UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 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 July 31, 2024, there were 34,496,197 shares of the registrant's common stock, no par value per share, outstanding.

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

June 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 JUNE 30, 2024 AND DECEMBER 31, 2023		6
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023		7
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023		8
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023		9
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND 2023		11
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		13
	NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	13
	NOTE 2.	INVESTMENT SECURITIES	14
	NOTE 3.	LOANS RECEIVABLE	17
	NOTE 4.	ALLOWANCE FOR CREDIT LOSSES ON LOANS	26
	NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	29
	NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	30
	NOTE 7.	STOCKHOLDERS’ EQUITY	30
	NOTE 8.	FAIR VALUE MEASUREMENTS	31
	NOTE 9.	INCOME TAXES	35
	NOTE 10.	COMMITMENTS AND CONTINGENCIES	35
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		36
	OVERVIEW		36
	RESULTS OF OPERATIONS		37
		NET INCOME OVERVIEW	37
		NET INTEREST INCOME AND MARGIN OVERVIEW	37
		PROVISION FOR CREDIT LOSSES OVERVIEW	41
		NONINTEREST INCOME OVERVIEW	42
		NONINTEREST EXPENSE OVERVIEW	42
		INCOME TAX EXPENSE OVERVIEW	44
	FINANCIAL CONDITION OVERVIEW		44
		INVESTMENT ACTIVITIES OVERVIEW	45
		LOAN PORTFOLIO OVERVIEW	46
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	47
		DEPOSITS OVERVIEW	48
		BORROWINGS OVERVIEW	48
		STOCKHOLDERS' EQUITY OVERVIEW	49
	REGULATORY REQUIREMENTS OVERVIEW		49
	LIQUIDITY AND CAPITAL RESOURCES		50
	CRITICAL ACCOUNTING ESTIMATES		51
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		51
ITEM 4.	CONTROLS AND PROCEDURES		52

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PART II.	OTHER INFORMATION	52
ITEM 1.	LEGAL PROCEEDINGS	52
ITEM 1A.	RISK FACTORS	52
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	53
ITEM 4.	MINE SAFETY DISCLOSURES	53
ITEM 5.	OTHER INFORMATION	53
ITEM 6.	EXHIBITS	53
	SIGNATURES	54

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
FRB	Federal Reserve Bank of San Francisco
FHLB	Federal Home Loan Bank of Des Moines
GAAP	U.S. Generally Accepted Accounting Principles
LIBOR	London Interbank Offering Rate
LIHTC	Low-Income Housing Tax Credit
MBS	Mortgage-Backed 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

3

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:

•changes in economic conditions generally, and in the financial services industry, 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 employment levels, labor shortages, a potential recession or slowed economic growth, or increased political instability due to acts of war or terrorism;

•changes in the interest rate environment, including prior increases in the Federal Reserve benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;

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

•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;

•potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election;

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

•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;

•credit and interest rate risks associated with our business, customers, borrowings, repayment, investment, and deposit practices;

•the concentration of large deposits from certain clients, who have balances above current FDIC insurance limits;

•our ability to attract and retain deposits;

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

•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 overall health of local and national real estate markets;

•concentrations within our loan portfolio;

•the level of nonperforming assets on our balance sheet;

•disruptions, fraudulent activity, 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, 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;

•the composition of our executive management team and our ability to attract and retain key personnel;

•our ability to control operating costs and expenses;

•effects of critical accounting policies and judgments or new and revised accounting policies and practices as may be adopted by the financial institution regulatory agencies or the FASB, 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 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;

•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;

4

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

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

•increased competitive pressures among financial service companies;

•changes in consumer spending, borrowing and savings habits;

•our ability to pay dividends on our common stock;

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

•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, as well as the negative impact it may have on our customers and their businesses;

•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)

	June 30, 2024		December 31, 2023
ASSETS
Cash on hand and in banks	$	55,469	$	55,851
Interest earning deposits	58,288		169,122
Cash and cash equivalents	113,757		224,973
Investment securities available for sale, at fair value, net (amortized cost of $1,022,211 and $1,227,787, respectively)	931,248		1,134,353
Investment securities held to maturity, at amortized cost, net (fair value of $642,051 and $662,450, respectively)	727,342		739,442
Total investment securities	1,658,590		1,873,795
Loans receivable	4,532,615		4,335,627
Allowance for credit losses on loans	(51,219)		(47,999)
Loans receivable, net	4,481,396		4,287,628
Premises and equipment, net	73,218		74,899
Federal Home Loan Bank stock, at cost	22,303		4,186
Bank owned life insurance	126,420		125,655
Accrued interest receivable	19,855		19,518
Prepaid expenses and other assets	319,428		318,571
Other intangible assets, net	3,951		4,793
Goodwill	240,939		240,939
Total assets	$	7,059,857	$	7,174,957
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits	$	1,599,367	$	1,715,847
Interest bearing deposits	3,916,285		3,884,025
Total deposits	5,515,652		5,599,872
Borrowings	500,000		500,000
Junior subordinated debentures	21,912		21,765
Accrued expenses and other liabilities	171,786		200,059
Total liabilities	6,209,350		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; 34,496,197 and 34,906,233 shares issued and outstanding, respectively	541,294		549,748
Retained earnings	379,714		375,989
Accumulated other comprehensive loss, net	(70,501)		(72,476)
Total stockholders’ equity	850,507		853,261
Total liabilities and stockholders’ equity	$	7,059,857	$	7,174,957

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

6

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except shares and per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
INTEREST INCOME:
Interest and fees on loans	$	60,608	$	53,623	$	118,470	$	104,073
Taxable interest on investment securities	14,156		14,774		28,990		29,431
Nontaxable interest on investment securities	165		520		346		1,106
Interest on interest earning deposits	1,653		1,154		3,129		2,126
Total interest income	76,582		70,071		150,935		136,736
INTEREST EXPENSE:
Deposits	18,453		8,607		34,841		13,135
Junior subordinated debentures	539		499		1,086		981
Securities sold under agreement to repurchase	—		63		—		110
Borrowings	6,477		5,078		12,365		6,844
Total interest expense	25,469		14,247		48,292		21,070
Net interest income	51,113		55,824		102,643		115,666
Provision for credit losses	1,268		1,909		2,660		3,734
Net interest income after provision for credit losses	49,845		53,915		99,983		111,932
NONINTEREST INCOME:
Service charges and other fees	2,817		2,682		5,605		5,306
Card revenue	1,930		2,123		3,769		4,123
Loss on sale of investment securities, net	(1,921)		—		(11,894)		(286)
Gain on sale of loans, net	—		101		26		150
Interest rate swap fees	52		115		52		168
Bank owned life insurance income	931		837		1,851		1,546
Gain on sale of other assets, net	49		—		49		2
Other income	1,388		1,423		2,888		4,530
Total noninterest income	5,246		7,281		2,346		15,539
NONINTEREST EXPENSE:
Compensation and employee benefits	24,448		24,781		49,924		50,317
Occupancy and equipment	4,765		4,666		9,697		9,558
Data processing	3,785		4,500		7,322		8,842
Marketing	244		441		455		843
Professional services	795		751		1,362		1,379
State/municipal business and use taxes	1,160		1,054		2,460		2,062
Federal deposit insurance premium	812		797		1,607		1,647
Amortization of intangible assets	421		623		842		1,246
Other expense	2,666		3,712		5,797		7,036
Total noninterest expense	39,096		41,325		79,466		82,930
Income before income taxes	15,995		19,871		22,863		44,541
Income tax expense	1,836		3,025		2,956		7,238
Net income	$	14,159	$	16,846	$	19,907	$	37,303
Basic earnings per share	$	0.41	$	0.48	$	0.58	$	1.06
Diluted earnings per share	$	0.41	$	0.48	$	0.57	$	1.06
Dividends declared per share	$	0.23	$	0.22	$	0.46	$	0.44
Average number of basic shares outstanding	34,609,900		35,058,155		34,717,685		35,083,133
Average number of diluted shares outstanding	34,919,395		35,126,590		35,127,407		35,348,268

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 June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net Income	$	14,159	$	16,846	$	19,907	$	37,303
Change in fair value of investment securities available for sale, net of tax of $(355), $(4,102), $(2,262), and $415 respectively	(1,250)		(14,595)		(7,161)		2,295
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(18), $(18), $(35), and $(34) respectively	(62)		(63)		(126)		(123)
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax benefit of $425, $0, $2,632, and $63 respectively	1,496		—		9,262		223
Other comprehensive income (loss)	184		(14,658)		1,975		2,395
Comprehensive income	$	14,343	$	2,188	$	21,882	$	39,698

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 June 30, 2024
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at March 31, 2024	34,689,843	$	544,636	$	373,629	$	(70,685)	$	847,580
Restricted stock units vested	46,507							—
Stock-based compensation expense		1,064						1,064
Common stock repurchased	(240,153)	(4,406)						(4,406)
Net income				14,159				14,159
Other comprehensive income, net of tax						184		184
Cash dividends declared on common stock ($0.23 per share)				(8,074)				(8,074)
Balance at June 30, 2024	34,496,197	$	541,294	$	379,714	$	(70,501)	$	850,507

	Six Months Ended June 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	159,695							—
Stock-based compensation expense		2,070						2,070
Common stock repurchased	(569,731)	(10,524)						(10,524)
Net income				19,907				19,907
Other comprehensive income, net of tax						1,975		1,975
Cash dividends declared on common stock ($0.46 per share)				(16,182)				(16,182)
Balance at June 30, 2024	34,496,197	$	541,294	$	379,714	$	(70,501)	$	850,507

	Three Months Ended June 30, 2023
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at March 31, 2023	35,108,120	$	550,869	$	358,010	$	(82,797)	$	826,082
Restricted stock units vested	38,138							—
Stock-based compensation expense		985						985
Common stock repurchased	(98,458)	(1,751)						(1,751)
Net income				16,846				16,846
Other comprehensive loss, net of tax						(14,658)		(14,658)
Cash dividends declared on common stock ($0.22 per share)				(7,771)				(7,771)
Balance at June 30, 2023	35,047,800	$	550,103	$	367,085	$	(97,455)	$	819,733

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	Six Months Ended June 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	154,640							—
Stock-based compensation expense		2,084						2,084
Common stock repurchased	(213,537)	(4,378)						(4,378)
Net income				37,303				37,303
Other comprehensive income, net of tax						2,395		2,395
Cash dividends declared on common stock ($0.44 per share)				(15,564)				(15,564)
Balance at June 30, 2023	35,047,800	$	550,103	$	367,085	$	(97,455)	$	819,733

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)

	Six Months Ended June 30,
	2024		2023
Cash flows from operating activities:
Net income	$	19,907	$	37,303
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	1,060		1,737
Provision for credit losses	2,660		3,734
Stock-based compensation expense	2,070		2,084
Amortization of intangible assets	842		1,246
Origination of mortgage loans held for sale	(1,318)		(6,511)
Proceeds from sale of mortgage loans held for sale	1,344		5,909
Bank owned life insurance income	(1,851)		(1,546)
Gain on sale of mortgage loans held for sale, net	(26)		(150)
Loss on sale of investment securities available for sale, net	11,894		286
Other	(16,892)		3,371
Net cash provided by operating activities	19,690		47,463
Cash flows from investing activities:
Loan originations and purchases, net of payments	(194,853)		(198,937)
Maturities and repayments of investment securities available for sale	56,579		49,733
Maturities and repayments of investment securities held to maturity	11,662		11,673
Purchase of investment securities available for sale	(33,132)		(14,994)
Purchase of premises and equipment	(1,716)		(5,477)
Purchase of bank owned life insurance	(39)		—
Proceeds from bank owned life insurance death benefit	590		—
Purchases of Federal Home Loan Bank stock	(58,829)		(44,192)
Proceeds from sales of investment securities available for sale	170,893		22,688
Proceeds from redemption of Federal Home Loan Bank stock	40,712		44,735
Proceeds from sales of premises and equipment	50		2
Capital contributions to LIHTC investments	(12,075)		(419)
Net cash used by investing activities	(20,158)		(135,188)
Cash flows from financing activities:
Net decrease in deposits	(84,220)		(329,297)
Proceeds from borrowings	1,319,710		1,754,800
Repayment of borrowings	(1,319,710)		(1,304,800)
Common stock cash dividends paid	(16,004)		(15,430)
Net decrease in securities sold under agreement to repurchase	—		(8,382)
Repurchase of common stock	(10,524)		(4,378)
Net cash (used) provided by financing activities	(110,748)		92,513
Net (decrease) increase in cash and cash equivalents	(111,216)		4,788
Cash and cash equivalents at beginning of period	224,973		103,590
Cash and cash equivalents at end of period	$	113,757	$	108,378
Supplemental disclosures of cash flow information:
Cash paid for interest	$	58,231	$	17,587
Cash paid for income taxes, net of refunds	225		1,384

11

	Six Months Ended June 30,
	2024	2023
Supplemental non-cash disclosures of cash flow information:
Investment in LIHTC partnership and related funding commitment	103	47
Right of use assets obtained in exchange for new operating lease liabilities	2,323	6,111
Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued	535	700

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

12

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 first mortgage 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 six months ended June 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.

(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 six months ended June 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 majority of the Company’s instruments indexed to LIBOR were transferred to another index during the year ended December 31, 2023. The remaining instruments including investments that are either in the process of transition or will transition to a new index at the next repricing date.

FASB ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), was issued in February 2023. The amendments in this ASU permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the statement of operations as a component of income tax expense (benefit). The amendments also require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understand the investments that generate income tax credits and other income tax benefits from a tax credit program. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption

13

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 June 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:

	June 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	$	14,945	$	—	$	(2,471)	$	12,474
Municipal securities	82,309		6		(12,595)		69,720
Residential CMO and MBS(1)	489,451		627		(43,610)		446,468
Commercial CMO and MBS(1)	411,465		113		(32,810)		378,768
Corporate obligations	11,672		9		(297)		11,384
Other asset-backed securities	12,369		76		(11)		12,434
Total	$	1,022,211	$	831	$	(91,794)	$	931,248

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

	June 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	$	151,146	$	—	$	(29,378)	$	121,768
Residential CMO and MBS(1)	256,742		—		(18,761)		237,981
Commercial CMO and MBS(1)	319,454		—		(37,152)		282,302
Total	$	727,342	$	—	$	(85,291)	$	642,051

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

14

	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.

	June 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	$	1,918	$	1,913	$	—	$	—
Due after one year through five years	9,231		8,648		—		—
Due after five years through ten years	36,179		33,125		93,277		77,764
Due after ten years	61,598		49,892		57,869		44,004
Total investment securities due at a single maturity date	108,926		93,578		151,146		121,768
MBS(1)	913,285		837,670		576,196		520,283
Total investment securities	$	1,022,211	$	931,248	$	727,342	$	642,051

(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 June 30, 2024 and December 31, 2023.

15

(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:

	June 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	$	—	$	—	$	12,474	$	(2,471)	$	12,474	$	(2,471)
Municipal securities	3,125		(80)		62,284		(12,515)		65,409		(12,595)
Residential CMO and MBS(1)	26,652		(32)		269,370		(43,578)		296,022		(43,610)
Commercial CMO and MBS(1)	5,702		(60)		352,855		(32,750)		358,557		(32,810)
Corporate obligations	4,699		(145)		3,848		(152)		8,547		(297)
Other asset-backed securities	1,722		(10)		268		(1)		1,990		(11)
Total	$	41,900	$	(327)	$	701,099	$	(91,467)	$	742,999	$	(91,794)

(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 June 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 June 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 June 30, 2024 and December 31, 2023.

The Company also evaluated investment securities held to maturity for current expected credit losses as of June 30, 2024 and December 31, 2023. There were no investment securities held to maturity classified as nonaccrual or past due as of June 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 June 30, 2024 or December 31, 2023.

16

(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 June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Gross realized gains	$	—	$	—	$	—	$	36
Gross realized losses	(1,921)		—		(11,894)		(322)
Net realized losses	$	(1,921)	$	—	$	(11,894)	$	(286)

(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:

	June 30, 2024				December 31, 2023
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
State and local governments public deposits	$	236,818	$	220,885	$	238,060	$	224,879
FRB	441,429		377,504		845,098		742,197
Other securities pledged	53,884		48,089		54,636		49,032
Total	$	732,131	$	646,478	$	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 $3.3 million and $3.8 million at June 30, 2024 and December 31, 2023, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $2.3 million at both June 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 six months ended June 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:

	June 30, 2024		December 31, 2023
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	779,495	$	718,291
Owner-occupied CRE	953,518		958,620

17

	June 30, 2024		December 31, 2023
	(Dollars in thousands)
Non-owner occupied CRE	1,759,605		1,697,574
Total commercial business	3,492,618		3,374,485
Residential real estate	413,358		375,342
Real estate construction and land development:
Residential	80,451		78,610
Commercial and multifamily	378,695		335,819
Total real estate construction and land development	459,146		414,429
Consumer	167,493		171,371
Loans receivable	4,532,615		4,335,627
ACL on loans	(51,219)		(47,999)
Loans receivable, net	$	4,481,396	$	4,287,628
Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans	$	(1,614)	$	(1,923)
Unamortized net deferred fee	$	(9,770)	$	(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 June 30, 2024 and December 31, 2023.

18

The following tables present the amortized cost of loans receivable by risk grade and origination year at the dates indicated:

	June 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	$	90,134	$	136,288	$	135,978	$	60,577	$	60,540	$	96,459	$	141,210	$	1,069	$	722,255
SM	—		—		6,782		162		1,219		5,584		10,774		5,735		30,256
SS	—		270		906		2,105		3,417		6,607		11,432		2,247		26,984
Total	90,134		136,558		143,666		62,844		65,176		108,650		163,416		9,051		779,495
Owner-occupied CRE
Pass	43,124		83,818		137,811		151,789		81,835		421,646		—		—		920,023
SM	—		—		—		989		886		9,723		—		—		11,598
SS	—		—		—		2,990		646		18,261		—		—		21,897
Total	43,124		83,818		137,811		155,768		83,367		449,630		—		—		953,518
Non-owner occupied CRE
Pass	53,278		167,833		282,838		218,114		155,669		831,270		—		—		1,709,002
SM	—		—		—		8,080		—		33,003		—		—		41,083
SS	—		—		591		—		—		8,929		—		—		9,520
Total	53,278		167,833		283,429		226,194		155,669		873,202		—		—		1,759,605
Total commercial business
Pass	186,536		387,939		556,627		430,480		298,044		1,349,375		141,210		1,069		3,351,280
SM	—		—		6,782		9,231		2,105		48,310		10,774		5,735		82,937
SS	—		270		1,497		5,095		4,063		33,797		11,432		2,247		58,401
Total	186,536		388,209		564,906		444,806		304,212		1,431,482		163,416		9,051		3,492,618
Residential real estate
Pass	33,850		50,288		138,823		136,304		23,679		29,464		—		—		412,408
SS	—		—		—		794		—		156		—		—		950
Total	33,850		50,288		138,823		137,098		23,679		29,620		—		—		413,358
Real estate construction and land development:
Residential
Pass	14,289		41,324		15,930		17		1,044		1,206		1		—		73,811
SS	—		1,000		—		5,640		—		—		—		—		6,640
Total	14,289		42,324		15,930		5,657		1,044		1,206		1		—		80,451
Commercial and multifamily
Pass	8,428		96,772		201,269		42,644		116		3,567		—		—		352,796
SM	—		—		—		—		4,792		5,965		—		—		10,757
SS	—		—		—		15,142		—		—		—		—		15,142
Total	8,428		96,772		201,269		57,786		4,908		9,532		—		—		378,695
Total real estate construction and land development
Pass	22,717		138,096		217,199		42,661		1,160		4,773		1		—		426,607
SM	—		—		—		—		4,792		5,965		—		—		10,757
SS	—		1,000		—		20,782		—		—		—		—		21,782
Total	22,717		139,096		217,199		63,443		5,952		10,738		1		—		459,146
Consumer
Pass	1,496		1,640		1,822		386		4,585		26,972		129,029		200		166,130
SS	—		—		25		—		135		781		419		3		1,363
Total	1,496		1,640		1,847		386		4,720		27,753		129,448		203		167,493

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	June 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	244,599		577,963		914,471		609,831		327,468		1,410,584		270,240		1,269		4,356,425
SM	—		—		6,782		9,231		6,897		54,275		10,774		5,735		93,694
SS	—		1,270		1,522		26,671		4,198		34,734		11,851		2,250		82,496
Total	$	244,599	$	579,233	$	922,775	$	645,733	$	338,563	$	1,499,593	$	292,865	$	9,254	$	4,532,615

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

20

	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
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:

	Six Months Ended June 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	$	—	$	312	$	—	$	—	$	—	$	77	$	—	$	389
Consumer	—		6		31		9		20		86		209		361
Total	$	—	$	318	$	31	$	9	$	20	$	163	$	209	$	750

	Six Months Ended June 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	$	—	$	—	$	—	$	61	$	—	$	100	$	—	$	161
Consumer	—		—		12		13		53		70		149		297
Total	$	—	$	—	$	12	$	74	$	53	$	170	$	149	$	458

(d) Nonaccrual Loans

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

	June 30, 2024
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	1,680	$	2,141	$	3,821

21

	June 30, 2024
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(Dollars in thousands)
Owner-occupied CRE	—		5		5
Total	$	1,680	$	2,146	$	3,826

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

	Three Months Ended June 30,
	2024				2023
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	(14)	$	210	$	—	$	2
Owner-occupied CRE	—		144		—		—
Total	$	(14)	$	354	$	—	$	2

	Six Months Ended June 30,
	2024				2023
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	(27)	$	213	$	(14)	$	30
Owner-occupied CRE	—		144		—		—
Total	$	(27)	$	357	$	(14)	$	30

For the three and six months ended June 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:

	June 30, 2024
	30-89 Days		90 Days or Greater		Total Past  Due		Current		Loans Receivable
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	7,230	$	7,628	$	14,858	$	764,637	$	779,495
Owner-occupied CRE	999		—		999		952,519		953,518

22

	June 30, 2024
	30-89 Days		90 Days or Greater		Total Past  Due		Current		Loans Receivable
	(Dollars in thousands)
Non-owner occupied CRE	—		—		—		1,759,605		1,759,605
Total commercial business	8,229		7,628		15,857		3,476,761		3,492,618
Residential real estate	—		—		—		413,358		413,358
Real estate construction and land development:
Residential	—		—		—		80,451		80,451
Commercial and multifamily	—		—		—		378,695		378,695
Total real estate construction and land development	—		—		—		459,146		459,146
Consumer	1,056		160		1,216		166,277		167,493
Total	$	9,285	$	7,788	$	17,073	$	4,515,542	$	4,532,615

	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 $4.3 million and $1.3 million as of June 30, 2024 and December 31, 2023, respectively.

(f) Collateral-dependent Loans

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

	June 30, 2024
	CRE		Farmland		Residential Real Estate		Equipment		Total
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	—	$	389	$	613	$	546	$	1,548
Total	$	—	$	389	$	613	$	546	$	1,548

	December 31, 2023
	CRE		Farmland		Residential Real Estate		Equipment		Total
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	260	$	389	$	621	$	304	$	1,574

23

	December 31, 2023
	CRE		Farmland		Residential Real Estate		Equipment		Total
	(Dollars in thousands)
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 six months ended June 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 June 30, 2024
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable, net
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	16,001	$	16,001	2.05	%
Real estate construction and land development:
Commercial and multifamily	19,934		19,934		5.26
Consumer	14		14		0.01
Total	$	35,949	$	35,949	0.79	%

	Three Months Ended June 30, 2023
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable, net
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	5,899	$	5,899	0.83	%
Real estate construction and land development:
Commercial and multifamily	2,984		2,984		0.97
Consumer	29		29		0.02
Total	$	8,912	$	8,912	0.21	%

	Six Months Ended June 30, 2024
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable, net
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	18,050	$	18,050	2.32	%
Non-owner occupied CRE	2,672		2,672		0.15
Total commercial business	20,722		20,722		0.59

24

	Six Months Ended June 30, 2024
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable, net
	(Dollars in thousands)
Real estate construction and land development:
Commercial and multifamily	19,934		19,934		5.26	%
Consumer	33		33		0.02	%
Total	$	40,689	$	40,689	0.90	%

	Six Months Ended June 30, 2023
	Term Extension		Term Extension & Int. Rate Reduction		Total Modified Loans		% of Modified Loans to Loans Receivable, net
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	5,899	$	—	$	5,899	0.83	%
Non-owner occupied CRE	2,730		—		2,730		0.17
Total commercial business	8,629		—		8,629		0.26
Real estate construction and land development:
Commercial and multifamily	2,984		—		2,984		0.97	%
Consumer	29		18		47		0.03	%
Total	$	11,642	$	18	$	11,660	0.27	%

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

	Three Months Ended  June 30, 2024
	Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial	0.83
Real estate construction and land development:
Commercial and multifamily	0.68
Consumer	1.42
Total	0.75

	Three Months Ended  June 30, 2023
	Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial	0.50
Real estate construction and land development:
Commercial and multifamily	0.42
Consumer	2.88
Total	0.48

25

	Six Months Ended  June 30, 2024
	Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial	0.79
Non-owner occupied CRE	0.50
Total commercial business	0.76
Real estate construction and land development:
Commercial and multifamily	0.68
Consumer	1.29
Total	0.72

	Six Months Ended  June 30, 2023
	Weighted Average % of Interest Rate Reductions		Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial	—	%	0.50
Non-owner occupied CRE	—		1.00
Total commercial business	—		0.66
Real estate construction and land development:
Commercial and multifamily	—		0.42
Consumer	1.00		2.61
Total	1.00	%	0.61

At June 30, 2024, there were $1.7 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms have been modified during the six months ended June 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 $14.3 million and $13.3 million at June 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.

(i) Foreclosure proceedings in process

At June 30, 2024, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

(4)Allowance for Credit Losses on Loans

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

26

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 June 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 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 is appropriate given all the above considerations.

During the six months ended June 30, 2024, the ACL on loans increased $3.2 million to $51.2 million from $48.0 million at December 31, 2023 due primarily to growth in loans receivable, net.

27

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

	Three Months Ended June 30, 2024
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	11,647	$	(312)	$	159	$	(360)	$	11,134
Owner-occupied CRE	9,392		—		359		99		9,850
Non-owner occupied CRE	12,874		—		—		609		13,483
Total commercial business	33,913		(312)		518		348		34,467
Residential real estate	3,478		—		—		257		3,735
Real estate construction and land development:
Residential	917		—		—		(7)		910
Commercial and multifamily	9,158		—		—		750		9,908
Total real estate construction and land development	10,075		—		—		743		10,818
Consumer	2,270		(238)		45		122		2,199
Total	$	49,736	$	(550)	$	563	$	1,470	$	51,219

	Six Months Ended June 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	$	(389)	$	376	$	19	$	11,134
Owner-occupied CRE	8,999		—		359		492		9,850
Non-owner occupied CRE	11,176		—		—		2,307		13,483
Total commercial business	31,303		(389)		735		2,818		34,467
Residential real estate	3,473		—		—		262		3,735
Real estate construction and land development:
Residential	1,643		—		—		(733)		910
Commercial and multifamily	9,233		—		—		675		9,908
Total real estate construction and land development	10,876		—		—		(58)		10,818
Consumer	2,347		(361)		61		152		2,199
Total	$	47,999	$	(750)	$	796	$	3,174	$	51,219

	Three Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	13,566	$	—	$	38	$	(316)	$	13,288
Owner-occupied CRE	7,525		—		—		978		8,503
Non-owner occupied CRE	8,846		—		—		636		9,482
Total commercial business	29,937		—		38		1,298		31,273
Residential real estate	2,902		—		—		(37)		2,865

28

	Three Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(Dollars in thousands)
Real estate construction and land development:
Residential	1,542		—		—		129		1,671
Commercial and multifamily	7,443		—		—		571		8,014
Total real estate construction and land development	8,985		—		—		700		9,685
Consumer	2,645		(144)		57		27		2,585
Total	$	44,469	$	(144)	$	95	$	1,988	$	46,408

	Six Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	13,962	$	(161)	$	89	$	(602)	$	13,288
Owner-occupied CRE	7,480		—		—		1,023		8,503
Non-owner occupied CRE	9,276		—		—		206		9,482
Total commercial business	30,718		(161)		89		627		31,273
Residential real estate	2,872		—		—		(7)		2,865
Real estate construction and land development:
Residential	1,654		—		—		17		1,671
Commercial and multifamily	5,409		—		—		2,605		8,014
Total real estate construction and land development	7,063		—		—		2,622		9,685
Consumer	2,333		(297)		90		459		2,585
Total	$	42,986	$	(458)	$	179	$	3,701	$	46,408

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Balance, beginning of period	$	976	$	1,856	$	1,288	$	1,744
(Reversal of) provision for credit losses on unfunded commitments	(202)		(79)		(514)		33
Balance, end of period	$	774	$	1,777	$	774	$	1,777

(5)Goodwill and Other Intangible Assets

(a) Goodwill

There were no additions to goodwill during the six months ended June 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 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.

(b) Other Intangible Assets

Other intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets during the six months ended June 30, 2024 and 2023.

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(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:

	June 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)	$	289,608	26,504	$	291,740	$	23,195
Interest rate swap liability (1)	289,608		(26,504)	291,740		(23,195)

(1) The estimated fair value of derivatives with customers was $(26.2) million and $(22.5) million as of June 30, 2024 and December 31, 2023, respectively. The estimated fair value of derivatives with third-parties was $26.2 million and $22.5 million as of June 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 June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(Dollars in thousands, except shares)
Net income allocated to common shareholders	$	14,159	$	16,846	$	19,907	$	37,303
Basic:
Weighted average common shares outstanding	34,609,900		35,058,155		34,717,685		35,083,133

30

	Three Months Ended June 30,		Six Months Ended June 30,
	2024	2023	2024	2023
	(Dollars in thousands, except shares)
Diluted:
Basic weighted average common shares outstanding	34,609,900	35,058,155	34,717,685	35,083,133
Effect of potentially dilutive common shares (1)	309,495	68,435	409,722	265,135
Total diluted weighted average common shares outstanding	34,919,395	35,126,590	35,127,407	35,348,268
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)	159,996	328,084	50,671	142,197

(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 six months ended June 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

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 the new repurchase plan, with 1,502,444 shares remaining available for repurchase as of June 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 Company previously had a stock repurchase program approved on March 12, 2020 which authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, with 3,910 shares remaining available for repurchase as of March 31, 2024 and all remaining shares repurchased during the three months ended June 30, 2024.

(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 June 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:

	June 30, 2024
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities	$	12,474	$	—	$	12,474	$	—
Municipal securities	69,720		—		69,720		—
Residential CMO and MBS(1)	446,468		—		446,468		—
Commercial CMO and MBS(1)	378,768		—		378,768		—

32

	June 30, 2024
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Corporate obligations	11,384		—		11,384		—
Other asset-backed securities	12,434		—		12,434		—
Total investment securities available for sale	931,248		—		931,248		—
Equity security	254		254		—		—
Derivative assets - interest rate swaps	26,504		—		26,504		—
Liabilities
Derivative liabilities - interest rate swaps	$	26,504	$	—	$	26,504	$	—

(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. There were no assets measured at fair value on a nonrecurring basis as of June 30, 2024. The following table presents assets measured at fair value on a nonrecurring basis at December 31, 2023:

	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

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:

	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

33

(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:

	June 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	$	113,757	$	113,757	$	113,757	$	—	$	—
Investment securities available for sale	931,248		931,248		—		931,248		—
Investment securities held to maturity	727,342		642,051		—		642,051		—
Loans receivable, net	4,481,396		4,347,740		—		—		4,347,740
Accrued interest receivable	19,855		19,855		34		5,528		14,293
Derivative assets - interest rate swaps	26,504		26,504		—		26,504		—
Equity security	254		254		254		—		—
Financial Liabilities:
Non-maturity deposits	$	4,632,441	$	4,632,441	$	4,632,441	$	—	$	—
Certificates of deposit	883,211		893,401		—		893,401		—
Borrowings	500,000		499,607		—		499,607		—
Junior subordinated debentures	21,912		19,450		—		—		19,450
Accrued interest payable	2,940		2,940		56		2,812		72
Derivative liabilities - interest rate swaps	26,504		26,504		—		26,504		—

	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		—

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(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 June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Income tax expense at Federal statutory rate	$	3,359	$	4,173	$	4,801	$	9,354
State tax, net of Federal tax benefit	147		181		208		401
Tax-exempt instruments	(237)		(231)		(470)		(617)
LIHTC	(975)		(750)		(1,984)		(1,500)
Effects of BOLI	(185)		(137)		(366)		(273)
Restricted stock unit excess liability	17		51		267		104
Other, net	(290)		(262)		500		(231)
Income tax expense	$	1,836	$	3,025	$	2,956	$	7,238

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 $197.2 million and $207.3 million as of June 30, 2024 and December 31, 2023, respectively. The proportional amortization for LIHTC during the three months ended June 30, 2024 and 2023 was $4.9 million and $4.1 million, respectively, and during the six months ended June 30, 2024 and 2023 was $10.0 million and $8.1 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 June 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:

	June 30, 2024		December 31, 2023
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	522,437	$	542,975
Owner-occupied CRE	4,690		8,731
Non-owner occupied CRE	17,088		26,534
Total commercial business	544,215		578,240

35

	June 30, 2024		December 31, 2023
	(Dollars in thousands)
Real estate construction and land development:
Residential	35,671		46,924
Commercial and multifamily	235,372		308,206
Total real estate construction and land development	271,043		355,130
Consumer	343,170		335,729
Total outstanding commitments	$	1,158,428	$	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 six months ended June 30, 2024. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Cautionary Note Regarding Forward-Looking Statements included herein and the December 31, 2023 audited Consolidated Financial Statements, and the accompanying Notes included in our 2023 Annual Form 10-K.

Overview

Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our local communities with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this Quarterly Report on Form 10-Q relates primarily to the Bank’s operations.

Our business consists primarily of commercial lending and deposit relationships with small- and medium-sized businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and land development loans, consumer loans and residential real estate loans on single family properties located primarily in our markets.

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

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

Net income is also affected by noninterest income (loss) and noninterest expense. Noninterest income (loss) 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."

36

Results of Operations

Net Income Overview

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

Net income decreased $2.7 million, or 16.0%, to $14.2 million, or $0.41 per diluted common share, for the three months ended June 30, 2024, compared to $16.8 million, or $0.48 per diluted common share, for the same period in 2023.

The decrease in net income was primarily due to a $11.2 million increase in interest expense from higher funding costs and a loss of $1.9 million on the sale of investment securities due to management's strategic repositioning of the Company's balance sheet during the three months ended June 30, 2024,

The decline in net income was partially offset by a $6.5 million increase in income due to increased yields earned on interest earning assets as a result of higher market interest rates and a $2.2 million decrease in noninterest expense due to management's expense management initiatives which included a reduction in full-time equivalent employees ("FTE") to 748 at June 30, 2024 compared to 813 at June 30, 2023 and technology-related contract renewals and terminations.

Comparison of the six months ended June 30, 2024 to the comparable period in the prior year.

Net income decreased $17.4 million, or 46.6%, to $19.9 million, or $0.57 per diluted common share, for the six months ended June 30, 2024 compared to $37.3 million, or $1.06 per diluted common share, for the same period in 2023.

The decrease in net income was due primarily to a $27.2 million increase in interest expense from higher funding costs and a loss of $11.9 million on the sale of investment securities incurred during the six months ended June 30, 2024 due to management's strategic repositioning of the Company's balance sheet. The Company sold investment securities with an amortized cost of $182.8 million and an estimated weighted average book yield of 2.44% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05% during the six months ended June 30, 2024. The remaining proceeds from investment sales were invested in loans and interest earning deposits.

The decline in net income was partially offset by a $14.2 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 $3.5 million due to management's expense management initiatives, which included a reduction in FTE and technology-related contract renewals and terminations.

Net Interest Income and Margin Overview

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

Comparison of the quarter ended June 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 June 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)	$	4,415,790	$	60,608	5.52	%	$	4,145,556	$	53,623	5.19	%	$	270,234	$	6,985	0.33	%
Taxable securities	1,685,795		14,156		3.38		1,989,297		14,774		2.98		(303,502)		(618)		0.40
Nontaxable securities (3)	18,812		165		3.53		71,803		520		2.90		(52,991)		(355)		0.63
Interest earning deposits	121,539		1,653		5.47		90,754		1,154		5.10		30,785		499		0.37
Total interest earning assets	6,241,936		76,582		4.93	%	6,297,410		70,071		4.46	%	(55,474)		6,511		0.47	%
Noninterest earning assets	864,855						845,455						19,400
Total assets	$	7,106,791					$	7,142,865					$	(36,074)
Interest Bearing Liabilities:
Certificates of deposit	$	838,285	$	9,128	4.38	%	$	421,451	$	2,483	2.36	%	$	416,834	$	6,645	2.02	%
Savings accounts	453,099		190		0.17		551,201		157		0.11		(98,102)		33		0.06
Interest bearing demand and money market accounts	2,625,593		9,135		1.40		2,782,353		5,967		0.86		(156,760)		3,168		0.54
Total interest bearing deposits	3,916,977		18,453		1.89		3,755,005		8,607		0.92		161,972		9,846		0.97

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	Three Months Ended June 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)
Junior subordinated debentures	21,874		539		9.91		21,577		499		9.28		297		40		0.63
Securities sold under agreement to repurchase	—		—		—		39,755		63		0.64		(39,755)		(63)		(0.64)
Borrowings	500,230		6,477		5.21		417,896		5,078		4.87		82,334		1,399		0.34
Total interest bearing liabilities	4,439,081		25,469		2.31	%	4,234,233		14,247		1.35	%	204,848		11,222		0.96	%
Noninterest bearing demand deposits	1,638,262						1,900,640						(262,378)
Other noninterest bearing liabilities	186,010						183,250						2,760
Stockholders’ equity	843,438						824,742						18,696
Total liabilities and stock-holders’ equity	$	7,106,791					$	7,142,865					$	(36,074)
Net interest income and spread			$	51,113	2.62	%			$	55,824	3.11	%			$	(4,711)	(0.49)	%
Net interest margin					3.29	%					3.56	%					(0.27)	%

(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 $971,000 and $726,000 for the three months ended June 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 June 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	$	3,605	$	3,380	$	6,985
Taxable securities	(2,413)		1,795		(618)
Nontaxable securities	(447)		92		(355)
Interest earning deposits	414		85		499
Total interest income	$	1,159	$	5,352	$	6,511
Interest Bearing Liabilities:
Certificates of deposit	$	3,577	$	3,068	$	6,645
Savings accounts	(32)		65		33
Interest bearing demand and money market accounts	(353)		3,521		3,168
Total interest bearing deposits	3,192		6,654		9,846
Junior subordinated debentures	7		33		40
Securities sold under agreement to repurchase	(31)		(32)		(63)
Borrowings	1,050		349		1,399
Total interest expense	$	4,218	$	7,004	$	11,222
Net interest income	$	(3,059)	$	(1,652)	$	(4,711)

Net interest income decreased $4.7 million, or 8.4%, to $51.1 million for the three months ended June 30, 2024, compared to $55.8 million for the same period in 2023 due primarily to an $11.2 million increase in total interest expense, offset partially by a $6.5 million increase in total interest income.

Total interest income increased to $76.6 million for the three months ended June 30, 2024, compared to $70.1 million for the same period in 2023. The increase was primarily due to a $7.0 million increase in interest income on loans receivable, net, and a $499,000 increase in interest income on interest earning deposits, offset partially by a $973,000 decrease in interest income on investment securities during the three months ended June 30, 2024 as compared to 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

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average outstanding balance of those assets. The yield earned on loans receivable, net, increased 33 basis points to 5.52% and the average balance of loans receivable, net, increased $270.2 million to $4.42 billion during the three months ended June 30, 2024, as compared to the same period in 2023. Similarly, the yield earned on interest earning deposits increased 37 basis points to 5.47% and the average balance of those deposits increased $30.8 million to $121.5 million during the three months ended June 30, 2024, as compared to the same period in 2023.

Interest income on investment securities decreased $973,000 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 40 basis points to 3.38% and average balances decreased $303.5 million to $1.69 billion during the three months ended June 30, 2024 compared to 2.98% and average balances of $1.99 billion during the same period in 2023.

Total interest expense increased to $25.5 million during the three months ended June 30, 2024 compared to $14.2 million for the same period in 2023. The increase was due primarily to a $9.8 million increase in interest expense on interest bearing deposits and a $1.4 million increase in interest expense on borrowings during the three months ended June 30, 2024, as compared to the same period in 2023. The increase in interest expense on interest bearing deposits was due primarily to a 97 basis point increase in the average rate to 1.89% for the three months ended June 30, 2024, as compared to 0.92% for the same period in 2023 due to competitive rate pressures, and to a lesser extent, a $416.8 million increase in the average balance of certificates of deposit which are generally at higher rates than other deposit products.

Net interest margin decreased 27 basis points to 3.29% for the three months ended June 30, 2024 compared to 3.56% for the same period in 2023.

Comparison of six months ended June 30, 2024 to the comparable period in the prior year

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

	Six Months Ended June 30,
	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)	$	4,359,592	$	118,470	5.46	%	$	4,092,769	$	104,073	5.13	%	$	266,823	$	14,397	0.33	%
Taxable securities	1,748,252		28,990		3.33		1,998,268		29,431		2.97		(250,016)		(441)		0.36
Nontaxable securities (3)	20,057		346		3.47		77,317		1,106		2.88		(57,260)		(760)		0.59
Interest earning deposits	115,136		3,129		5.47		87,086		2,126		4.92		28,050		1,003		0.55
Total interest earning assets	6,243,037		150,935		4.86	%	6,255,440		136,736		4.41	%	(12,403)		14,199		0.45	%
Noninterest earning assets	856,584						847,195						9,389
Total assets	$	7,099,621					$	7,102,635					$	(3,014)
Interest Bearing Liabilities:
Certificates of Deposit	$	786,050	$	16,799	4.30	%	$	386,026	$	3,707	1.94	%	$	400,024	$	13,092	2.36	%
Savings accounts	464,087		420		0.18		576,046		299		0.10		(111,959)		121		0.08
Interest bearing demand and money market accounts	2,642,796		17,622		1.34		2,805,645		9,129		0.66		(162,849)		8,493		0.68
Total interest bearing deposits	3,892,933		34,841		1.80		3,767,717		13,135		0.70		125,216		21,706		1.10
Junior subordinated debentures	21,837		1,086		10.00		21,539		981		9.18		298		105		0.82
Securities sold under agreement to repurchase	—		—		—		41,469		110		0.53		(41,469)		(110)		(0.53)
Borrowings	500,445		12,365		4.97		282,502		6,844		4.89	%	217,943		5,521		0.08
Total interest bearing liabilities	4,415,215		48,292		2.20	%	4,113,227		21,070		1.03	%	301,988		27,222		1.17	%
Noninterest bearing demand deposits	1,647,697						1,984,200						(336,503)
Other noninterest bearing liabilities	191,516						186,553						4,963
Stockholders’ equity	845,193						818,655						26,538
Total liabilities and stock-holders’ equity	$	7,099,621					$	7,102,635					$	(3,014)

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	Six Months Ended June 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)
Net interest income and spread		$	102,643	2.66	%		$	115,666	3.38	%		$	(13,023)	(0.72)	%
Net interest margin				3.31	%				3.73	%				(0.42)	%

(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 $1.8 million and $1.5 million for the six months ended June 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 six months ended June 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	$	7,012	$	7,385	$	14,397
Taxable securities	(3,913)		3,472		(441)
Nontaxable securities	(951)		191		(760)
Interest earning deposits	742		261		1,003
Total interest income	$	2,890	$	11,309	$	14,199
Interest Bearing Liabilities:
Certificates of deposit	$	5,998	$	7,094	$	13,092
Savings accounts	(67)		188		121
Interest bearing demand and money market accounts	(559)		9,052		8,493
Total interest bearing deposits	5,372		16,334		21,706
Junior subordinated debentures	14		91		105
Securities sold under agreement to repurchase	(55)		(55)		(110)
Borrowings	5,383		138		5,521
Total interest expense	$	10,714	$	16,508	$	27,222
Net interest income	$	(7,824)	$	(5,199)	$	(13,023)

Net interest income decreased $13.0 million, or 11.3%, to $102.6 million for the six months ended June 30, 2024, as compared to $115.7 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 $14.2 million, or 10.4%, to $150.9 million for the six months ended June 30, 2024, compared to $136.7 million for the same period in 2023. The increase was primarily due to a $14.4 million increase in interest income on loans receivable, net, and a $1.0 million increase in interest income on interest earning deposits, offset partially by a $1.2 million decrease in interest income on investment securities during the six months ended June 30, 2024 as compared to 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 33 basis points to 5.46% and the average balance of loans receivable, net, increased $266.8 million to $4.36 billion during the six months ended June 30, 2024, as compared to the same period in 2023. Similarly, the yield earned on interest earning deposits increased 55 basis points to 5.47% and the average balance of those deposits increased $28.1 million to $115.1 million during six months ended June 30, 2024, as compared to the same period in 2023.

Interest income on investment securities decreased $1.2 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 3.33% and average balances decreased $250.0 million to $1.75 billion during the six months ended June 30, 2024 compared to 2.97% and average balances of $2.00 billion during the same period in 2023.

Total interest expense increased $27.2 million, or 129.2%, to $48.3 million during the six months ended June 30, 2024, compared to $21.1 million for the same period in 2023. The increase was due primarily to a $21.7 million increase in interest expense on interest bearing deposits and a $5.5 million increase in interest expense on borrowings during the six months ended

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June 30, 2024, as compared to the same period in 2023. The increase in interest expense on deposits was due primarily to a 110 basis point increase in the average rate of interest bearing deposits to 1.80% for the six months ended June 30, 2024, as compared to 0.70% for the same period in 2023, due to competitive rate pressures, and to a lesser extent, a $400.0 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 $217.9 million increase in average balances.

Net interest margin decreased 42 basis points to 3.31% for the six months ended June 30, 2024, compared to 3.73% 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 June 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 June 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Provision for credit losses on loans	$	1,470	$	1,988	$	(518)	(26.1)	%
Reversal of provision for credit losses on unfunded commitments	(202)		(79)		(123)		155.7
Provision for credit losses	$	1,268	$	1,909	$	(641)	(33.6)	%

The provision for credit losses on loans reflects the amount required to maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The provision for credit losses on loans was $1.5 million during the three months ended June 30, 2024 and was primarily driven by loan growth during the quarter. 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 June 30, 2024 was due primarily to a decrease in the unfunded exposure on loans and an increase in loan utilization rates.

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

Comparison of the six months ended June 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:

	Six Months Ended June 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Provision for credit losses on loans	$	3,174	$	3,701	$	(527)	(14.2)	%
(Reversal of) provision for credit losses on unfunded commitments	(514)		33		(547)		(1657.6)
Provision for credit losses	$	2,660	$	3,734	$	(1,074)	(28.8)	%

The $3.2 million provision for credit losses on loans during the six months ended June 30, 2024 was due primarily to an increase in loans receivable as well as a change in mix of loans. The $514,000 reversal of provision for credit losses on unfunded commitments during the six months ended June 30, 2024 was due primarily to a $65.7 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 provision for credit losses recognized during the six months ended June 30, 2023 was due primarily to an increase in loans receivable as well as a change in mix of loans. The provision for credit losses on unfunded commitments recognized during the six months ended June 30, 2023 was due primarily to an increase in unfunded loan commitments offset partially by higher loan utilization rates.

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Noninterest Income Overview

Comparison of the three months ended June 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 June 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Service charges and other fees	$	2,817	$	2,682	$	135	5.0	%
Card revenue	1,930		2,123		(193)		(9.1)
Loss on sale of investment securities, net	(1,921)		—		(1,921)		100.0
Gain on sale of loans, net	—		101		(101)		(100.0)
Interest rate swap fees	52		115		(63)		(54.8)
Bank owned life insurance income	931		837		94		11.2
Gain on sale of other assets, net	49		—		49		100.0
Other income	1,388		1,423		(35)		(2.5)
Total noninterest income	$	5,246	$	7,281	$	(2,035)	(27.9)	%

Noninterest income decreased $2.0 million from the same period in 2023, due primarily to a $1.9 million pre-tax loss on the sale of investment securities during the three months ended June 30, 2024, as part of the Company's strategic balance sheet repositioning. Card revenue declined modestly due to a reduction in card activity as non-maturity deposit balances have declined.

Comparison of six months ended June 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:

	Six Months Ended June 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Service charges and other fees	$	5,605	$	5,306	$	299	5.6	%
Card revenue	3,769		4,123		(354)		(8.6)
Loss on sale of investment securities, net	(11,894)		(286)		(11,608)		4,058.7
Gain on sale of loans, net	26		150		(124)		(82.7)
Interest rate swap fees	52		168		(116)		(69.0)
Bank owned life insurance income	1,851		1,546		305		19.7
Gain on sale of other assets, net	49		2		47		2,350.0
Other income	2,888		4,530		(1,642)		(36.2)
Total noninterest income	$	2,346	$	15,539	$	(13,193)	(84.9)	%

Noninterest income decreased $13.2 million, or 84.9%, during the six months ended June 30, 2024 compared to the same period in 2023, due primarily to a loss on sale of investment securities of $11.9 million recognized during the six months ended June 30, 2024 as a result of the sale of $170.9 million of investment securities available for sale. Other income decreased due primarily to a one-time $1.6 million gain on sale of Visa Inc. Class B common stock recognized during the six months ended June 30, 2023. Card revenue declined modestly due to a reduction in card activity as non-maturity deposit balances have declined.

Noninterest Expense Overview

Comparison of three months ended June 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 June 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Compensation and employee benefits	$	24,448	$	24,781	$	(333)	(1.3)	%
Occupancy and equipment	4,765		4,666		99		2.1

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	Three Months Ended June 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Data processing	3,785		4,500		(715)		(15.9)
Marketing	244		441		(197)		(44.7)
Professional services	795		751		44		5.9
State/municipal business and use taxes	1,160		1,054		106		10.1
Federal deposit insurance premium	812		797		15		1.9
Amortization of intangible assets	421		623		(202)		(32.4)
Other expense	2,666		3,712		(1,046)		(28.2)
Total noninterest expense	$	39,096	$	41,325	$	(2,229)	(5.4)	%

Noninterest expense decreased $2.2 million, or 5.4%, during the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a decrease in data processing and other expense. Data processing decreased primarily due to a decline in ongoing costs resulting from prior technology-related contract renewals and terminations. Other expense decreased due to a decline in customer account loss expense and a reduction in employee related expenses which included additional expenses in the second quarter of 2024 related to newly added teams. Compensation and employee benefits decreased due to a reduction in full-time equivalent employees to 748 at June 30, 2024 from 813 at June 30, 2023, as a result of management's expense management initiatives.

Comparison of the six months ended June 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:

	Six Months Ended June 30,				Change
	2024		2023		$		%
	(Dollars in thousands)
Compensation and employee benefits	$	49,924	$	50,317	$	(393)	(0.8)	%
Occupancy and equipment	9,697		9,558		139		1.5
Data processing	7,322		8,842		(1,520)		(17.2)
Marketing	455		843		(388)		(46.0)
Professional services	1,362		1,379		(17)		(1.2)
State/municipal business and use taxes	2,460		2,062		398		19.3
Federal deposit insurance premium	1,607		1,647		(40)		(2.4)
Amortization of intangible assets	842		1,246		(404)		(32.4)
Other expense	5,797		7,036		(1,239)		(17.6)
Total noninterest expense	$	79,466	$	82,930	$	(3,464)	(4.2)	%

Noninterest expense decreased $3.5 million, or 4.2%, during the six months ended June 30, 2024 compared to the same period in 2023 due primarily to an decrease in data processing and other expense. Data processing decreased primarily due to a decline in ongoing costs resulting from technology-related contract renewals and terminations. Other expense decreased due to a decline in customer deposit loss expense and employee related expenses, which included additional expenses related to calling efforts for the newly added teams, as well as a general increase in operating costs incurred during the six months ended June 30, 2023. Amortization of intangible assets decreased due to the full amortization of the core deposit intangible from one acquisition. Compensation and employee benefits decreased due to a decline in the average number of full-time equivalent employees as a result of management's expense management initiatives during the six months ended June 30, 2024. This was offset partially by an increase in state/municipal business and use tax due primarily to an increase in gross revenue.

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Income Tax Expense Overview

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

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

	Three Months Ended June 30,						Change
	2024			2023			$			%
	(Dollars in thousands)
Income before income taxes	$	15,995		$	19,871		$	(3,876)		(19.5)	%
Income tax expense	$	1,836		$	3,025		$	(1,189)		(39.3)	%
Effective income tax rate	11.5		%	15.2		%	(3.7)		%	(24.3)	%

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

Comparison of the six months ended June 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:

	Six Months Ended June 30,						Change
	2024			2023			$			%
	(Dollars in thousands)
Income before income taxes	$	22,863		$	44,541		$	(21,678)		(48.7)	%
Income tax expense	$	2,956		$	7,238		$	(4,282)		(59.2)	%
Effective income tax rate	12.9		%	16.3		%	(3.4)		%	(20.9)	%

Income tax expense and the effective income tax rate both decreased due primarily to lower estimated pre-tax income during the six months ended June 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 bank owned life insurance and LIHTC investments.

Financial Condition Overview

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

	June 30, 2024		December 31, 2023		Change
					$		%
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	113,757	$	224,973	$	(111,216)	(49.4)	%
Investment securities available for sale, at fair value, net	931,248		1,134,353		(203,105)		(17.9)
Investment securities held to maturity, at amortized cost, net	727,342		739,442		(12,100)		(1.6)
Loans receivable, net	4,481,396		4,287,628		193,768		4.5
Premises and equipment, net	73,218		74,899		(1,681)		(2.2)
Federal Home Loan Bank stock, at cost	22,303		4,186		18,117		432.8
Bank owned life insurance	126,420		125,655		765		0.6
Accrued interest receivable	19,855		19,518		337		1.7
Prepaid expenses and other assets	319,428		318,571		857		0.3
Other intangible assets, net	3,951		4,793		(842)		(17.6)
Goodwill	240,939		240,939		—		—
Total assets	$	7,059,857	$	7,174,957	$	(115,100)	(1.6)	%
Liabilities and Stockholders' Equity
Total deposits	$	5,515,652	$	5,599,872	$	(84,220)	(1.5)	%
Borrowings	500,000		500,000		—		—

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	June 30, 2024		December 31, 2023		Change
					$		%
Junior subordinated debentures	21,912		21,765		147		0.7
Accrued expenses and other liabilities	171,786		200,059		(28,273)		(14.1)
Total liabilities	6,209,350		6,321,696		(112,346)		(1.8)
Common stock	541,294		549,748		(8,454)		(1.5)
Retained earnings	379,714		375,989		3,725		1.0
Accumulated other comprehensive loss, net	(70,501)		(72,476)		1,975		2.7
Total stockholders' equity	850,507		853,261		(2,754)		(0.3)
Total liabilities and stockholders' equity	$	7,059,857	$	7,174,957	$	(115,100)	(1.6)	%

Total assets decreased due primarily to sales of investment securities available for sale as part of the 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 deposits.

Investment Activities Overview

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

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

	June 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	$	12,474	0.8	%	$	13,750	0.7	%	$	(1,276)	(9.3)	%
Municipal securities	69,720		4.2		79,525		4.2		(9,805)		(12.3)
Residential CMO and MBS(1)	446,468		26.9		512,049		27.3		(65,581)		(12.8)
Commercial CMO and MBS(1)	378,768		22.8		504,258		27.0		(125,490)		(24.9)
Corporate obligations	11,384		0.7		7,613		0.4		3,771		49.5
Other asset-backed securities	12,434		0.7		17,158		0.9		(4,724)		(27.5)
Total	$	931,248	56.1	%	$	1,134,353	60.5	%	$	(203,105)	(17.9)	%
Investment securities held to maturity, at amortized cost:
U.S. government and agency securities	$	151,146	9.1	%	$	151,075	8.1	%	$	71	—	%
Residential CMO and MBS(1)	256,742		15.5		267,204		14.3		(10,462)		(3.9)
Commercial CMO and MBS(1)	319,454		19.3		321,163		17.1		(1,709)		(0.5)
Total	$	727,342	43.9	%	$	739,442	39.5	%	$	(12,100)	(1.6)	%
Total investment securities	$	1,658,590	100.0	%	$	1,873,795	100.0	%	$	(215,205)	(11.5)	%

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

Total investment securities decreased $215.2 million, or 11.5%, to $1.66 billion at June 30, 2024 from $1.87 billion at December 31, 2023, due primarily to the sale of investment securities with an amortized cost of $182.8 million at a loss of $11.9 million during the six months ended June 30, 2024, and offset partially by investment purchases of $33.1 million as part of the strategic balance sheet repositioning discussed above. Additionally, there were investment maturities and repayments of $68.2 million during the six months ended June 30, 2024.

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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:

	June 30, 2024				December 31, 2023				Change
	Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		$		%
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	779,495	17.2	%	$	718,291	16.6	%	$	61,204	8.5	%
Owner-occupied CRE	953,518		21.0		958,620		22.1		(5,102)		(0.5)
Non-owner occupied CRE	1,759,605		38.8		1,697,574		39.1		62,031		3.7
Total commercial business	3,492,618		77.0		3,374,485		77.8		118,133		3.5
Residential real estate	413,358		9.1		375,342		8.7		38,016		10.1
Real estate construction and land development:
Residential	80,451		1.8		78,610		1.8		1,841		2.3
Commercial and multifamily	378,695		8.4		335,819		7.7		42,876		12.8
Total real estate construction and land development	459,146		10.2		414,429		9.5		44,717		10.8
Consumer	167,493		3.7		171,371		4.0		(3,878)		(2.3)
Total	$	4,532,615	100.0	%	$	4,335,627	100.0	%	$	196,988	4.5	%

Loans receivable increased $197.0 million, or 4.5%, to $4.53 billion at June 30, 2024 from $4.34 billion at December 31, 2023. New loans funded in the six months ended June 30, 2024 totaled $268.4 million and loan prepayments were $87.6 million.

Non-owner occupied CRE loans increased $62.0 million, or 3.7%, due primarily to new loan production of $53.9 million during the six months ended June 30, 2024 and advances on outstanding commitments. Commercial and industrial loans increased $61.2 million, or 8.5%, due primarily to new loan production of $100.2 million during the six months ended June 30, 2024 and advances on outstanding commitments. Commercial and multifamily construction loans increased $42.9 million, or 12.8%, due primarily to advances on outstanding commitments. Residential real estate loans increased $38.0 million, or 10.1%, due primarily to loan purchases during the six months ended June 30, 2024.

The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:

	June 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	$	552,238	20.4	%	$	555,822	20.9	%	$	(3,584)	(0.6)	%
Industrial	432,748		16.0		418,651		15.8		14,097		3.4
Retail store / shopping center	293,405		10.8		285,926		10.8		7,479		2.6
Multi-family	343,110		12.6		305,499		11.5		37,611		12.3
Mixed use property	156,891		5.8		154,674		5.8		2,217		1.4
Motel / hotel	145,465		5.4		142,172		5.4		3,293		2.3
Single purpose	117,201		4.3		123,344		4.6		(6,143)		(5.0)
Warehouse	139,200		5.1		149,176		5.6		(9,976)		(6.7)
Mini-storage	173,612		6.4		171,778		6.5		1,834		1.1
Recreational / school	69,865		2.6		67,791		2.6		2,074		3.1
Other	289,388		10.6		281,361		10.5		8,027		2.9
Total	$	2,713,123	100.0	%	$	2,656,194	100.0	%	$	56,929	2.1	%

Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans, totaling $552.2 million, or 20.4% of total CRE loans, at June 30, 2024. Of this total, $279.0 million, or 50.5%, 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

46

generally have guarantees from the company occupying the space as well as the owners of the company. The average loan balance of CRE loans was $1.3 million at June 30, 2024.

Loans classified as nonaccrual and performing modified loans and nonperforming assets

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

	June 30, 2024			December 31, 2023			Change
							$			%
	(Dollars in thousands)
Nonaccrual loans: (1)
Commercial business	$	3,826		$	4,468		$	(642)		(14.4)	%
Total nonaccrual loans	3,826			4,468			(642)			(14.4)
Accruing loans past due 90 days or more	$	4,296		$	1,293		$	3,003		232.3	%
Total nonperforming loans	8,122			5,761			2,361			41.0
Other real estate owned	—			—			—			—
Total nonperforming assets	$	8,122		$	5,761		$	2,361		41.0	%
Credit quality ratios:
Nonaccrual loans to loans receivable	0.08		%	0.10		%	(0.02)		%	(20.0)	%
Nonperforming loans to loans receivable	0.18			0.13			0.05			38.5
Nonperforming assets to total assets	0.12			0.08			0.04			50.0

(1) At June 30, 2024 and December 31, 2023, $3.1 million and $3.2 million, respectively, of nonaccrual loans, were guaranteed by government agencies.

The following table provides the changes in nonaccrual loans during the six months ended June 30, 2024:

(Dollars in thousands)
Balance, beginning of period	$	4,468
Additions	1,142
Net principal payments, sales and transfers to accruing status	(752)
Payoffs	(769)
Charge-offs	(263)
Balance, end of period	$	3,826

Allowance for Credit Losses on Loans Overview

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

	At or For the Six Months Ended June 30,						Change
	2024			2023			$			%
	(Dollars in thousands)
ACL on loans at the end of period	$	51,219		$	46,408		$	4,811		10.4	%
Credit quality ratios:
ACL on loans to loans receivable	1.13		%	1.09		%	0.04			3.7
ACL on loans to nonaccrual loans	1,338.71			1,002.33			336.38			33.6
Net recoveries (charge-offs)	$	46		$	(279)		$	325		(116.5)
Average balance of loans receivable, net during the period(1)	4,359,592			4,092,769			266,823			6.5
Net charge-offs on loans to average loans receivable, net(2)	—		%	0.01		%	(0.01)		%	100.0	%

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

(2) Annualized.

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The ACL on loans increased $3.2 million, or 6.7%, to $51.2 million at June 30, 2024, compared to $48.0 million at December 31, 2023, due primarily to an increase in loans receivable, net. The following table presents the ACL on loans by loan portfolio segment at the dates indicated:

	June 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	$	34,467	0.99	%	77.0	%	$	31,303	0.93	%	77.8	%
Residential real estate	3,735		0.90		9.1		3,473		0.93		8.7
Real estate construction and land development	10,818		2.36		10.2		10,876		2.62		9.5
Consumer	2,199		1.31		3.7		2,347		1.37		4.0
Total ACL on loans	$	51,219	1.13	%	100.0	%	$	47,999	1.11	%	100.0	%

Deposits Overview

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

	June 30, 2024				December 31, 2023				Change
	Balance		% of Total Deposits		Balance		% of Total Deposits		$		%
	(Dollars in thousands)
Noninterest demand deposits	$	1,599,367	29.0	%	$	1,715,847	30.7	%	$	(116,480)	(6.8)	%
Interest bearing demand deposits	1,487,670		27.0		1,608,745		28.7		(121,075)		(7.5)
Money market accounts	1,098,821		19.9		1,094,351		19.5		4,470		0.4
Savings accounts	446,583		8.1		487,956		8.7		(41,373)		(8.5)
Total non-maturity deposits	4,632,441		84.0		4,906,899		87.6		(274,458)		(5.6)
Certificates of deposit	883,211		16.0		692,973		12.4		190,238		27.5
Total deposits	$	5,515,652	100.0	%	$	5,599,872	100.0	%	$	(84,220)	(1.5)	%

Total deposits decreased $84.2 million, or 1.5%, to $5.52 billion at June 30, 2024, compared to $5.60 billion at December 31, 2023. Certificates of deposit increased $190.2 million, or 27.5%, to $883.2 million at June 30, 2024 from $693.0 million at December 31, 2023, primarily due to transfers from 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 June 30, 2024, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.34 billion. The Bank had $400.0 million FHLB advances outstanding at June 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 June 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 $278.6 million at June 30, 2024. The Bank had $100.0 million in BTFP borrowings outstanding at June 30, 2024, and $500.0 million at December 31, 2023. The entire amount of 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 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 $21.9 million as of June 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 June 30, 2024.

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Stockholders' Equity Overview

The Company’s stockholders' equity to assets ratio was 12.0% at June 30, 2024, compared to 11.9% at December 31, 2023. Total stockholders' equity decreased $2.8 million, or 0.3%, to $850.5 million at June 30, 2024, compared to $853.3 million at December 31, 2023, due primarily to $16.2 million in dividends paid to common shareholders and $10.5 million in common stock repurchases, offset partially by $19.9 million of net income recognized for the six months ended June 30, 2024.

The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. On July 24, 2024, the Company’s Board of Directors declared a regular quarterly dividend of $0.23 per common share payable on August 21, 2024 to shareholders of record on August 7, 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 plan. 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 buyback of 1,799,054 shares and was completed during the six months ended June 30, 2024.

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 June 30, 2024, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of June 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)
June 30, 2024
Total capital ratio
Company	$	750,281	13.9	%	$	432,072	8.0	%	$	540,090	10.0	%
Bank	742,703		13.8		431,705		8.0		539,631		10.0
Tier 1 capital ratio
Company	699,900		13.0		324,054		6.0		432,072		8.0
Bank	692,322		12.8		323,779		6.0		431,705		8.0
Common equity Tier 1 capital ratio
Company	677,988		12.6		243,040		4.5		351,058		6.5
Bank	692,322		12.8		242,834		4.5		350,760		6.5
Leverage ratio
Company	699,900		10.1		278,461		4.0		348,076		5.0
Bank	692,322		10.0		278,290		4.0		347,863		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” 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 June 30, 2024 and December 31, 2023, the capital measures reflect 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 acquire non-maturity deposits from our retail accounts, and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. Our liquidity policy permits the purchase of brokered deposits in an amount not to exceed 15% of the 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 $2.07 billion, or 37.6% of total deposits, at June 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 June 30, 2024, we had $145.0 million in brokered deposits, or 2.63% 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:

	June 30, 2024		December 31, 2023
	(Dollars in thousands)
On-balance sheet liquidity
Cash and cash equivalents	113,757		224,973
Unencumbered investment securities available for sale (1)	926,822		756,258
Total on-balance sheet liquidity	$	1,040,579	$	981,231
Off-balance sheet liquidity
FRB borrowing availability	$	278,632	$	319,492
FHLB borrowing availability (2)	943,492		1,417,518

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	June 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	$	1,367,124	$	1,882,010
Total available liquidity	$	2,407,703	$	2,863,241

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

(2) Includes FHLB borrowing availability of $1.34 billion at June 30, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.19 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 six months ended June 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 June 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:

	June 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)	$	(11,087)	(5.1)	%	$	(6,343)	(2.8)	%
+200(shock)	(2,210)		(1.0)		1,438		0.6
+100(shock)	(246)		(0.1)		1,644		0.7
+0(flat)	—		—		—		—

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	June 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)	2,730	1.3	1,861	0.8
-200(shock)	3,935	1.8	1,549	0.7
-300(shock)	2,600	1.2	(1,233)	(0.6)

The Company’s balance sheet sensitivity to changes in market rates shows a slight liability sensitive position, meaning results are slightly better in down rate scenarios. The subtle change in balance sheet sensitivity from December 31, 2023, is due primarily to slightly higher deposit rates that would be expected to decrease if market rates decline.

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 June 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 June 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 Plans

The following table provides information about repurchases of common stock by the Company during the three months ended June 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
April 1, 2024—April 30, 2024	—	$	—	—	1,738,402
May 1, 2024— May 31, 2024	235,958	18.38		235,958	1,502,444
June 1, 2024—June 30, 2024	4,195	16.68		—	1,502,444
Total	240,153	$	18.35

(1)Of the common shares repurchased by the Company between April 1, 2024 and June 30, 2024, a total of 4,195 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, approved on March 12, 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, and which was completed during the three months ended June 30, 2024.

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 June 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
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

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		Incorporated by Reference
Exhibit No.	Description of Exhibit	Form	Exhibit	Filing Date/Period End Date
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:
August 9, 2024	/S/ JEFFREY J. DEUEL
	Jeffrey J. Deuel
	Chief Executive Officer
	(Principal Executive Officer)
Date:
August 9, 2024	/S/ DONALD J. HINSON
	Donald J. Hinson
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

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