Total | $ | 449 |  |  | $ | 389 |  |  | $ | 621 |  |  | $ | 304 |  |  | $ | 1,763 |

There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the nine months ended September 30, 2024, except changes due to additions or removals of loans in this classification.
(g) Modification of Loans
Occasionally, the Company modifies loans to borrowers in financial distress by providing modifications of loans which may include interest rate reductions, principal or interest forgiveness, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. In some cases, the Company provides multiple types of concessions on one loan. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.
The following tables present the amortized cost of loans that were experiencing both financial difficulty and modified during the periods indicated:

|  |  | Three Months Ended September 30, 2024
|  |  | Term Extension |  |  |  |  |  |  |  |  |  | Total Modified Loans |  | % of Modified Loans to Loans Receivable, net
|  |  | (Dollars in thousands)
Commercial business:
Commercial and industrial |  |  | $ | 7,041 |  |  |  |  |  |  |  |  |  |  | $ | 7,041 |  |  | 0.85 | %
Non-owner occupied CRE |  |  | 2,657 |  |  |  |  |  |  |  |  |  |  | 2,657 |  |  | 0.14 |
Total commercial business |  |  | 9,698 |  |  |  |  |  |  |  |  |  |  | 9,698 |  |  | 0.27 |
Real estate construction and land development: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  |  | 6,750 |  |  |  |  |  |  |  |  |  |  | 6,750 |  |  | 8.51 |
Total real estate construction and land development |  |  | 6,750 |  |  |  |  |  |  |  |  |  |  | 6,750 |  |  | 1.47 |
Consumer |  |  | 10 |  |  |  |  |  |  |  |  |  |  | 10 |  |  | 0.01 |
Total |  |  | $ | 16,458 |  |  |  |  |  |  |  |  |  |  | $ | 16,458 |  |  | 0.35 | %

|  | Three Months Ended September 30, 2023
|  |  | Term Extension |  |  |  |  |  |  |  | Combination Term Extension and Interest Rate Reduction(1) |  | Total Modified Loans |  | % of Modified Loans to Loans Receivable, net
|  | (Dollars in thousands)
Commercial business:
Commercial and industrial |  |  | $ | 313 |  |  |  |  |  |  |  |  | $ | — |  |  | $ | 313 |  |  | 0.05 | %
Non-owner occupied CRE |  |  | — |  |  |  |  |  |  |  |  | 239 |  |  | 239 |  |  | 0.01 |
Total commercial business |  |  | 313 |  |  |  |  |  |  |  |  | 239 |  |  | 552 |  |  | 0.02 |
Total |  |  | $ | 313 |  |  |  |  |  |  |  |  | $ | 239 |  |  | $ | 552 |  |  | 0.01 | %

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|  |  |  |  | Nine Months Ended September 30, 2024
|  |  |  |  | Term Extension |  |  |  |  |  |  |  | Total Modified Loans |  | % of Modified Loans to Loans Receivable, net
|  |  |  |  | (Dollars in thousands)
Commercial business:
Commercial and industrial |  |  |  |  | $ | 20,611 |  |  |  |  |  |  |  |  | $ | 20,611 |  |  | 2.50 | %
Non-owner occupied CRE |  |  |  |  | 2,658 |  |  |  |  |  |  |  |  | 2,658 |  |  | 0.14 |
Total commercial business |  |  |  |  | 23,269 |  |  |  |  |  |  |  |  | 23,269 |  |  | 0.64 |
Real estate construction and land development: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  |  |  |  | 6,750 |  |  |  |  |  |  |  |  | 6,750 |  |  | 8.51 | %
Commercial and multifamily |  |  |  |  | 20,800 |  |  |  |  |  |  |  |  | 20,800 |  |  | 5.50 | %
Total real estate construction and land development |  |  |  |  | 27,550 |  |  |  |  |  |  |  |  | 27,550 |  |  | 6.02 | %
Consumer |  |  |  |  | 39 |  |  |  |  |  |  |  |  | 39 |  |  | 0.02 | %
Total |  |  |  |  | $ | 50,858 |  |  |  |  |  |  |  |  | $ | 50,858 |  |  | 1.09 | %

|  |  | Nine Months Ended September 30, 2023
|  |  | Term Extension |  |  |  |  |  | Term Extension & Int. Rate Reduction |  | Total Modified Loans |  | % of Modified Loans to Loans Receivable, net
|  |  | (Dollars in thousands)
Commercial business:
Commercial and industrial |  |  | $ | 6,516 |  |  |  |  |  |  | $ | — |  |  | $ | 6,516 |  |  | 0.94 | %
Non-owner occupied CRE |  |  | 2,716 |  |  |  |  |  |  | 239 |  |  | 2,955 |  |  | 0.17 |
Total commercial business |  |  | 9,232 |  |  |  |  |  |  | 239 |  |  | 9,471 |  |  | 0.28 |
Real estate construction and land development: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and multifamily |  |  | 3,452 |  |  |  |  |  |  | — |  |  | 3,452 |  |  | 1.11 | %
Total real estate construction and land development |  |  | 3,452 |  |  |  |  |  |  | — |  |  | 3,452 |  |  | 0.91 | %
Consumer |  |  | 28 |  |  |  |  |  |  | 17 |  |  | 45 |  |  | 0.03 | %
Total |  |  | $ | 12,712 |  |  |  |  |  |  | $ | 256 |  |  | $ | 12,968 |  |  | 0.30 | %

The following tables present the financial effects of the loan modifications presented in the preceding tables during the periods indicated:

|  |  |  |  | Three Months Ended September 30, 2024
|  |  |  |  | Weighted Average Years of Term Extensions
Commercial business: |  |  |  |  |
Commercial and industrial |  |  |  |  | 0.59
Non-owner occupied CRE |  |  |  |  | 0.83
Total commercial business |  |  |  |  | 0.66
Real estate construction and land development: |  |  |  |  |
Residential |  |  |  |  | 0.17
Total real estate construction and land development |  |  |  |  | 0.17
Consumer |  |  |  |  | 2.17
Total |  |  |  |  | 0.46

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|  |  | Three Months Ended September 30, 2023
|  |  | Weighted Average % of Interest Rate Reductions |  | Weighted Average Years of Term Extensions
Commercial business: |  |  |  |  |
Commercial and industrial |  |  | — | % |  | 1.82
Non-owner occupied CRE |  |  | 3.00 |  |  | 2.00
Total |  |  | 3.00 | % |  | 1.90

|  |  |  |  | Nine Months Ended September 30, 2024
|  |  |  |  | Weighted Average Years of Term Extensions
Commercial business: |  |  |  |  |
Commercial and industrial |  |  |  |  | 0.76
Non-owner occupied CRE |  |  |  |  | 0.83
Total commercial business |  |  |  |  | 0.77
Real estate construction and land development: |  |  |  |  |
Residential |  |  |  |  | 0.17
Commercial and multifamily |  |  |  |  | 0.69
Total real estate construction and land development |  |  |  |  | 0.56
Consumer |  |  |  |  | 1.52
Total |  |  |  |  | 0.66

| Nine Months Ended September 30, 2023
| Weighted Average % of Interest Rate Reductions |  | Weighted Average Years of Term Extensions
Commercial business: |  |  |
Commercial and industrial | — | % |  | 0.58
Non-owner occupied CRE | 3.00 |  |  | 1.09
Total commercial business | 3.00 |  |  | 0.74
Real estate construction and land development: |  |  |
Commercial and multifamily | — |  |  | 0.42
Total real estate construction and land development | — |  |  | 0.42
Consumer | 1.00 |  |  | 2.62
Total | 3.00 | % |  | 0.66

At September 30, 2024, there were $5.4 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms have been modified during the nine months ended September 30, 2024. At December 31, 2023, there were $6.6 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms have been modified during the year ended December 31, 2023.
The Company closely monitors the performance of loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The Company considers a modified loan as a payment default if the borrower is 90 or more days past due. There were no loans 90 days past due or in default that have been modified in the past 12 months.
(h) Accrued interest receivable on loans receivable
Accrued interest receivable on loans receivable totaled $14.8 million and $13.3 million at September 30, 2024 and December 31, 2023, respectively, and is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.
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(i) Foreclosure proceedings in process
At September 30, 2024, there was one home equity loan valued at $160,000, secured by residential real estate for which formal foreclosure proceedings were in process. At December 31, 2023, there were no home equity loans secured by residential real estate for which formal foreclosure proceedings were in process.
(4)Allowance for Credit Losses on Loans
The Company's methodology for determining the ACL on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. For a description of the Company's ACL policy, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2023 Annual Form 10-K.
GAAP requires the Company to develop reasonable and supportable forecasts of future conditions, and estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Company and the ultimate collectability of future cash flows over the life of a loan. Management has adopted a historic loss, open pool CECL methodology to calculate the ACL on loans. Under this methodology, loans are either collectively evaluated if they share similar risk characteristics, including performing modified loans, or individually evaluated if they do not share similar risk characteristics, including nonaccrual loans.
The allowance for individually evaluated loans is calculated using either the collateral value method, which considers the likely source of repayment as the value of the collateral less estimated costs to sell, or the net present value method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt.
The allowance for collectively evaluated loans is comprised of the baseline loss allowance, the macroeconomic allowance and the qualitative allowance. The baseline loss allowance begins with the baseline loss rates calculated using the Company's average quarterly historical loss information for an economic cycle. The Company evaluates the historical period on a quarterly basis with the assumption that economic cycles have historically lasted between 10 and 15 years. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan under the remaining life method to determine the baseline loss estimate for each loan. Estimated cash flows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments. Contractual cash flows are based on the amortized cost and are adjusted for balances guaranteed by governmental entities, such as Small Business Administration or USDA, resulting in the unguaranteed amortized cost. The contractual term excludes expected extensions, renewals and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Prepayments are established for each segment based on historical averages for the segment, which management believes is an accurate representation of future prepayment activity. Management reviews the adequacy of the prepayment assumption on a quarterly basis.
The macroeconomic allowance includes consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. The Company uses macroeconomic scenarios from an independent third party. These scenarios are based on past events, current conditions, the likelihood of future events occurring and include consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets certain forecasted macroeconomic factors, such as unemployment rate, gross domestic product, housing price index, commercial real estate price index, and certain rate and market indices. Macroeconomic factor multipliers are determined through regression analysis and applied to loss rates for each segment of loans with similar risk characteristics. Each of the forecasted segment balances is impacted by a mix of these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year. A macroeconomic sensitive model is developed for each segment given the current and forecasted conditions and a macroeconomic multiplier is calculated for each forecast period considering the forecasted losses as compared to the long-term average actual losses of the dataset. The impact of those macroeconomic factors on each segment, both positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss allowance. After the reasonable and supportable period, forecasted loss rates revert to historical baseline loss levels over the predetermined reversion period on a straight-lined basis.
The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Since historical information (such as historical net losses and economic cycles) may not always, by themselves, provide a sufficient basis for determining future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as those identified through back-testing, underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.
As of September 30, 2024, qualitative adjustments primarily related to segments of the loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have
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fully captured the associated impact to the ACL. Qualitative adjustments also related to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.
In general, management's estimate of the ACL on loans uses relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The evaluation of ACL on loans is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management utilizes its best judgment and information available to recognize estimated losses on loans, future additions to the ACL may be necessary based on further declines in local and national economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL on loans. Such agencies may require the Company to adjust the ACL based on their judgments about information available to them at the time of their examinations. The Company believes the ACL on loans was appropriate as of September 30, 2024 given all the above considerations.
During the nine months ended September 30, 2024, the ACL on loans increased $3.4 million to $51.4 million from $48.0 million at December 31, 2023 due primarily to growth in loans receivable, net.
The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:

| Three Months Ended September 30, 2024
| Beginning Balance |  | Charge-offs |  | Recoveries |  | (Reversal of) Provision for Credit Losses |  | Ending Balance
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 11,134 |  |  | $ | (50) |  |  | $ | 72 |  |  | $ | (472) |  |  | $ | 10,684 |
Owner-occupied CRE | 9,850 |  |  | (2,510) |  |  | — |  |  | 4,819 |  |  | 12,159 |
Non-owner occupied CRE | 13,483 |  |  | — |  |  | — |  |  | 841 |  |  | 14,324 |
Total commercial business | 34,467 |  |  | (2,560) |  |  | 72 |  |  | 5,188 |  |  | 37,167 |
Residential real estate | 3,735 |  |  | — |  |  | — |  |  | (131) |  |  | 3,604 |
Real estate construction and land development:
Residential | 910 |  |  | — |  |  | — |  |  | (118) |  |  | 792 |
Commercial and multifamily | 9,908 |  |  | — |  |  | — |  |  | (2,235) |  |  | 7,673 |
Total real estate construction and land development | 10,818 |  |  | — |  |  | — |  |  | (2,353) |  |  | 8,465 |
Consumer | 2,199 |  |  | (85) |  |  | 40 |  |  | 1 |  |  | 2,155 |
Total | $ | 51,219 |  |  | $ | (2,645) |  |  | $ | 112 |  |  | $ | 2,705 |  |  | $ | 51,391 |

| Nine Months Ended September 30, 2024
| Beginning Balance |  | Charge-offs |  | Recoveries |  | Provision for (Reversal of) Credit Losses |  | Ending Balance
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 11,128 |  |  | $ | (439) |  |  | $ | 448 |  |  | $ | (453) |  |  | $ | 10,684 |
Owner-occupied CRE | 8,999 |  |  | (2,510) |  |  | 359 |  |  | 5,311 |  |  | 12,159 |
Non-owner occupied CRE | 11,176 |  |  | — |  |  | — |  |  | 3,148 |  |  | 14,324 |
Total commercial business | 31,303 |  |  | (2,949) |  |  | 807 |  |  | 8,006 |  |  | 37,167 |
Residential real estate | 3,473 |  |  | — |  |  | — |  |  | 131 |  |  | 3,604 |
Real estate construction and land development:
Residential | 1,643 |  |  | — |  |  | — |  |  | (851) |  |  | 792 |
Commercial and multifamily | 9,233 |  |  | — |  |  | — |  |  | (1,560) |  |  | 7,673 |
Total real estate construction and land development | 10,876 |  |  | — |  |  | — |  |  | (2,411) |  |  | 8,465 |
Consumer | 2,347 |  |  | (446) |  |  | 101 |  |  | 153 |  |  | 2,155 |
Total | $ | 47,999 |  |  | $ | (3,395) |  |  | $ | 908 |  |  | $ | 5,879 |  |  | $ | 51,391 |

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| Three Months Ended September 30, 2023
| Beginning Balance |  | Charge-offs |  | Recoveries |  | Provision for (Reversal of) Credit Losses |  | Ending Balance
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 13,288 |  |  | $ | (15) |  |  | $ | 1,253 |  |  | $ | (2,781) |  |  | $ | 11,745 |
Owner-occupied CRE | 8,503 |  |  | — |  |  | — |  |  | 191 |  |  | 8,694 |
Non-owner occupied CRE | 9,482 |  |  | — |  |  | — |  |  | 1,184 |  |  | 10,666 |
Total commercial business | 31,273 |  |  | (15) |  |  | 1,253 |  |  | (1,406) |  |  | 31,105 |
Residential real estate | 2,865 |  |  | — |  |  | — |  |  | 684 |  |  | 3,549 |
Real estate construction and land development:
Residential | 1,671 |  |  | — |  |  | — |  |  | (163) |  |  | 1,508 |
Commercial and multifamily | 8,014 |  |  | — |  |  | — |  |  | 437 |  |  | 8,451 |
Total real estate construction and land development | 9,685 |  |  | — |  |  | — |  |  | 274 |  |  | 9,959 |
Consumer | 2,585 |  |  | (123) |  |  | 59 |  |  | (187) |  |  | 2,334 |
Total | $ | 46,408 |  |  | $ | (138) |  |  | $ | 1,312 |  |  | $ | (635) |  |  | $ | 46,947 |

| Nine Months Ended September 30, 2023
| Beginning Balance |  | Charge-offs |  | Recoveries |  | (Reversal of) Provision for Credit Losses |  | Ending Balance
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 13,962 |  |  | $ | (176) |  |  | $ | 1,342 |  |  | $ | (3,383) |  |  | $ | 11,745 |
Owner-occupied CRE | 7,480 |  |  | — |  |  | — |  |  | 1,214 |  |  | 8,694 |
Non-owner occupied CRE | 9,276 |  |  | — |  |  | — |  |  | 1,390 |  |  | 10,666 |
Total commercial business | 30,718 |  |  | (176) |  |  | 1,342 |  |  | (779) |  |  | 31,105 |
Residential real estate | 2,872 |  |  | — |  |  | — |  |  | 677 |  |  | 3,549 |
Real estate construction and land development:
Residential | 1,654 |  |  | — |  |  | — |  |  | (146) |  |  | 1,508 |
Commercial and multifamily | 5,409 |  |  | — |  |  | — |  |  | 3,042 |  |  | 8,451 |
Total real estate construction and land development | 7,063 |  |  | — |  |  | — |  |  | 2,896 |  |  | 9,959 |
Consumer | 2,333 |  |  | (420) |  |  | 149 |  |  | 272 |  |  | 2,334 |
Total | $ | 42,986 |  |  | $ | (596) |  |  | $ | 1,491 |  |  | $ | 3,066 |  |  | $ | 46,947 |

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

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
| (Dollars in thousands)
Balance, beginning of period | $ | 774 |  |  | $ | 1,777 |  |  | $ | 1,288 |  |  | $ | 1,744 |
(Reversal of) provision for credit losses on unfunded commitments | (266) |  |  | (243) |  |  | (780) |  |  | (210) |
Balance, end of period | $ | 508 |  |  | $ | 1,534 |  |  | $ | 508 |  |  | $ | 1,534 |

(5)Goodwill and Other Intangible Assets
(a) Goodwill
There were no additions to goodwill during the nine months ended September 30, 2024 and 2023. Additionally, management analyzes its goodwill on an annual basis on December 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent the carrying
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amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2023 and concluded that there was no impairment as of that date.
(b) Other Intangible Assets
Other intangible assets represent core deposit intangibles acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets during the nine months ended September 30, 2024 and 2023.
(6)Derivative Financial Instruments
The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate loan, or a fixed rate loan to a variable rate loan, and the Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third-party. These interest rate swaps are not designated as hedging instruments.
The Company is exposed to interest rate risk as part of the transaction. However, the Company acts as an intermediary for its customer; therefore, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.
Fee income related to interest rate swap derivative contract transactions is recorded in Interest rate swap fees on the unaudited Condensed Consolidated Statements of Income. The fair value of derivative positions outstanding is included in Prepaid expenses and other assets and Accrued expenses and other liabilities in the unaudited Condensed Consolidated Statements of Financial Condition. The gains and losses due to changes in fair value and all cash flows are included in Other income in the unaudited Condensed Consolidated Statements of Income, but typically net to zero based on the identical back-to-back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at the dates indicated:

| September 30, 2024 |  | December 31, 2023
| Notional Amounts |  | Estimated Fair Value |  | Notional Amounts |  | Estimated Fair Value
| (Dollars in thousands)
Non-hedging interest rate derivatives |  |  |  |  |  |  |
Interest rate swap asset (1) | $ | 280,570 |  |  | 17,366 |  |  | $ | 291,740 |  |  | $ | 23,195 |
Interest rate swap liability (1) | 280,570 |  |  | (17,366) |  |  | 291,740 |  |  | (23,195) |

(1) The estimated fair value of derivatives with customers was $(16.4) million and $(22.5) million as of September 30, 2024 and December 31, 2023, respectively. The estimated fair value of derivatives with third-parties was $16.4 million and $22.5 million as of September 30, 2024 and December 31, 2023, respectively.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk for derivatives with the customer is controlled through the credit approval process, amount limits, and monitoring procedures and is concentrated within our primary market areas. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.
(7)Stockholders’ Equity
(a) Earnings Per Common Share
The following table illustrates the calculation of weighted average shares used for earnings per common share computations for the periods indicated:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
| (Dollars in thousands, except shares)
Net income allocated to common shareholders | $ | 11,423 |  |  | $ | 18,219 |  |  | $ | 31,330 |  |  | $ | 55,522 |
Basic: |  |  |  |  |  |  |
Weighted average common shares outstanding | 34,322,069 |  |  | 35,022,676 |  |  | 34,584,851 |  |  | 35,062,760 |

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| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
| (Dollars in thousands, except shares)
Diluted: |  |  |  |  |  |  |
Basic weighted average common shares outstanding | 34,322,069 |  |  | 35,022,676 |  |  | 34,584,851 |  |  | 35,062,760 |
Effect of potentially dilutive common shares (1) | 336,605 |  |  | 92,489 |  |  | 417,524 |  |  | 242,696 |
Total diluted weighted average common shares outstanding | 34,658,674 |  |  | 35,115,165 |  |  | 35,002,375 |  |  | 35,305,456 |
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2) | 131,152 |  |  | 312,539 |  |  | 45,341 |  |  | 163,860 |

(1) Represents the effect of the vesting of restricted stock units.
(2) Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock unit exceeds the market price of the Company’s stock.
(b) Dividends
The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.
The following table summarizes the dividend activity during the nine months ended September 30, 2024 and the calendar year 2023:

Declared |  | Cash Dividend per Share |  | Record Date |  | Paid Date |  |
January 25, 2023 |  | $0.22 |  | February 8, 2023 |  | February 22, 2023 |  |
April 19, 2023 |  | $0.22 |  | May 4, 2023 |  | May 18, 2023 |  |
July 19, 2023 |  | $0.22 |  | August 2, 2023 |  | August 16, 2023 |  |
October 18, 2023 |  | $0.22 |  | November 1, 2023 |  | November 15, 2023 |  |
January 24, 2024 |  | $0.23 |  | February 8, 2024 |  | February 22, 2024 |  |
April 24, 2024 |  | $0.23 |  | May 8, 2024 |  | May 22, 2024 |  |
July 24, 2024 |  | $0.23 |  | August 7, 2024 |  | August 21, 2024 |  |

The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.
(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On April 24, 2024, the Company's Board of Directors announced the repurchase of up to 5% of the Company's outstanding common shares or 1,734,492 shares in total, under a new repurchase program, with 1,155,452 shares remaining available for repurchase as of September 30, 2024. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will 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 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.
(8)Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.
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Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
(a) Recurring and Nonrecurring Basis
The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:
Investment Securities:
The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third-party pricing services.
Collateral-Dependent Loans:
Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Company also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.
Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Derivative Financial Instruments:
The Company obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Company has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2024 and December 31, 2023, the Company assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Company has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.
Recurring Basis
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:

| September 30, 2024
| Total |  | Level 1 |  | Level 2 |  | Level 3
| (Dollars in thousands)
Assets |  |  |  |  |  |  |
Investment securities available for sale: |  |  |  |  |  |  |
U.S. government and agency securities | $ | 13,054 |  |  | $ | — |  |  | $ | 13,054 |  |  | $ | — |
Municipal securities | 61,263 |  |  | — |  |  | 61,263 |  |  | — |
Residential CMO and MBS(1) | 427,048 |  |  | — |  |  | 427,048 |  |  | — |
Commercial CMO and MBS(1) | 328,861 |  |  | — |  |  | 328,861 |  |  | — |

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| September 30, 2024
| Total |  | Level 1 |  | Level 2 |  | Level 3
| (Dollars in thousands)
Corporate obligations | 11,706 |  |  | — |  |  | 11,706 |  |  | — |
Other asset-backed securities | 10,847 |  |  | — |  |  | 10,847 |  |  | — |
Total investment securities available for sale | 852,779 |  |  | — |  |  | 852,779 |  |  | — |
Equity security | 287 |  |  | 287 |  |  | — |  |  | — |
Derivative assets - interest rate swaps | 17,366 |  |  | — |  |  | 17,366 |  |  | — |
Liabilities |  |  |  |  |  |  |
Derivative liabilities - interest rate swaps | $ | 17,366 |  |  | $ | — |  |  | $ | 17,366 |  |  | $ | — |

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

| December 31, 2023
| Total |  | Level 1 |  | Level 2 |  | Level 3
| (Dollars in thousands)
Assets |  |  |  |  |  |  |
Investment securities available for sale: |  |  |  |  |  |  |
U.S. government and agency securities | $ | 13,750 |  |  | $ | — |  |  | $ | 13,750 |  |  | $ | — |
Municipal securities | 79,525 |  |  | — |  |  | 79,525 |  |  | — |
Residential CMO and MBS(1) | 512,049 |  |  | — |  |  | 512,049 |  |  | — |
Commercial CMO and MBS(1) | 504,258 |  |  | — |  |  | 504,258 |  |  | — |
Corporate obligations | 7,613 |  |  | — |  |  | 7,613 |  |  | — |
Other asset-backed securities | 17,158 |  |  | — |  |  | 17,158 |  |  | — |
Total investment securities available for sale | 1,134,353 |  |  | — |  |  | 1,134,353 |  |  | — |
Equity security | 314 |  |  | 314 |  |  | — |  |  | — |
Derivative assets - interest rate swaps | 23,195 |  |  | — |  |  | 23,195 |  |  | — |
Liabilities |  |  |  |  |  |  |
Derivative liabilities - interest rate swaps | $ | 23,195 |  |  | $ | — |  |  | $ | 23,195 |  |  | $ | — |

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
Nonrecurring Basis
The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following tables present assets measured at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023:

| Fair Value at September 30, 2024
| Total |  | Level 1 |  | Level 2 |  | Level 3
| (Dollars in thousands)
Collateral-dependent loans: |  |  |  |  |  |  |
Commercial business: |  |  |  |  |  |  |
Owner-occupied CRE | $ | 2,449 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,449 |
Total assets measured at fair value on a nonrecurring basis | $ | 2,449 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,449 |

| Fair Value at December 31, 2023
| Total |  | Level 1 |  | Level 2 |  | Level 3
Collateral-dependent loans: |  |  |  |  |  |  |
Owner-occupied CRE | $ | 173 |  |  | $ | — |  |  | $ | — |  |  | $ | 173 |
Total assets measured at fair value on a nonrecurring basis | $ | 173 |  |  | $ | — |  |  | $ | — |  |  | $ | 173 |

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

| September 30, 2024
| Fair Value |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range of Inputs |  | Weighted Average (1)
| (Dollars in thousands)
Collateral-dependent loans | $ | 2,449 |  |  | Market approach |  | Adjustments to reflect current conditions and selling costs |  | 10.0% - 10.0% |  | 10.0%

| December 31, 2023
| Fair Value |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range of Inputs |  | Weighted Average (1)
| (Dollars in thousands)
Collateral-dependent loans | $ | 173 |  |  | Market approach |  | Adjustments to reflect current conditions and selling costs |  | 16.5% - 16.5% |  | 16.5%

(1) Weighted by net discount to net appraisal fair value
(b) Fair Value of Financial Instruments
Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.
The following tables present the carrying value of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated:

| September 30, 2024
| Carrying Value |  | Fair Value |  | Fair Value Measurements Using:
|  | Level 1 |  | Level 2 |  | Level 3
| (Dollars in thousands)
Financial Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 175,572 |  |  | $ | 175,572 |  |  | $ | 175,572 |  |  | $ | — |  |  | $ | — |
Investment securities available for sale | 852,779 |  |  | 852,779 |  |  | — |  |  | 852,779 |  |  | — |
Investment securities held to maturity | 719,400 |  |  | 661,696 |  |  | — |  |  | 661,696 |  |  | — |
Loans receivable, net | 4,628,088 |  |  | 4,598,146 |  |  | — |  |  | — |  |  | 4,598,146 |
Accrued interest receivable | 20,102 |  |  | 20,102 |  |  | 209 |  |  | 5,138 |  |  | 14,755 |
Derivative assets - interest rate swaps | 17,366 |  |  | 17,366 |  |  | — |  |  | 17,366 |  |  | — |
Equity security | 287 |  |  | 287 |  |  | 287 |  |  | — |  |  | — |
Financial Liabilities: |  |  |  |  |  |  |  |  |
Non-maturity deposits | $ | 4,762,932 |  |  | $ | 4,762,932 |  |  | $ | 4,762,932 |  |  | $ | — |  |  | $ | — |
Certificates of deposit | 945,560 |  |  | 956,950 |  |  | — |  |  | 956,950 |  |  | — |
Borrowings | 382,000 |  |  | 382,457 |  |  | — |  |  | 382,457 |  |  | — |
Junior subordinated debentures | 21,985 |  |  | 19,677 |  |  | — |  |  | — |  |  | 19,677 |
Accrued interest payable | 3,909 |  |  | 3,909 |  |  | 58 |  |  | 3,778 |  |  | 73 |
Derivative liabilities - interest rate swaps | 17,366 |  |  | 17,366 |  |  | — |  |  | 17,366 |  |  | — |

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| December 31, 2023
| Carrying Value |  | Fair Value |  | Fair Value Measurements Using:
|  | Level 1 |  | Level 2 |  | Level 3
| (Dollars in thousands)
Financial Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 224,973 |  |  | $ | 224,973 |  |  | $ | 224,973 |  |  | $ | — |  |  | $ | — |
Investment securities available for sale | 1,134,353 |  |  | 1,134,353 |  |  | — |  |  | 1,134,353 |  |  | — |
Investment securities held to maturity | 739,442 |  |  | 662,450 |  |  | — |  |  | 662,450 |  |  | — |
Loans receivable, net | 4,287,628 |  |  | 4,159,513 |  |  | — |  |  | — |  |  | 4,159,513 |
Accrued interest receivable | 19,518 |  |  | 19,518 |  |  | 96 |  |  | 6,127 |  |  | 13,295 |
Derivative assets - interest rate swaps | 23,195 |  |  | 23,195 |  |  | — |  |  | 23,195 |  |  | — |
Equity security | 314 |  |  | 314 |  |  | 314 |  |  | — |  |  | — |
Financial Liabilities: |  |  |  |  |  |  |  |  |
Non-maturity deposits | $ | 4,906,899 |  |  | $ | 4,906,899 |  |  | $ | 4,906,899 |  |  | $ | — |  |  | $ | — |
Certificates of deposit | 692,973 |  |  | 701,029 |  |  | — |  |  | 701,029 |  |  | — |
Borrowings | 500,000 |  |  | 499,861 |  |  | — |  |  | 499,861 |  |  | — |
Junior subordinated debentures | 21,765 |  |  | 19,750 |  |  | — |  |  | — |  |  | 19,750 |
Accrued interest payable | 13,026 |  |  | 13,026 |  |  | 63 |  |  | 12,880 |  |  | 83 |
Derivative liabilities - interest rate swaps | 23,195 |  |  | 23,195 |  |  | — |  |  | 23,195 |  |  | — |

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

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
| (Dollars in thousands) |  |
Income tax expense at Federal statutory rate | $ | 2,744 |  |  | $ | 4,577 |  |  | $ | 7,545 |  |  | $ | 13,931 |
State tax, net of Federal tax benefit | 118 |  |  | 196 |  |  | 326 |  |  | 597 |
Tax-exempt instruments | (240) |  |  | (344) |  |  | (710) |  |  | (961) |
LIHTC | (991) |  |  | (615) |  |  | (2,975) |  |  | (2,115) |
Effects of BOLI | (168) |  |  | (169) |  |  | (534) |  |  | (442) |
Restricted stock unit excess liability | — |  |  | 2 |  |  | 267 |  |  | 106 |
Other, net | 180 |  |  | (69) |  |  | 680 |  |  | (300) |
Income tax expense | $ | 1,643 |  |  | $ | 3,578 |  |  | $ | 4,599 |  |  | $ | 10,816 |

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LIHTC Investments
The CRA encourages banks to meet the credit needs of their communities, particularly low- and moderate-income individuals and neighborhoods. The Company invests in certain affordable housing projects in the form of ownership interests in limited partnerships or limited liability companies that qualify for CRA consideration and tax credits. These entities are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the U.S. To fully utilize the available tax credits, each of these entities must meet the regulatory affordable housing requirements for a 15-year minimum compliance period. For the Company’s accounting policies on tax credit investments, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2023 Annual Form 10-K.
Tax credit investments are reported in "Prepaid expenses and other assets" and the unfunded contingent commitments related to these investments as "Accrued expenses and other liabilities" on the Company’s Condensed Consolidated Statements of Financial Condition. The Company accounts for LIHTC investments using the proportional amortization method. Under the proportional amortization method, such investment is amortized in proportion to the allocation of tax benefits received in each period, and the investment amortization and the tax benefits are presented on a net basis within “Income tax expense” on our Condensed Consolidated Statements of Income and as a component within "Other" cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows.
The carrying values of LIHTC investments were $192.3 million and $207.3 million as of September 30, 2024 and December 31, 2023, respectively. The proportional amortization for LIHTC during the three months ended September 30, 2024 and 2023 was $4.9 million and $4.2 million, respectively, and during the nine months ended September 30, 2024 and 2023 was $14.9 million and $12.3 million, respectively.
There were no significant modifications or events that resulted in a change in the nature or change in the underlying project for LIHTC investments at September 30, 2024 or December 31, 2023.
(10)Commitments and Contingencies
In the ordinary course of business, the Company may enter into various types of transactions that include commitments to extend credit that are not included in its unaudited Condensed Consolidated Financial Statements. The Company applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The majority of the commitments presented below are variable rate. Loan commitments can be either revolving or non-revolving. The Company’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.
The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:

| September 30, 2024 |  | December 31, 2023
| (Dollars in thousands)
Commercial business: |  |  |
Commercial and industrial | $ | 577,763 |  |  | $ | 542,975 |
Owner-occupied CRE | 3,352 |  |  | 8,731 |
Non-owner occupied CRE | 14,851 |  |  | 26,534 |
Total commercial business | 595,966 |  |  | 578,240 |
Real estate construction and land development: |  |  |
Residential | 31,699 |  |  | 46,924 |
Commercial and multifamily | 167,561 |  |  | 308,206 |
Total real estate construction and land development | 199,260 |  |  | 355,130 |
Consumer | 347,134 |  |  | 335,729 |
Total outstanding commitments | $ | 1,142,360 |  |  | $ | 1,269,099 |

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three and nine months ended September 30, 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
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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 decrease d $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 t o $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
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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:

| Three Months Ended September 30, |  |  |  |  |  |
| 2024 |  | 2023 |  | Change
| Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate(1) |  | Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate(1) |  | Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate(1)
| (Dollars in thousands)
Interest Earning Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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:
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| Increase (Decrease) Due to Changes In:
| Volume |  | Yield/Rate |  | Total
| (Dollars in thousands)
Interest Earning Assets: |  |  |  |  |
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:

| Nine Months Ended September 30, |  |  |  |  |  |
| 2024 |  | 2023 |  | Change
| Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate(1) |  | Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate |  | Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate
| (Dollars in thousands)
Interest Earning Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans receivable, net (2)(3) | $ | 4,425,234 |  |  | $ | 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 |

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| Nine Months Ended September 30, |  |  |  |  |  |
| 2024 |  | 2023 |  | Change
| Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate(1) |  | Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate |  | Average Balance(1) |  | Interest Earned/ Paid |  | Average Yield/ Rate
| (Dollars in thousands)
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:

| Increase (Decrease) Due to Changes In:
| Volume |  | Yield/Rate |  | Total
| (Dollars in thousands)
Interest Earning Assets: |  |  |  |  |
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) |

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| Increase (Decrease) Due to Changes In:
| Volume |  | Yield/Rate |  | Total
| (Dollars in thousands)
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:

| Three Months Ended September 30, |  | Change
| 2024 |  | 2023 |  | $ |  | %
| (Dollars in thousands)
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
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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:

| Nine Months Ended September 30, |  | Change
| 2024 |  | 2023 |  | $ |  | %
| (Dollars in thousands)
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 losse s 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 losse s 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:

| Three Months Ended September 30, |  | Change
| 2024 |  | 2023 |  | $ |  | %
| (Dollars in thousands)
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
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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:

| Nine Months Ended September 30, |  | Change
| 2024 |  | 2023 |  | $ |  | %
| (Dollars in thousands)
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) | %

Nonintere st 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:

| Three Months Ended September 30, |  | Change
| 2024 |  | 2023 |  | $ |  | %
| (Dollars in thousands)
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.
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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:

| Nine Months Ended September 30, |  | Change
| 2024 |  | 2023 |  | $ |  | %
| (Dollars in thousands)
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:

| Three Months Ended September 30, |  | Change
| 2024 |  | 2023 |  | $ |  | %
| (Dollars in thousands)
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:

| Nine Months Ended September 30, |  | Change
| 2024 |  | 2023 |  | $ |  | %
| (Dollars in thousands)
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) | %

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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:

| September 30, 2024 |  | December 31, 2023 |  | Change
|  |  | $ |  | %
| (Dollars in thousands)
Assets |  |  |  |  |  |  |
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.
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The following table provides information regarding our investment securities at the dates indicated:

| September 30, 2024 |  | December 31, 2023 |  | Change
| Balance |  | % of Total |  | Balance |  | % of Total |  | $ |  | %
| (Dollars in thousands)
Investment securities available for sale, at fair value:
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:

| September 30, 2024 |  | December 31, 2023 |  | Change
| Amortized Cost |  | % of Loans Receivable |  | Amortized Cost |  | % of Loans Receivable |  | $ |  | %
| (Dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |
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 |

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| September 30, 2024 |  | December 31, 2023 |  | Change
| Amortized Cost |  | % of Loans Receivable |  | Amortized Cost |  | % of Loans Receivable |  | $ |  | %
| (Dollars in thousands)
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:

| September 30, 2024 |  | December 31, 2023 |  | Change
| Amortized Cost |  | % of CRE Loans |  | Amortized Cost |  | % of CRE Loans |  | $ |  | %
| (Dollars in thousands)
Owner occupied and non-owner occupied CRE loans by collateral type:
Office | $ | 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 l argest 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:

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

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| 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:

| At or For the Nine Months Ended September 30, |  |
| 2024 |  | 2023 |  | Change
| (Dollars in thousands)
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.
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The ACL on l oans 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:

| September 30, 2024 |  | December 31, 2023 |  |  |  |
| ACL on Loans |  | ACL as a % of Loans in Loan Category |  | % of Loans in Loan Category to Total Loans |  | ACL on Loans |  | ACL as a % of Loans in Loan Category |  | % of Loans in Loan Category to Total Loans |  |  |  |
| (Dollars in thousands)
Commercial business | $ | 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:

| September 30, 2024 |  | December 31, 2023 |  | Change
| Balance |  | % of Total Deposits |  | Balance |  | % of Total Deposits |  | $ |  | %
| (Dollars in thousands)
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.
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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:

| Actual |  | Adequately Capitalized |  | Well-Capitalized (1)
| (Dollars in thousands)
September 30, 2024 |
Total capital ratio |  |  |  |  |  |  |  |  |  |  |
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 |

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| Actual |  | Adequately Capitalized |  | Well-Capitalized (1)
| (Dollars in thousands)
December 31, 2023 |
Total capital ratio |  |  |  |  |  |  |  |  |  |  |
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:

| September 30, 2024 |  | December 31, 2023
| (Dollars in thousands)
On-balance sheet liquidity |  |  |
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 |

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| September 30, 2024 |  | December 31, 2023
| (Dollars in thousands)
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through our exposure to market interest rates, equity prices and credit spreads. Our 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:

| September 30, 2024 |  | December 31, 2023
| $ Change in Net Interest Income |  | % Change in Net Interest Income |  | $ Change in Net Interest Income |  | % Change in Net Interest Income
Change in Interest Rates (Basis Points) | (Dollars in thousands)
+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) | — |  |  | — |  |  | — |  |  | — |

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| September 30, 2024 |  | December 31, 2023
| $ Change in Net Interest Income |  | % Change in Net Interest Income |  | $ Change in Net Interest Income |  | % Change in Net Interest Income
Change in Interest Rates (Basis Points) | (Dollars in thousands)
-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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in Item 1A of the Company’s 2023 Annual Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
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(c) Repurchase Programs
The following table provides information about repurchases of common stock by the Company during the three months ended September 30, 2024:

Period | Total Number of Shares Purchased (1) |  | Average Price Paid Per Share (1) |  | Total number of shares purchased as part of publicly announced plans or programs |  | Maximum number of shares that may be purchased at period end under the program
July 1, 2024—July 31, 2024 | — |  |  | $ | — |  |  | — |  |  | 1,502,444 |
August 1, 2024— August 31, 2024 | 301,992 |  |  | 21.54 |  |  | 301,992 |  |  | 1,200,452 |
September 1, 2024—September 30, 2024 | 46,389 |  |  | 22.06 |  |  | 45,000 |  |  | 1,155,452 |
Total | 348,381 |  |  | $ | 21.61 |  |  |  |  |

(1)Of the common shares repurchased by the Company between July 1, 2024 and September 30, 2024, a total of 1,389 shares represented the cancellation of stock to pay withholding taxes on vested restricted stock units and were not repurchased pursuant to the publicly announced stock repurchase program.
On April 24, 2024, the Company's Board of Directors approved the repurchase of up to 5% of the Company's outstanding common shares or approximately 1,734,492 shares. The new stock repurchase program supersedes 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
(a) None
(b) None
(c) During the three months ended September 30, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
ITEM 6. EXHIBITS

|  |  |  | Incorporated by Reference
Exhibit No. |  | Description of Exhibit |  | Form |  | Exhibit |  | Filing Date/Period End Date
3.1 |  | Amended and Restated Articles of Incorporation of Heritage Financial Corporation |  | 8-K |  | 3.1(B) |  | 05/18/2010
3.2 |  | Amendment to Amended and Restated Articles of Incorporation of Heritage Financial Corporation |  | S-14A |  | _ |  | 03/18/2011
3.3 |  | Amended and restated Bylaws of Heritage Financial Corporation |  | 8-K |  | 3.3 |  | 06/30/2020
10.32* |  | Transitional Employment Agreement between Heritage Financial Corporation and Jeffrey J. Deuel dated July 1, 2024 |  | 8-K |  | 10.1 |  | 07/01/2024
10.33* |  | Employment Agreement between Heritage Financial Corporation and Bryan D. McDonald dated July 1, 2024 |  | 8-K |  | 10.2 |  | 07/01/2024
10.34* |  | Employment Agreement between Heritage Financial Corporation and Nicholas Bley, dated July 23, 2024 |  | 8-K |  | 10.3 |  | 10/23/2024
31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) |  |  |  |  |  |
31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) |  |  |  |  |  |

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|  |  |  | Incorporated by Reference
Exhibit No. |  | Description of Exhibit |  | Form |  | Exhibit |  | Filing Date/Period End Date
32.1 |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) |  |  |  |  |  |
101.INS |  | XBRL Instance Document (1) |  |  |  |  |  |
101.SCH |  | XBRL Taxonomy Extension Schema Document (1) |  |  |  |  |  |
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document (1) |  |  |  |  |  |
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document (1) |  |  |  |  |  |
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document (1) |  |  |  |  |  |
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document (1) |  |  |  |  |  |
104 |  | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |  |  |  |  |  |

* Indicates management contract or compensatory plan or arrangement.
(1) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | HERITAGE FINANCIAL CORPORATION
Date: |  |
November 6, 2024 |  | /S/ JEFFREY J. DEUEL
|  | Jeffrey J. Deuel
|  | Chief Executive Officer
|  | (Principal Executive Officer)
Date: |  |
November 6, 2024 |  | /S/ DONALD J. HINSON
|  | Donald J. Hinson
|  | Executive Vice President and Chief Financial Officer
|  | (Principal Financial Officer)

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