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What changed in HERITAGE FINANCIAL CORP /WA/'s 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of HERITAGE FINANCIAL CORP /WA/'s 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+676 added−509 removedSource: 10-K (2025-02-27) vs 10-K (2024-02-27)

Top changes in HERITAGE FINANCIAL CORP /WA/'s 2024 10-K

676 paragraphs added · 509 removed · 181 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

49 edited+201 added−72 removed12 unchanged
Biggest changeTo be considered "well capitalized," a bank holding company must have, on a consolidated basis, a Tier 1 risk-based capital ratio of 6.0% or greater and a total risk-based capital ratio of 10.0% or greater and must not be subject to an individual order, directive or agreement under which the Federal Reserve requires it to maintain a specific capital level.
Biggest changeUnder the capital regulations of the Federal Reserve for the Company and the FDIC for the Bank, in order to be well capitalized, a banking organization, like the Company and the Bank, must maintain: • A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more; • A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more; • A ratio of Total Capital to total risk-weighted assets of 10% or more; and • A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.
Through the mutual holding company reorganization of the Bank and the subsequent conversion of the mutual holding company, the Bank became a stock savings bank and a wholly-owned subsidiary of the Company effective August 1997.
Through the mutual holding company reorganization of the Bank and subsequent conversion of the mutual holding company, the Bank became a stock savings bank and a wholly-owned subsidiary of the Company effective August 1997.
We will continue to be disciplined and opportunistic as it pertains to future acquisitions and de novo branching, focusing on the Pacific Northwest markets we know and understand. Focus on asset quality. A strong credit culture is a high priority for us.
We continue to be disciplined and opportunistic as it pertains to future acquisitions and de novo branching, focusing on the Pacific Northwest markets we know and understand. Focus on asset quality. A strong credit culture is a high priority for us.
We seek to minimize these risks by determining the financial condition of the borrower and any tenants, the quality and value of the collateral, and the management of the property securing the loan. We also generally obtain personal guarantees from the owners of the collateral after a thorough review of personal financial statements.
We seek to minimize these risks by determining the financial condition of the borrower and any tenants, the quality and value of the collateral and the strength of management of the property securing the loan. We also generally obtain personal guarantees from the owners of the collateral after a thorough review of personal financial statements.
We will seek to achieve our business goals through the following strategies: Expand geographically as opportunities present themselves. We are committed to continuing the controlled expansion of our franchise through strategic acquisitions designed to increase our market share and enhance franchise value.
We seek to achieve our business goals through the following strategies: Expand geographically as opportunities present themselves. We are committed to continuing the controlled expansion of our franchise through strategic acquisitions designed to increase our market share and enhance franchise value.
We have a strong corporate culture, which is supported by our commitment to internal development and promotion from within as well as the retention of management and officers in key roles. There have been no material changes to our business strategy during the years ended December 31, 2023 and 2022.
We have a strong corporate culture, which is supported by our commitment to internal development and promotion from within as well as the retention of management and officers in key roles. There have been no material changes to our business strategy during the years ended December 31, 2024 and 2023.
Emphasize business relationships with a focus on commercial lending . We will continue to market primarily commercial business loans and the deposit balances that accompany these relationships. Our seasoned lending staff has extensive knowledge and can add value through a focused advisory role that we believe strengthens our customer relationships and develops loyalty.
Emphasize business relationships with a focus on commercial lending . We continue to market primarily commercial business loans and the deposit balances that accompany these relationships. Our seasoned lending staff has extensive knowledge and experience, and can add value through a focused advisory role that we believe strengthens our customer relationships and develops loyalty.
Actual debt service coverage is usually higher than required covenant thresholds, as loan sizing requires sensitized coverage using an "underwriting" interest rate that is higher than the note rate. Commercial real estate loans typically involve a greater degree of risk than residential real estate loans.
Actual debt service coverage is usually higher than required covenant thresholds, as loan sizing requires sensitized coverage using an "underwriting" interest rate that is higher than the note rate. CRE loans typically involve a greater degree of risk than residential real estate loans.
Our technology-based products, including online personal financial management, business cash management and business remote deposit products enable us to compete effectively with banks of all sizes. Our retail and commercial management teams 6 Table of Contents are well-seasoned and have strong ties to the communities we serve with a strong focus on relationship building and customer service.
Our technology-based products, including online personal financial management, business cash management and business remote deposit products enable us to compete effectively with banks of all sizes. Our retail and commercial management teams are well-seasoned and have strong ties to the communities we serve with a strong focus on relationship building and customer service.
Our personal and business banking customers have the option of selecting from a variety of accounts. The major categories of deposit accounts that we offer are described below.
Our personal and business banking customers have the option of selecting from a variety of account types. The major categories of deposit accounts that we offer are described below.
Our underwriting standards require that non-owner occupied and owner-occupied commercial real estate loans not exceed 75% and 80%, respectively, of the lower of appraised value at origination or cost of the underlying collateral. Cash flow debt coverage covenant requirements typically range from 1.15 times to 1.25 times, depending on the type of property.
Our underwriting standards require that non-owner occupied and owner-occupied CRE loans not exceed 75% and 80%, respectively, of the lower of appraised value at origination or cost of the underlying collateral. Cash flow debt coverage covenant requirements typically range from 1.15 times to 1.25 times, depending on the type of property.
Payments on loans secured by commercial real estate properties are dependent on successful operation and management of the properties and repayment of these loans may be affected by adverse conditions in the real estate market or the economy.
Payments on loans secured by CRE properties are dependent on successful operation and management of the properties and repayment of these loans may be affected by adverse conditions in the real estate market or the broader economy.
The following table lists major combinations completed by the Company: Type of Combination Date of Combination Acquired Holding Company Name Acquired Bank Name Total Assets Acquired (in millions) Acquisition June 1998 North Pacific Bancorporation North Pacific Bank $ 85 Acquisition March 1999 Washington Independent Bancshares, Inc.
The following table lists major acquisitions completed by the Company: Type of Transaction Date of Transaction Acquired Holding Company Name Acquired Bank Name Total Assets Acquired (in millions) Acquisition June 1998 North Pacific Bancorporation North Pacific Bank $ 85 Acquisition March 1999 Washington Independent Bancshares, Inc.
In markets where we wish to enter or expand our business, we will also consider opening de novo branches, typically in conjunction with hiring commercial lending and deposit teams. In the past, we have successfully integrated acquired institutions and opened de novo branches.
In markets where we wish to enter or expand our business, we also periodically consider opening de novo branches, typically in conjunction with hiring commercial lending and 6 Table of Contents deposit teams. In the past, we have successfully integrated acquired institutions and opened de novo branches.
Valley Bank 237 Merger May 2014 Washington Banking Company Whidbey Island Bank 1,657 Acquisition January 2018 Puget Sound Bancorp, Inc.
Valley Bank 237 Merger May 2014 Washington Banking Company Whidbey Island Bank 1,657 7 Table of Contents Acquisition January 2018 Puget Sound Bancorp, Inc.
Emphasis is placed on having a comprehensive understanding of the borrower’s global cash flow and performing necessary financial due diligence. We originate commercial real estate loans within our primary market areas with a preference for loans secured by owner-occupied properties.
Emphasis is placed on having a comprehensive understanding of the borrower’s global cash flow and performing necessary financial due diligence. We originate CRE loans within our primary market areas, with a focus on loans secured by owner-occupied properties.
In addition, we reviewed over 70% of our commercial real estate loan portfolio during the year ended December 31, 2023 for various performance related criteria and stress-test loans for potential changes in interest rates, occupancy and collateral values. The Company may enter into non-hedging interest rate swap contracts with commercial customers to accommodate their business needs.
In addition, we reviewed over 65% of our CRE loan portfolio during the year ended December 31, 2024 for various performance related criteria and stress-test loans for potential changes in interest rates, occupancy and collateral values. 8 Table of Contents The Company may enter into non-hedging interest rate swap contracts with commercial customers to accommodate their business needs.
As of December 31, 2023, the regulatory capital ratios of the Bank were in excess of the levels required for “well-capitalized” status, and our consolidated common equity tier 1 capital ratio, leverage ratio, Tier 1 capital ratio, and total capital ratio were 12.9%, 10.0%, 13.3% and 14.1%, respectively. Focused deposit growth.
As of December 31, 2024, the regulatory capital ratios of the Bank were in excess of the levels required for “well-capitalized” status, and our consolidated common equity tier 1 capital ratio, leverage ratio, Tier 1 capital ratio, and total capital ratio were 12.0%, 10.0%, 12.4% and 13.3%, respectively. Focus on deposit growth.
Our primary focus is to maintain a high level of non-maturity deposits to internally fund our loan growth with a low reliance on maturity (certificate) deposits. At December 31, 2023, our non-maturity deposits were 87.6% of our total deposits.
Our primary focus is to maintain a high level of non-maturity deposits to internally fund our loan growth with a low reliance on maturity (certificate) deposits. At December 31, 2024, our non-maturity deposits were 82.8% of our total deposits.
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 for sale or investment purposes on residential properties located primarily in our market.
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 and consumer loans.
See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" of this Form 10-K.
Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources of this Form 10-K.
Heritage 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 as of December 31, 2023. The deposits of the Bank are insured by the FDIC.
Heritage 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 as of December 31, 2024. Heritage Bank also does business under the Whidbey Island Bank name on Whidbey Island, Washington. The deposits of the Bank are insured by the FDIC.
SBA, for which the Bank is a “preferred lender,” the U.S. Department of Agriculture and the Federal Agricultural Mortgage Corporation. Before extending credit to a business, we review and analyze the borrower’s management ability, financial history, including cash flow of the borrower and all guarantors, and the liquidation value of the collateral.
We also originate loans that are guaranteed by the U.S. SBA, for which the Bank is a “preferred lender,” the USDA and the Federal Agricultural Mortgage Corporation. Before extending credit to a business, we review and analyze the borrower’s management ability, financial history, including cash flow of the borrower and all guarantors, and anticipated liquidation value of the collateral.
The majority of our residential real estate loans are secured by single-family residences located in our primary market areas. Our underwriting standards require that residential real estate loans generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms typically range from 15 to 30 years.
Our underwriting standards require that residential real estate loans generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms typically range from 15 to 30 years.
Maintain a strong balance sheet. In addition to our focus on underwriting, we believe the strength of our balance sheet provides us with the flexibility to manage through a variety of scenarios including additional growth-related activities. As of December 31, 2023, our liquidity position was $225.0 million in cash and cash equivalents and $1.87 billion in total investment securities.
In addition to our focus on underwriting, we believe the strength of our balance sheet provides us with the flexibility to manage through a variety of scenarios including additional growth-related activities. As of December 31, 2024, our on-balance sheet liquidity position was $117.1 million in cash and cash equivalents and $1.47 billion in total investment securities. See also Item 7.
We have a well-developed credit approval structure that has enabled us to maintain a standard of asset quality that we believe has moderate and manageable risk while at the same time allowing us to achieve our lending objectives.
We have a well-developed credit approval structure that has enabled us to maintain a standard of asset quality that we believe has moderate and manageable risk while at the same time allowing us to achieve our lending objectives. We continue to focus on loan types and markets that we know well and where we have a historical record of success.
Deposits are interest bearing provided that a minimum balance is maintained to avoid service charges. Certificate of Deposit Accounts. Deposits require a minimum deposit of $2,500 and have maturities ranging from three months to five years.
Deposits are interest bearing provided that a minimum balance is maintained to avoid service charges. Certificate of Deposit Accounts. Deposits require a minimum deposit of $2,500 and have maturities ranging from three months to five years. Jumbo certificate of deposit accounts are offered in amounts of $100,000 or more for terms of seven days to one year.
We also provide financing to builders for the construction of pre-sold homes and speculative residential property. Because of the higher risks present in the residential construction industry, our lending to builders is limited to those who have demonstrated a favorable record of performance and who are building in markets that management understands.
Because of the higher risks present in the residential construction industry, our lending to builders is limited to those who have demonstrated a favorable record of performance and who are building in markets that our management understands. We further endeavor to limit our construction lending risk through adherence to strict underwriting guidelines and procedures.
For additional information, see “Capital Adequacy” below. In addition, under Washington corporate law, a company generally may not pay dividends if, after that payment, the company would not be able to pay its liabilities as they become due in the usual course of business or its total assets would be less than its total liabilities.
As a Washington corporation, we are subject to the limitations of Washington corporate law, which does not allow us to pay dividends if, after that payment, the Company would not be able to pay its liabilities as they become due in the usual course of business or its total assets would be less than its total liabilities.
As part of our asset/liability management strategy, we may also sell originated residential real estate loans in the secondary market with no recourse and servicing released. In January 2024, we ceased the origination of residential real estate loans for the purpose of sales on the secondary market.
As part of our asset/liability management strategy, we have historically sold originated residential real estate loans in the secondary market with no recourse and servicing released. In January 2024, we ceased the origination of residential real estate loans. We have and may buy pools of mortgage loans or otherwise acquire mortgage loans from other originators.
Real Estate Construction and Land Development At December 31, 2023, we had $414.4 million, or 9.5% of our loans receivable, in real estate construction and land development loans, including residential construction loans and commercial and multifamily construction loans. We originate residential construction loans for the construction of single-family custom homes where the homeowner is the borrower.
Real Estate Construction and Land Development At December 31, 2024, we had $479.4 million, or 9.9% of our loans receivable, in real estate construction and land development loans, including residential construction loans and commercial and multifamily construction loans. We originate residential construction loans to builders for the construction of pre-sold homes and speculative residential properties.
With respect to commercial business lending, which is our predominant lending activity, we view ourselves as cash-flow lenders obtaining additional support from realistic collateral values, personal guarantees and other secondary sources of repayment. We have a problem loan resolution process that is focused on quick detection and implementing feasible solutions and subject our loans to periodic internal loan reviews.
We focus on loan relationships that are well-diversified in both size and industry types. With respect to commercial business lending, which is our predominant lending activity, we view ourselves as cash-flow lenders obtaining additional support from realistic collateral values, personal guarantees and other secondary sources of repayment.
We conduct post-approval reviews on selected loans and routinely perform internal loan reviews of our loan portfolio to confirm credit quality, proper documentation and compliance with laws and regulations. Loan repayments are considered one of the primary sources of funding for the Company.
These policies and guidelines address underwriting standards, structure and rate considerations and compliance with laws, regulations and internal lending limits. We conduct post-approval reviews on selected loans and routinely perform internal loan reviews of our loan portfolio to confirm credit quality, proper documentation and compliance with laws and regulations.
Commercial Business Lending At December 31, 2023 we had $3.37 billion, or 77.8% of our loans receivable, in commercial business loans. We offer different types of commercial business loans, including lines of credit, term equipment financing and term owner-occupied and non-owner occupied commercial real estate loans. We also originate loans that are guaranteed by the U.S.
Loan repayments are considered one of the primary sources of funding for the Company. Commercial Business Lending At December 31, 2024, we had $3.76 billion, or 78.3% of our loans receivable, in commercial business loans. We offer different types of commercial business loans, including lines of credit, term equipment financing and term owner-occupied and non-owner occupied CRE loans.
We require builders to have tangible equity in each construction project; have prompt and thorough documentation of all draw requests; and we inspect the project prior to paying any draw requests. Commercial and multifamily construction loans also have a higher risk because of the construction element and lease-up, if not pre-leased.
Speculative construction loans are short term in nature and have a variable rate of interest. We require builders to have tangible equity in each construction project, have prompt and thorough documentation of all draw requests and permit us to inspect the project prior to paying any draw requests.
Jumbo certificate of deposit accounts are offered in amounts of $100,000 or more for terms of seven days to one year. 7 Table of Contents Our personal checking accounts feature an array of benefits and options, including online banking, online statements, mobile banking with mobile deposit, VISA debit cards and access to more than 40,000 surcharge free Automated Teller Machines through the MoneyPass network.
Our personal checking accounts feature an array of benefits and options, including online banking, online statements, mobile banking with mobile deposit, VISA debit cards and access to more than 40,000 surcharge free Automated Teller Machines through the MoneyPass network. We also offer investment advice through a Wealth Management department that provides objective advice from trusted advisers.
Under these capital regulations, the minimum capital ratios are: (1) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (2) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%; (3) a Tier 1 capital ratio of 6.0% of risk-weighted assets; and (4) a total capital ratio of 8.0% of risk-weighted assets.
The Basel III Rule requires banking organizations to maintain minimum capital ratios as follows: • A ratio of Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets; • A ratio of Tier 1 Capital equal to 6% of risk-weighted assets; • A ratio of Total Capital (Tier 1 plus Tier 2) equal to 8% of risk-weighted assets; and • A leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.
Project feasibility is also important and our lenders ensure the project is economically viable. Commercial and multifamily construction loans are monitored through cost reviews, regulatory-compliant appraisals, sufficient equity, engineering inspections and controlled disbursements. Consumer At December 31, 2023, we had $171.4 million, or 4.0% of our loans receivable, in consumer loans.
The Company performs due diligence to gain comfort that the experience of the general contractor is sufficient to finish the project on budget and on time. Project feasibility is also important and our lenders ensure the project is economically viable. Commercial and multifamily construction loans are monitored through cost reviews, regulatory-compliant appraisals, sufficient equity, engineering inspections and controlled disbursements.
For additional information, see Note (7) Derivative Financial Instruments of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data. Residential Real Estate Loans, Originations and Sales At December 31, 2023, residential real estate loans totaled $375.3 million, or 8.7% of our loans receivable.
For additional information, see Note (7) Derivative Financial Instruments of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data of this Form 10-K.
These regulations require the Bank to disclose its privacy policy, including informing consumers of their information sharing practices and informing consumers of their rights to opt out of certain practices.
These laws require the Bank to periodically disclose its privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances.
Heritage Financial Corporation As a bank holding company registered with the Federal Reserve, we are subject to comprehensive regulation and supervision by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve.
As a bank holding company, we are registered with, and subject to regulation, supervision and enforcement by, the Federal Reserve under the BHCA. We are legally obligated to act as a source of financial and managerial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so.
We also offer investment advice through a Wealth Management department that provides objective advice from trusted advisers. Lending Activities Our lending activities are conducted through the Bank. While our focus is on commercial business lending, we also originate real estate construction and land development loans, residential real estate and consumer loans.
Lending Activities Our lending activities are conducted through the Bank. While our focus is on commercial business lending, we also originate real estate construction and land development loans and consumer loans. Our loans are originated under policies that are reviewed and approved annually by our Board. In addition, we have established internal lending guidelines that are updated as needed.
The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and maintaining capital levels commensurate with the level and nature of real estate concentrations.
The CRE Guidance does not limit banks’ levels of CRE activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their CRE concentrations.
As a result, this type of construction loan is made only to strong borrowers with sufficient equity into the 8 Table of Contents project and additional resources they can draw on if needed. The Company performs due diligence to gain comfort that the experience of the general contractor is sufficient to finish the project on budget and on time.
Commercial and multifamily construction loans also have a higher risk because of the construction element and lease-up elements, if such properties are not pre-leased. As a result, this type of construction loan is made only to strong borrowers with sufficient equity into the project and additional resources they can draw on if needed.
As such, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Heritage Bank The Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the FDIC, and is subject to regulation by the FDIC and the DFI.
Our common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Exchange Act. Consequently, we are subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. Corporate Governance.
The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), enacted in May 2018, required the federal banking agencies, including the FDIC, to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” or “CBLR” of between 8 to 10%.
Section 201 of the Economic Growth Act specifically instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8% and 10%.
In addition to the approval of the Federal Reserve, prior approval may for such acquisitions also be necessary from other agencies including the FDIC, DFI and agencies that regulate the target. In July 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy.
The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies. In addition to approval from the Federal Reserve, prior approval for acquisitions may be required from other agencies, such as the DFI or other agencies that regulate the target company of an acquisition.
This regulation and supervision is generally intended to ensure that we limit our activities to those allowed by law and that we operate in a safe and sound manner without endangering the financial health of the Bank. We are required to file annual and periodic reports with the Federal Reserve and provide additional information as the Federal Reserve may require.
Under the BHCA, we are subject to periodic examination by the Federal Reserve and are required to file with the Federal Reserve periodic reports of our operations and such additional information regarding us and the Bank as the Federal Reserve may require. Acquisitions, Activities and Financial Holding Company Election.
Bank Secrecy Act / Anti-Money Laundering Laws The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001.
Anti-Money Laundering/Countering the Financing of Terrorism/Sanctions . The Bank Secrecy Act (“BSA”) is the common name for a series of laws and regulations enacted in the United States to combat money laundering and the financing of terrorism.
Removed
We will continue to focus on loan types and markets that we know well and where we have a historical record of success. We focus on loan relationships that are well-diversified in both size and industry types.
Added
We have a problem loan resolution process that is focused on quick detection and implementing feasible solutions and subject our loans to periodic internal loan reviews. Maintain a strong balance sheet.
Removed
Our loans are originated under policies that are reviewed and approved annually by our Board of Directors. In addition, we have established internal lending guidelines that are updated as needed. These policies and guidelines address underwriting standards, structure and rate considerations, and compliance with laws, regulations and internal lending limits.
Added
Residential Real Estate Loans, Originations and Sales At December 31, 2024, residential real estate loans totaled $403.0 million, or 8.4% of our loans receivable. The majority of our residential real estate loans are secured by single-family residences located in our primary market areas.
Removed
We further endeavor to limit our construction lending risk through adherence to strict underwriting guidelines and procedures. Speculative construction loans are short term in nature and have a variable rate of interest.
Added
Consumer At December 31, 2024, we had $164.7 million, or 3.4% of our loans receivable, in consumer loans. We originate consumer loans and lines of credit that are both secured and unsecured. For additional information, see Item 1A. Risk Factors—Credit Risks this Form 10-K.
Removed
We originate consumer loans and lines of credit that are both secured and unsecured. During the three months ended March 31, 2020, we ceased indirect auto and recreational vehicle loan originations, which are classified as consumer loans within loans receivable.
Added
Supervision and Regulation General FDIC-insured institutions, like the Bank, their holding companies and affiliates are extensively regulated under federal and state law.
Removed
These indirect consumer loans are secured by new and used automobile and recreational vehicles and were originated indirectly by established and well-known dealers located in our market areas. In addition, the indirect loans purchased were made to only prime borrowers.
Added
As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various banking agencies, including the DFI, the Federal Reserve, the FDIC and the Consumer Financial Protection Bureau (“CFPB”).
Removed
At December 31, 2023, we had $32.3 million, or 0.7% of our loans receivable, in indirect consumer loans remaining which is a decrease of $30.5 million or 48.6% from $62.9 million as of December 31, 2022. See also, Item 1A. Risk Factors—Risks Related to Our Lending Activities.
Added
Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB and PCAOB, securities laws administered by the SEC and state securities authorities, and anti-money and sanctions laundering laws enforced by the U.S. Department of the Treasury (“Treasury”) have an impact on our business.
Removed
Supervision and Regulation We are subject to extensive regulation, and supervision under federal law and the laws of Washington State, which are both primarily intended to protect depositors and the FDIC, and not shareholders.
Added
The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results.
Removed
Additionally, the Consumer Financial Protection Bureau is responsible for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. Any change in applicable laws, regulations, or regulatory policies may have a material effect on our business, operations, and prospects.
Added
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders.
Removed
We cannot predict the nature or the extent of the effects on our business and earnings that any fiscal or monetary policies or new Federal or State laws may have in the future.
Added
These laws, and the regulations of the banking agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments that the Company and the Bank may make, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability of the Company or the Bank to merge, consolidate and acquire, dealings with our insiders and affiliates and the payment of dividends.
Removed
The following is a summary discussion of certain laws and regulations applicable to the Company and the Bank which is qualified in its entirety by reference to the actual laws and regulations.
Added
In reaction to the global financial crisis and particularly following the passage of the Dodd-Frank Act, we experienced heightened regulatory requirements and scrutiny.
Removed
The Federal Reserve may examine us, and any of our subsidiaries, and assess us for the cost of such examination.
Added
Although the reforms primarily targeted large banking organizations and systemically important financial institutions, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase.
Removed
The Federal Reserve has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders, or require that a holding company divest subsidiaries (including its bank subsidiary). In general, enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.
Added
The Economic Growth Act eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving them of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. These reforms have been favorable to our operations.
Removed
The Federal Reserve may also order termination of non-banking activities by non-banking subsidiaries of bank holding companies, or divestiture of ownership and control of a non-banking subsidiary by a bank holding company. Some violations may also result in criminal penalties.
Added
It is anticipated that the Trump Administration and the current U.S.
Removed
Federal Reserve policy provides that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks.
Added
Congress likely will not increase the regulatory burden on community banking organizations and may seek to reduce and streamline certain prudential and regulatory requirements 9 Table of Contents applicable to community banking organizations at a federal level based on statements made by relevant congressional leaders and the acting leaders of certain federal banking agencies.
Removed
A bank holding company’s failure to meet its obligation to serve as a source of strength by providing financial assistance to a subsidiary bank in financial distress is generally considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both.
Added
At this time, however, it is not possible to predict with any certainty the actual impact that the Trump Administration may have on the banking industry or the operations of the Company or the Bank.
Removed
As a bank holding company, we are required to obtain the prior approval of the Federal Reserve to acquire all, or substantially all, of the assets of any other bank or bank holding company.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

31 edited+210 added−167 removed9 unchanged
Biggest changeAlthough we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures and could result in losses to us or our customers, our loss of business and/or customers, damage to our reputation, incurrence of additional expenses, 21 Table of Contents disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
Biggest changeThe Company’s third party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to the Company or its customers, loss of business or customers, damage to the Company’s reputation, the incurrence of additional expenses, disruption to the Company’s business, additional regulatory scrutiny or penalties or the Company’s exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Decreases in the fair value of investment securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity. Stockholders' equity, specifically AOCI, is increased or decreased by the amount of change in the estimated fair value of our securities available for sale, net of deferred income taxes.
Decreases in the fair value of investment securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity, specifically AOCI, which is increased or decreased by the amount of change in the estimated fair value of our securities available for sale, net of deferred income taxes.
The Company could recognize an impairment loss for any security that has declined in fair value below its amortized cost basis if management has the intent to sell the security or if it is more likely than not it will be required to sell the security before recovery of its amortized cost basis.
The Company could recognize impairment loss for any security that has declined in fair value below its amortized cost basis if management has the intent to sell the security, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.
In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in the Company’s reporting materially different results than would have been reported under a different alternative.
In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in the Company’s reporting materially different results than would have been reported under a different alternative.
This risk is affected by, among other things: • the cash flow of the borrower, guarantors and/or the project being financed; • the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan; • the character and creditworthiness of a particular borrower or guarantor; 17 Table of Contents • changes in economic and industry conditions; and • the duration of the loan.
This risk is affected by, among other things: • the cash flow of the borrower, guarantors and/or the project being financed; • the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan; • the character and creditworthiness of a particular borrower or guarantor; • changes in economic and industry conditions; and • the duration of the loan.
The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment regarding the most appropriate manner to report the Company’s financial condition and results of operations.
Management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report the Company’s financial condition and results of operations.
Our future success will depend, to some degree, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as create additional efficiencies in our operations.
The Company’s future success will depend in part upon its, and its third party partners’, ability to address the needs of the Company’s customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations.
Increases in criminal activity levels and sophistication, advances in computer capabilities, new vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and/or controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions.
In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that the Company uses to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access our systems.
Certain accounting policies are critical to presenting the Company’s financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include the ACL on loans, investments and unfunded commitments, and goodwill.
Certain accounting policies are critical to presenting the Company’s financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts 27 Table of Contents could be reported under different conditions or using different assumptions or estimates.
An inability to raise funds through deposits, borrowings, the sale of loans or investment securities and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and borrowings from the FHLB and certain other wholesale funding sources to fund our operations.
An inability to raise funds through deposits, borrowings, the sale of loans or investment securities, and from other sources could have a substantial negative effect on our liquidity.
UNRESOLVED STAFF COMMENTS The Company has no unresolved staff comments from the SEC as it relates to the Company's financial information as reported in the Form 10-K. ITEM 1C. CYBERSECURITY Risk Management and Strategy Enterprise Risk Management and Technology Risk Management.
UNRESOLVED STAFF COMMENTS The Company has no unresolved staff comments from the SEC as it relates to the Company's financial information as reported in this Form 10-K.
The financial services industry is experiencing rapid technological changes with frequent introductions of new technology-driven products and services. Effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Many of our competitors have substantially greater resources to invest in technological improvements than we do.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.
We may not be able to effectively implement new technology-driven products or services or be successful in marketing these products and services. Additionally, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws.
In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause the Company to fail to comply with applicable laws.
Before making an investment decision, you should carefully consider the risks described below together with all of the other information included in this Form 10-K and our other filings with the SEC.
Before you decide to invest, you should carefully review and consider the risks described below, together with all other information included in this Form 10-K and other reports and documents the Company files with the SEC.
These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by, or other adverse events affecting the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets.
These factors include, but are not limited to, changes in interest rates, rating agency downgrades or the Company’s own analysis of the value of the securities, defaults by the issuers or individual mortgagors with respect to the underlying securities and instability in the credit markets.
We are susceptible to fraudulent activity that may be committed against us or our customers which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer’s information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation.
As a financial institution, the Company is susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against the Company, its customers or third parties with whom it interacts, which may result in financial losses or increased costs to the Company or its customers, disclosure or misuse of the Company’s information or its customer information, misappropriation of assets, privacy breaches against the Company’s customers, litigation or damage to the Company’s reputation.
Our profitability is dependent primarily upon net interest income, which is the difference (or “spread”) between the interest earned on loans, investment securities and other interest earning assets and the interest paid on deposits, borrowings, and other interest bearing liabilities.
The Company’s earnings and cash flows are primarily dependent on net interest income, which is the difference between the interest income that the Company earns on interest earning assets such as loans and investment securities, and the interest expense that the Company pays on interest-bearing liabilities such as deposits and borrowings.
Any decline in available funding in amounts adequate to finance our activities or on terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations. 23 Table of Contents Additionally, collateralized public funds are bank deposits of state and local municipalities.
Any decline in available funding could adversely impact the Company’s ability to continue to implement its strategic plan, including originating loans and investing in securities, or to fulfill obligations such as paying expenses, repaying borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
A return of recessionary conditions or adverse economic conditions in the primary market areas of the Pacific Northwest in which we operate could reduce our rate of growth, affect our customers' ability to repay loans and have a material adverse effect on our business, financial condition, and results of operations.
A decline in the business and economic conditions in the Company’s market areas could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Increases in interest rates generally decrease the fair value of securities available for sale, which adversely impacts stockholders' equity.
Increases in interest rates generally decrease the fair value of securities available for sale, adversely impacting stockholders’ equity. In recent periods, the company has realized losses on the sale of investment securities in connection with strategic balance sheet repositioning transactions.
Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets.
The Company’s access to funding sources in amounts adequate to finance or capitalize the Company’s activities or on terms that are acceptable to the Company could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
The occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our business, financial condition, and results of operations.
A system failure or service denial could result in a deterioration of the Company’s ability to process loans or gather deposits and provide customer service, compromise the Company’s ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage the Company’s reputation, result in a loss of customer business or subject the Company to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on its business, financial condition, results of operations and growth prospects.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances we will be able to raise additional capital, if needed, on terms that are acceptable to us or at all.
Accordingly, the Company cannot provide assurances that it will be able to raise additional capital if needed or on terms acceptable to the Company.
All of these loans were performing in accordance with their repayment terms as of December 31, 2023. Our ACL on loans may prove to be insufficient to absorb losses in our loan portfolio. Lending money is a substantial part of our business.
The Company’s allowance for credit losses may prove to be insufficient to absorb potential losses in its loan portfolio. 20 Table of Contents Lending money is a substantial part of our business.
Changes in the valuation of our investment securities portfolio could hurt our profits and reduce capital levels. Factors beyond our control can significantly influence the fair value of investment securities in our portfolio and can cause potential adverse changes to the fair value of these investment securities, potentially reducing AOCI and/or earnings.
The Company could recognize additional losses on securities held in the Company’s securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate. Factors beyond the Company’s control can influence and cause potential adverse changes to the fair value of securities in the Company’s portfolio.
As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially adversely affected.
The Company’s risk management framework may not be effective under all circumstances, and may not adequately mitigate any risk or loss. If the Company’s framework is not effective, the Company could suffer unexpected losses and its business, reputation, financial condition, results of operations and growth prospects could be materially and adversely affected.
The Company’s accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations.
The Company may also be subject to potentially adverse regulatory consequences. The Company’s accounting estimates and risk management processes and controls rely on analytical and forecasting techniques and models and assumptions, which may not accurately predict future events. The Company’s accounting policies and methods are fundamental to the way it records and reports its financial condition and results of operations.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
Failure to adequately manage the risks associated with the Company’s anticipated organic growth could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Commercial business lending involves distinct risks compared to residential real estate lending. Our commercial business loans are primarily made based on our assessment of the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.
The Company’s commercial and industrial loans are primarily made based on the identified cash flow of the 21 Table of Contents borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment.
Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering, and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes, although such losses have been relatively insignificant to date.
Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by the Company or its customers, denial or degradation of service attacks and malware or other cyber-attacks.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.
Changes in interest rates also affect the Company’s ability to fund operations with customer deposits and the fair value of securities in the Company’s investment portfolio. Any change in general market interest rates, including changes in federal fiscal and monetary policies, could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Removed
ITEM 1A. RISK FACTORS We assume and manage a certain degree of risk in order to conduct our business strategy.
Added
ITEM 1A. RISK FACTORS Investing in the Company’s common stock involves a high degree of risk. The material risks and uncertainties that management believes affect the Company are described below.
Removed
In addition to the risk factors described below, other risks and uncertainties not specifically mentioned, or that are currently known to, or deemed to be immaterial by management, also may materially and adversely affect our financial condition, results of operations and/or cash flows.
Added
Any of the following risks, as well as risks that the Company does not know or currently deems immaterial, could have a material adverse effect on the Company’s business, reputation, financial condition, results of operations and growth prospects.
Removed
If any of the circumstances described in the following risk factors actually occur to a significant degree, the value of our common stock could decline, and you could lose all or part of your investment. This Form 10-K is qualified in its entirety by these risk factors.
Added
Market and Interest Rate Risks The Company’s business is subject to interest rate risk, and fluctuations in interest rates or monetary policy may adversely affect the Company’s business, financial condition, results of operations and growth prospects. Fluctuations in interest rates may negatively affect the Company’s business and weaken demand for some of its products.
Removed
Risks Related to our Lending Activities Repayment of our commercial business loans, consisting of commercial and industrial loans as well as owner-occupied and non-owner occupied commercial real estate loans, is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
Added
The Company’s interest earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types of assets and liabilities may lag behind.
Removed
We offer a variety of commercial business loans across various industries such as real estate, healthcare, accommodation and food services, retail trade and construction. Our primary loan offerings comprise lines of credit, term equipment financing, and term real estate loans. Additionally, we facilitate loans guaranteed by the SBA, holding the designation of a “preferred lender” by the SBA.
Added
The result of these changes to rates may cause differing spreads on interest earning assets and interest-bearing liabilities.
Removed
The unpredictability of a borrower's cash flow and the potential fluctuations in collateral values underscore the inherent risks in these loans.
Added
The Company could also be prevented from altering the interest rates charged on loans or from maintaining the interest rates offered on deposits and money market savings accounts due to “price” competition from other banks and financial institutions with which the Company competes.
Removed
While our commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things.
Added
The Company does not know what market rates will be throughout 2025, including the frequency and significance with which the target range for the federal funds rate may be changed in 2025.
Removed
Accordingly, the repayment of commercial business loans primarily relies on the borrower’s cash flow and creditworthiness, supplemented by the underlying collateral. At December 31, 2023, our commercial business loans totaled $3.37 billion, or 77.8% of our total loan portfolio, of which $4.5 million, or 0.1% of commercial business loans were classified as nonaccrual.
Added
If the Company fails to 19 Table of Contents offer interest at a sufficient level to keep its non-maturity interest-bearing deposits, core deposits may be reduced, which would require the Company to obtain funding in other ways or risk slowing future asset growth.
Removed
Within commercial business loans, agricultural 16 Table of Contents loans totaled $65.7 million, or 1.5% of our total loan portfolio and 1.9% of our commercial business loans at December 31, 2023 of which $825,000, or 1.3% of agricultural loans were classified as nonaccrual loans.
Added
The foregoing factors, as well as changing economic and market conditions or other factors, could cause write-downs and realized or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Removed
Our portfolio encompasses owner and non-owner occupied commercial real estate loans, including multifamily residential real estate loans. These loans often involve higher principal amounts compared to other loan types, and their repayment may be contingent on factors beyond our or our borrowers' control. We originate commercial real estate loans for individuals and businesses, which are secured by commercial properties.
Added
The process for determining whether a write-down is required usually requires complex, subjective judgments, which could subsequently prove to have been wrong, about the future financial performance and liquidity of the issuer, the fair value of any collateral underlying the security and whether and the extent to which the principal and interest on the security will ultimately be paid in accordance with its payment terms.
Removed
These loans typically involve higher principal amounts than other types of loans and repayment is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions.
Added
The Company cannot guarantee that its stock repurchase program will be fully implemented or that it will enhance long-term shareholder value. On April 24, 2024, the Board approved the repurchase of up to 5% of the Company's outstanding common shares, or 1,734,492 shares.
Removed
For example, if the project's cash flow diminishes due to unobtained or unrenewed leases, the borrower’s capacity to repay the loan could be impaired. Additionally, many of these loans have adjustable rates and reprice periodically. A significant increase in rates could increase the payment amount and could impact the borrower’s ability to repay the loan.
Added
This stock repurchase program supersedes the previous stock repurchase program, authorized in March 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares.
Removed
Commercial real estate lending also exposes us to greater credit risk than loans secured by residential real estate. Typically, the collateral securing these loans is not as easily liquidated as residential properties. In addition, many of our commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity.
Added
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 stock repurchase program’s expiration, without any prior notice.
Removed
Such balloon payments may require the borrower to either sell or refinance the underlying property, potentially elevating the risk of default or non-payment. If we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer compared to residential real estate loans due to fewer potential purchasers.
Added
Even if fully implemented, the stock repurchase program may not enhance long-term shareholder value. Credit Risks The Company’s business depends on its ability to manage credit risk.
Removed
Additionally, commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers, magnifying the impact of any errors in judgment regarding their collectability. Consequently, resulting charge-offs per loan may be larger than those incurred with our residential or consumer loan portfolios.
Added
The Company’s banking business requires it to manage credit risk; however, default risk may arise from events or circumstances that are difficult to detect, such as fraud, or difficult to predict, such as catastrophic events affecting certain industries.
Removed
As of December 31, 2023, our owner and non-owner occupied commercial real estate loans totaled $2.66 billion, or 61.2% of our total loan portfolio, of which $205,000 were classified as nonaccrual. Our real estate construction and land development loans are based upon estimates of costs and net operating income and the related value associated with the completed project.
Added
As a lender, the Company is exposed to the risk that its borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment.
Removed
These estimates may be inaccurate. Construction lending involves additional risks when compared with permanent commercial and residential real estate lending because funds are advanced upon the collateral for the project based on an estimate of costs to produce a future project value at completion.
Added
In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, proper loan underwriting, changes in economic and industry conditions and those inherent in dealing with specific borrowers, including the risk that a borrower may not provide information to the Company about its business in a timely manner, may present inaccurate or incomplete information to the Company or risks relating to the value of collateral.
Removed
Estimating construction costs, the project's market value upon completion, and the impact of regulatory changes on real property involve inherent uncertainties. Accurately evaluating the total funds required for a project and the resulting loan-to-value ratio upon completion is challenging. Unforeseen changes in demand or higher building costs may significantly deviate from initial estimates.
Added
To manage credit risk, the Company must maintain disciplined and prudent underwriting standards and ensure that the Company’s bankers follow those standards.
Removed
This type of lending also typically involves large loan principal amounts and may be concentrated among a limited number of builders. A downturn in the housing or the real estate market could increase delinquencies, defaults and foreclosures, significantly impairing the value of our collateral and our ability to sell it upon foreclosure.
Added
The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by the Company’s employees in underwriting and monitoring loans, the Company’s inability to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of the Company’s loan portfolio may result in loan defaults, foreclosures and charge-offs and may necessitate that the Company significantly increase its allowance for credit losses, each of which could adversely affect net income.
Removed
Further, some borrowers have multiple loans outstanding with us, exposing us to higher risk if one credit relationship encounters adverse developments. .
Added
As a result, the Company’s inability to successfully manage credit risk could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. The Company’s high concentration of large loans to certain borrowers may increase the Company’s credit risk.
Removed
Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest.
Added
The Company has developed relationships with certain individuals and businesses that have resulted in a concentration of large loans to a small number of borrowers. As of December 31, 2024, the Company’s 10 largest borrowing relationships accounted for approximately 6.5% of the total loan portfolio.
Removed
If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.
Added
The Company has established an informal, internal limit on loans to one borrower, principal or guarantor, but the Company may, under certain circumstances, consider going above this internal limit in situations where management’s understanding of the industry, the borrower’s business and the credit quality of the borrower are commensurate with the increased size of the loan.
Removed
Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and more costly to monitor. Increases in market rates of interest can significantly impact construction loans, escalating end-purchasers' borrowing costs and potentially hindering project financing or reducing overall demand for the project.
Added
Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers presents a risk to the Company’s lending operations.
Removed
Moreover, properties under construction are often difficult to sell and typically must be completed to be successfully sold, complicating the resolution of problematic construction loans.
Added
If any one of these borrowers becomes unable to repay its loan obligations as a result of business, economic or market conditions, the Company’s nonaccruing loans and provision for loan losses could increase significantly, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Removed
This may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

0 edited+27 added−61 removed0 unchanged
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Item 1C. Cybersecur ity for annual disclosures. Other Regulatory Developments Community Reinvestment Act . On October 24, 2023, the federal banking agencies, including the FDIC issued a final rule designed to strengthen and modernize regulations implementing the Community Reinvestment Act (CRA).
Added
ITEM 1C. CYBERSECURITY Risk Management and Strategy Enterprise Risk Management and Technology Risk Management. The Company's Enterprise Risk Management program and team plays a pivotal role in overseeing the organization's risk posture, specifically focusing on the implementation of a holistic risk management program for overseeing the assessment and appropriate control of information and cybersecurity risks.
Removed
The changes are designed to encourage banks to expand access to credit, investment and banking services in low and moderate income communities, adapt to changes in the banking industry including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type.
Added
Annually, the Information and Cyber Security Policy and Program and Risk Assessments are presented for approval to the Board to ensure the program is representative and supportive of the Bank’s risk appetite and security testing expectations. Risks identified are subject to rigorous controls, ensuring both design and operational effectiveness and adherence to regulatory requirements.
Removed
The Bank cannot predict the impact the changes the new CRA rule will have on its operations at this time. Website Access to Company Reports We post publicly available reports required to be filed with the SEC on our website, www.hf-wa.com, as soon as reasonably practicable after filing such reports.
Added
Instances where a risk is identified as inadequately controlled are promptly reported to Management requiring formal remediation activities that are tracked and reported to the Risk and Technology Committee of the Board, until measures are implemented to reduce the risk to an acceptable level Identification of risks is a multifaceted process, encompassing diverse activities such as the execution of formal risk assessments, as described above, management self-disclosures, monitoring of regulatory and interagency authorities, engagement with professional and industry forums, internal and external audits, collaboration with third-party professional services, policy reviews and walkthroughs, adherence to best practice frameworks, leveraging subject matter expertise and industry experience, and maintaining a collaborative relationship with third party service providers/vendors.
Removed
The required reports are available free of charge through our website. Code of Ethics We have adopted a Code of Ethics that applies to our principal officers. We have posted the text of our Code of Ethics at www.hf-wa.com in the section titled Overview: Governance Documents.
Added
The dedicated Technology Risk Management team operates a continuous risk management framework, utilizing information gathered daily, weekly, monthly, quarterly and annually to provide insights into the state of controlled risk within the organization.
Removed
Any significant changes or waivers of the Code of Ethics will be publicly disclosed to shareholders.
Added
Security testing and assurance activities are performed internally and are outsourced to independent audit and security firms based on factors such as resource capacity, subject matter expertise, regulatory requirements, and the prevailing rate and condition of risk.
Removed
Competition We compete for loans and deposits with other commercial banks, credit unions, mortgage bankers, and other providers of financial services, including finance companies, online-only banks, mutual funds, insurance companies, and more recently 12 Table of Contents with financial technology companies that rely on technology to provide financial services. Many of our competitors have substantially greater resources than we do.
Added
Daily operational activities are in place to ensure the achievement and implementation of security requirements, including the management of the Bank’s security architecture, monitoring for potential security events or incidents, and the reporting and 30 Table of Contents response to detected threats in our technology environments.
Removed
Particularly in times of high or rising interest rates, we also face significant competition for investors’ funds from short-term money market securities and other corporate and government securities. We compete for loans principally through the range and quality of the services we provide, interest rates and loan fees, and robust delivery channels for our products and services.
Added
The Information and Cyber Security Policy and Program establishes the additional policies and standards the Bank is required to implement in support of these practices and processes. Additionally, we maintain a compliant and comprehensive Security Incident Response Plan, incorporating accessible resources such as insurance providers, digital and cyber forensic experts and law enforcement, along with documentation of regulatory notification requirements.
Removed
We actively solicit deposit-related clients and compete for deposits by offering depositors high touch service on a variety of savings accounts, checking accounts, cash management and other services. Human Capital Our Culture and Our People The Company's success depends on the success of its people, and we are dedicated to fostering employee empowerment through robust human capital and talent management.
Added
Our practices are interdependent with third party vendors, and we collaborate appropriately with these partners on notification and investigation processes to ensure complete visibility into security risks and events. From time-to-time, we have identified cybersecurity threats that require us to make changes to our processes and to implement additional safeguards.
Removed
Our strong culture, built upon a clear mission and values, unites employees at all levels of the Company towards a common goal, enabling them to reach their full potential. Diversity, Equity, Inclusion (“DEI”) We recognize and appreciate the importance of creating an environment where all employees feel valued, included, and empowered to do their best work.
Added
While none of these identified threats or incidents have materially affected us, it is possible that threats and incidents we identify in the future could have a material adverse effect on our business strategy, reputation, results of operations and financial condition. During the reporting period, the Company had not experienced any material cybersecurity events or incidents.
Removed
Recognizing the unique perspectives each employee brings, we value their contributions to making us the leading commercial community bank in the Pacific Northwest. To advance DEI, we have a comprehensive plan, a DEI Officer certified by the National Diversity Council (“NDC”), and a dedicated Diversity Council.
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Although third party service providers that the Bank engages have encountered cybersecurity events or incidents during the year ended December 31, 2024, the Bank’s investigation of each event or incident has shown that these occurrences have not resulted in a material impact on our systems, computing environments, customers, or data.
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The Diversity Council, comprising diverse employees collaborating closely with senior leaders, ensures DEI initiatives align with our strategic goals. Both our Chief Executive Officer and Executive Vice President Chief Human Resources Officer serve as executive sponsors to the Diversity Council. The Diversity Council plays a crucial role in driving organizational change and prioritizing diversity, equity, and inclusion.
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Governance Board Oversight: The Board provides active oversight of cybersecurity threats in accordance with the Board-approved Information and Cyber Security Policy and Program.
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Our executive management team and Board of Directors have undergone instructor-led, customized DEI training. All employees receive ongoing diversity training. In 2023, the NDC recognized our community outreach and corporate social responsibility efforts, rating us among the best companies for diversity.
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These policies and programs aim to achieve a controlled risk environment while meeting regulatory, legislative, and compliance requirements, including but not limited to the Gramm-Leach-Bliley Act (GLBA), Health Insurance Portability and Accountability Act (HIPAA), Information Technology Sarbanes-Oxley Act (IT SOX) Compliance, and Payment Card Industry Data Security Standard (PCI-DSS) Compliance.
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The objectives of the Company's DEI plan include: • Workforce Diversity: Recruit from a diverse, qualified group of potential applicants to secure a high-performing workforce drawn from all segments of the communities we serve. • Workplace Inclusion: Promote a culture that encourages collaboration, flexibility, and fairness to enable individuals to contribute to their full potential. • Sustainability: Develop structures and strategies to equip leaders with the ability to manage diversity, be accountable, measure results, refine approaches on the basis of such data and foster a culture of inclusion.
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Direct oversight of information and cybersecurity risks is delegated to the Risk and Technology Committee of the Board. The Risk and Technology Committee meets at least quarterly and receives reports detailing current risks, maturity and functioning of associated processes and controls, and emerging or anticipated risks and threats.
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In 2023, we strengthened the integration of DEI goals into our hiring practices. Our recruiting team achieved certification as “Diversity and Inclusion Recruiters” after completing the Advanced Internet Recruitment Strategies (“AIRS”) program. We also introduced "Interview and Selection" training during 2023 to address and mitigate unconscious bias in hiring decisions.
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Additionally, the Risk and Technology Committee Chair provides a verbal summarized report to the full Board following each quarterly meeting, and as needed on an interim basis to address developing risk. All Risk and Technology Committee reports are available to the full Board for review.
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This initiative resulted in an enhanced diversity representation across the organization, with 37% of new hires in 2023 coming from Underrepresented Minority Groups (“URG”), compared to 31% in 2022. Additionally, the Company enlisted an external consultant in 2023 to provide inclusive leadership training to its managers.
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In the event critical matters arise between scheduled meetings, the Chief Risk Officer promptly notifies the Board and Risk and Technology Committee. To further ensure independence and effectiveness, the Board has delegated authority for the Information and Cybersecurity Policy and Program, including the referenced reports, to the Technology Risk Management Director.
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This training, offering insights into diversity, inclusion, and identity, has been incorporated into the mandatory curriculum for new managers. All employees receive quarterly "Inclusion Insights" training, and "Lunch & Learn" sessions are open to all, encouraging ongoing discussions on these crucial topics.
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This position fulfills the role and responsibilities of a Chief Information Security Officer and reports to the Chief Risk Officer who in turn reports independently to the Chair of the Risk and Technology Committee. Additional layers of oversight are integrated into the program through the Director of Internal Audit, who conducts independent audits of critical information technology and cybersecurity activities.
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Demographics As of December 31, 2023, the Company employed 764 full-time and 35 part-time employees across Washington, Oregon, and Idaho. The Company also had six employees who were working remotely in other states. No employees are represented by a collective bargaining agreement. During 2023, we hired 145 regular full-time and part-time employees.
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The results of these audits are reported to the Board's Audit and Finance Committee, providing an extra layer of assurance and accountability. The Director of Internal Audit reports independently to the Chair of the Board's Audit and Finance Committee. Management's Role in Assessing and Managing Cybersecurity Risks.
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Voluntary workforce turnover (rolling 12-month attrition) was 16.6%, compared to 19.4% in 2022. Our average overall tenure was 7.1 years. The average tenure of management was 9.9 years.
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Management's role in assessing and managing material risks from cybersecurity threats is integral to the Company's governance framework.
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The following tables illustrate workforce demographics by job group (Note: “Director” refers to director-level management positions within the organization, not the Board of Directors) as of December 31, 2023: Organizational Level Female (%) Male (%) Individual Contributor 70.13 % 29.87 % Manager 75.00 25.00 Director 50.00 50.00 Executive 22.22 77.78 Total Workforce 69.94 % 30.06 % 13 Table of Contents Organizational Level Underrepresented Groups (%) White (%) Individual Contributor 28.69 % 28.7 % 71.31 % Manager 23.26 23.3 76.74 Director 7.14 7.1 92.86 Executive — — 100.00 Total Workforce 26.46 % 26.5 73.54 % Communication and Listening The Company strives to maintain an environment of open communication, facilitating access to senior management through initiatives like quarterly virtual “All Banker Calls,” monthly updates for Company leaders, and orientation sessions led by the Chief Executive Officer and the President/COO for new hires.
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As discussed above, the Information and Cyber Security Policy and Program outline specific roles and responsibilities delegated to management and the Enterprise Risk Management Program, which includes the Technology Risk Management team, and responsibilities assigned to various employees and the Risk and Technology Committee.
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To further enhance our “listening culture,” we utilize a survey platform to allow employees to share feedback directly with leadership, including an annual employee engagement survey and periodic pulse surveys. Survey results, shared with employees, executive leadership and the Board, guide actions at both the corporate and departmental levels.
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The Technology Risk Management Director, a seasoned information and cyber security expert with significant experience in financial institutions, oversees the Technology Risk Management function. This expert conducts comprehensive assessments of cybersecurity risks inherent in the industry and the Company's business activities, evaluating controls implemented to address identified risks.
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In recognition of our commitment to employee engagement, the Company earned a spot among the top 100 Best Places to Work in Washington and Oregon by the Puget Sound and Portland Business Journals based on the 2023 employee engagement survey. Our commitment to open communication extends to providing employees with avenues for confidential and anonymous reporting.
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The Technology Risk Management Director is responsible for maintaining the Company's information and cyber security risk management framework. This framework establishes standards and processes for the continuous assessment of material cybersecurity risks, covering identification, measurement, mitigation activities, monitoring and reporting of the risk posture at any given time.
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We offer a whistleblower hotline/website, enabling employees to report financial and workplace concerns to key leadership, including the Board Chair, Audit Committee Chair, Chief Executive Officer, Chief Operations Officer, Chief Risk Officer and Chief Human Resources Officer. Additionally, our Company intranet hosts an "Idea Bank," allowing employees to submit new ideas or recommendations directly to executive management.
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Additionally, the Director ensures oversight and compliance with the Security Incident Response Plan, providing guidance during security incidents, whether within the Company or involving service provider/vendor engagements. The Company’s information technology department, including a dedicated security operations group, plays a crucial role in implementing practices aligned with the Information and Cyber Security Policy and Program requirements.
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Talent Development and Succession Developing employees for future growth and professional development is a vital corporate activity crucial to our long-term success. The Company views its employees as our most important assets, which makes training and professional development a worthy investment.
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Responsibilities include the maintenance and monitoring of systems, network(s), and application access and error logs, identification of unauthorized access attempts, adherence to access controls standards, configuration management, and the implementation of controls to mitigate risks related to information availability, integrity, and confidentiality.
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We offer an array of learning opportunities through virtual and in-house courses via “Heritage Bank University.” Additionally, we sponsor courses from external providers such as Blanchard, Risk Management Association, Archbright, Jennifer Brown Consulting, Washington Bankers Association, Oregon Bankers Association, and the Pacific Coast Banking School.
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Business activities, products, and services are managed by experts in their respective fields, with employees receiving training to detect and prevent material cybersecurity threats. Business leaders are expected to understand specific threats within their areas of responsibility and adhere to established processes and standards to control such threats.
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We offer situational leadership training for leaders that focuses on communication and employee engagement and endorse coaching using the tools from this program. All employees are required to complete an extensive series of quarterly digital training courses focused on bank regulatory compliance, ethics, workplace safety, security, fraud awareness and prevention and other interpersonal or leadership topics.
Added
To facilitate a transparent and collaborative approach to managing cybersecurity risk, an executive management level committee has been established. Chaired by the Chief Risk Officer and administered by the Technology and Risk Management Director, the committee ensures continual awareness of the information and cybersecurity risk posture, emerging threats, known threat actors, and vulnerabilities.
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An interactive leadership roadmap is available to assist future leaders in their career development. Heritage Bank University has been recognized as a “Champion of Learning” by The Association for Talent Development for its commitment to employee learning. In 2023, the Company launched an online succession planning tool to further identify next-generation leaders and establish development plans for these individuals.
Added
Its purpose is to foster a security culture within the Company through active participation in planning and managing threat and security risk activities. 31 Table of Contents All committee activities are reported to the Risk and Technology Committee through committee minutes and formal activity reports provided by the Technology and Risk Management Director.
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Over time, we expect this process to increase generational representation across all levels, including leadership positions. As of December 31, 2023, the Company’s generational representation consisted of 20% Baby Boomers, 39% Gen X-ers, 33% Millennials, and 8% Gen Z-ers. Management and the Board review leadership succession annually.
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The Risk and Technology Committee provides similar reports to the full Board quarterly, as well as on an as-needed basis. Results of cybersecurity-related audits are also reported to the Board's Audit and Finance Committee.
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Recognition and appreciation We host “Celebrate Great,” an active internal peer recognition platform enabling managers and employees to express appreciation and recognize their co-workers and teams. Throughout 2023, more than 6,000 e-cards were posted on Celebrate Great, with 44 individuals or teams receiving “Bravo” awards and seven employees receiving “Standing Ovation” awards for their exceptional work.
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The Company celebrates employees achieving milestone anniversaries or upon retirement with a personalized yearbook and special gift. Compensation, Benefits and Pay Equity Offering competitive compensation and benefit programs is critical to attracting and retaining top talent in our highly competitive market areas.
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Employees are generally eligible for a base pay review at least once a year or upon promotion or transfer. Our hiring practices prioritize pay transparency, with job postings disclosing the pay range minimum and maximum, as well as the benefits package, and we refrain from requesting salary history from job applicants.
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We collaborate with a third-party consultant annually to evaluate hiring, promotion, and other pay practices to ensure continued equity and fairness. Incentive plan goals and results are aligned with strategic Company objectives and are approved by the Board Compensation Committee. Further alignment is achieved by having similar corporate performance metrics cascade through most executive, management, and employee annual incentive plans.
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Employees working a minimum of 20 hours per week are eligible for most benefit plans, including a 401(k) Plan with an employer matching contribution, medical, dental and vision insurance, life and long-term disability insurance, public transit passes, paid parking, and paid time off.
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Further, full-time employees enjoy up to 11 paid holidays each year and receive an 14 Table of Contents annual floating holiday to be used at their discretion. Employees also accrue up to 12 days of paid sick time per year for personal use or to care for a family member.
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Both full-time and part-time employees accrue vacation time ranging from two and five weeks, dependent on factors such as position and tenure. Employee Wellness and Wellbeing Our corporate culture places a strong emphasis on the wellbeing of our employees, recognizing its pivotal role in cultivating a vibrant and productive workforce. To support holistic wellbeing, we offer a range of resources.
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Through our Employee Assistance Program, employees receive counseling and referral services to address challenges both at work and at home. This includes mental health counseling, financial planning, basic legal advice, and dependent/elder care referrals, all at no cost to them or their household members. Additional wellness benefits are available through the Company's medical insurance plans.
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Moreover, enrolled members can take advantage of mental health apps, weight loss and fitness programs, smoking cessation programs, and various online resources, all provided at no extra cost. To alleviate workplace stress and burnout, the Company hosts a "no meetings week" at the start of each quarter.
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This dedicated time allows managers and employees to engage in purposeful planning, catch up on tasks, and reduce stress. By incorporating these breaks, employees can participate in strategic planning, creative thinking, and collaborative efforts without the constraints of scheduled meetings, ultimately contributing to a more innovative and healthier work environment.
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Community Involvement As a community bank, we are committed to supporting the communities where we operate, and we actively encourage and support our employees to do the same.
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In 2022, the Company implemented an annual volunteer event, during which the Bank closes for half a day, providing employees with a paid opportunity to volunteer in teams at various community organizations within our operating footprint. Our 2023 volunteer day event involved over 600 employees volunteering approximately 1,770 hours to more than 50 organizations in Washington, Oregon, and Idaho.
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To further facilitate community involvement, employees receive a minimum of eight additional hours of paid time off each year specifically to use for volunteer activities of their choice. Heritage Bank also participated in a 2023 EcoChallenge, where 28 teams of employees engaged in friendly competition by undertaking environmentally sustainable actions and practices.
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Challenges involved activities such as reducing waste, conserving energy, and adopting eco-friendly lifestyle habits. The collective efforts of the EcoChallenge resulted in 9,673 actions, contributing to a heightened awareness of environmental responsibility, fostering a sense of community engagement, and reinforcing a shared commitment to sustainability.
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Executive Officers The following table sets forth information with respect to executive officers of the Company at December 31, 2023: Name Age as of December 31, 2023 Position Has Served the Company or Bank Since Jeffrey J. Deuel 65 President and Chief Executive Officer of Heritage Financial Corporation and Chief Executive Officer of Heritage Bank 2010 Bryan D.
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McDonald 52 Executive Vice President of Heritage Financial Corporation and President and Chief Operating Officer of Heritage Bank 2014 Donald J. Hinson 62 Executive Vice President and Chief Financial Officer of Heritage Financial Corporation and Heritage Bank 2005 Tony W. Chalfant 62 Executive Vice President and Chief Credit Officer of Heritage Financial Corporation and Heritage Bank 2018 Matthew T.
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Ray 52 Executive Vice President and Chief Lending Officer of Heritage Bank 2010 The business experience of each executive officer is set forth below. Jeffrey J. Deuel is the President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank. Mr.
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Deuel was promoted to President and Chief Executive Officer of the Bank and President of the Company effective July 2018 and then promoted to President and Chief Executive Officer of the Company effective July 2019. Mr. Deuel was promoted to President and Chief Operating Officer of the Bank and Executive Vice President of the Company in September 2012.
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In November 2010, Mr. Deuel was named Executive Vice President and Chief Operating Officer of the Bank and Executive Vice President of the Company. Mr. Deuel joined the Bank in February 2010 as Executive Vice President. Prior to joining the Company and the Bank, Mr.
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Deuel held the position of Executive Vice President Commercial Operations with JPMorgan Chase, formerly Washington Mutual. Prior to joining Washington Mutual, Mr. Deuel was based in Philadelphia where he worked for Bank United, First Union Bank, CoreStates Bank, and First Pennsylvania Bank. During his career Mr.
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Deuel held a variety of leadership positions in commercial banking including lending, credit administration, portfolio management, retail, corporate strategies, and support services. He earned his Bachelor’s degree at Gettysburg College. 15 Table of Contents Bryan D. McDonald is an Executive Vice President of the Company and the President and Chief Operating Officer of the Bank. Mr.
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McDonald joined the Bank as an Executive Vice President and Chief Lending Officer in connection with the Company’s acquisition of Washington Banking Company and its wholly owned banking subsidiary, Whidbey Island Bank, effective May 1, 2014. Mr.
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McDonald was promoted to Executive Vice President of the Company and Executive Vice President and Chief Operating Officer of the Bank effective July 1, 2018 and then promoted to President and Chief Operating Officer of the Bank effective July 1, 2021. Previously, Mr.
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McDonald held the position of President and Chief Executive Officer of Whidbey Island Bank from January 2012 to May 2014. He joined Whidbey Island Bank in 2006 as Commercial Banking Manager and was promoted to Chief Operating Officer in 2010. Mr. McDonald has extensive managerial experience in various sales, credit, operations, commercial banking and residential real estate areas.
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Before joining the team at Whidbey Island Bank, he was Snohomish and King County Business Group Manager where he was responsible for developing all aspects of Peoples Bank's commercial banking operation in King and Snohomish counties. Mr. McDonald is on the Washington Bankers Association Board and the American Bankers Association Government Relations Council. Mr.
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McDonald holds a Bachelor's degree in Management and a Master's degree in Business Administration from Washington State University. He is also a graduate of the Pacific Coast Banking School. Donald J. Hinson serves as Executive Vice President and Chief Financial Officer of the Company and the Bank, positions he has held since September 2012.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeITEM 2. PROPERTIES The main office of the Company and the Bank is located in downtown Olympia, Washington. In addition, the Company has two administrative office locations in Tacoma and Burlington Washington and one, which is currently held for sale, in Lynnwood, Washington.
Biggest changeITEM 2. PROPERTIES The main office of the Company and the Bank is located at 201 Fifth Avenue SW, in downtown Olympia, Washington. In addition to this main office, which includes a full-service banking office, the Company has three administrative office locations in Tacoma, Everett and Burlington, Washington.
The Bank's branch network at December 31, 2023 was comprised of 50 branches located throughout Washington, Oregon and Idaho. The Company leases 24 properties and owns 29 properties at December 31, 2023.
The Bank's branch network at December 31, 2024 was comprised of 50 branches located throughout Washington, Oregon and Idaho. The Company leases 24 properties and owns 29 properties at December 31, 2024.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

9 edited+7 added−4 removed1 unchanged
Biggest changeManagement's projections show an expectation that cash dividends will continue for the foreseeable future. 26 Table of Contents Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table sets forth information about the Company’s purchases of its outstanding common stock during the quarter ended December 31, 2023: Period Total Number of Shares Purchased (1) Average Price Paid Per Share (1) Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the plans or programs (2) October 1, 2023—October 31, 2023 — — — 307,790 November 1, 2023— November 30, 2023 — — — 307,790 December 1, 2023—December 31, 2023 1,225 20.65 — 307,790 Total 1,225 $ 20.65 — 307,790 (1) Of the common shares repurchased by the Company between October 1, 2023 and December 31, 2023, all shares represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units.
Biggest changeFinancial Statements and Supplementary Data of this Form 10-K for additional information regarding dividend restrictions. 32 Table of Contents Purchases of Equity Securities by the Issuer The following table sets forth information about the Company’s purchases of its outstanding common stock during the quarter ended December 31, 2024: Period Total number of shares purchased (1) Average price paid per share (1) Total number of shares purchased as part of publicly announced programs Maximum number of shares that may yet be purchased under the program October 1, 2024—October 31, 2024 — — — 1,155,452 November 1, 2024— November 30, 2024 20,000 25.44 20,000 1,135,452 December 1, 2024—December 31, 2024 145,498 26.50 144,930 990,522 Total 165,498 $ 26.37 164,930 990,522 (1) Of the common shares repurchased by the Company between October 1, 2024 and December 31, 2024, 568 shares represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units and were not repurchased pursuant to the publicly announced stock repurchase program.
Payments of future cash dividends, if any, will be at the discretion of our Board of Directors considering 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.
Payments of future cash dividends, if any, will be at the discretion of our Board, taking into account various factors, including our business, operating results, 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.
On January 24, 2024, the Company’s Board of Directors declared a regular quarterly dividend of $0.23 per common share payable on February 22, 2024 to shareholders of record on February 8, 2024.
On January 22, 2025, the Board declared a regular quarterly dividend of $0.24 per common share payable on February 20, 2025 to shareholders of record at the close of business on February 6, 2025.
Holders At December 31, 2023, we had approximately 1,097 shareholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms). The Company has historically paid cash dividends to its common shareholders.
Shareholders At February 18, 2025, we had approximately 1,039 shareholders of record (which does not include the number of beneficial owners of stock in nominee or street name through various brokerage firms). Dividends The Company has historically paid cash dividends to its common shareholders.
The graph assumes the value of the investment in Company’s common stock and each index was $100 on December 31, 2018, and all dividends were reinvested. .
SmallCap Banks Index is comparative peer index comprised of banks and related holding companies within the same market capitalization range as the Company. The graph assumes the value of the investment in Company’s common stock and each index was $100 on December 31, 2019, and all dividends were reinvested. .
(2) On March 12, 2020 the Company's Board of Directors announced the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan.
On April 24, 2024, the Board approved the repurchase of up to 5% of the Company's outstanding common shares, or 1,734,492 shares. This stock repurchase program supersedes the previous stock repurchase program, authorized in March 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares.
SmallCap Banks Index during the five-year period beginning December 31, 2018 and ending December 31, 2023. Total return includes appreciation or depreciation in market value of the Company’s common stock as well as actual cash and stock dividends paid to common shareholders.
Total return includes appreciation or depreciation in market value of the Company’s common stock as well as actual cash and stock dividends paid to common shareholders. The Nasdaq Composite Index is a broad equity market index comprised of all domestic and international common stocks listed on the Nasdaq Stock Market ("Nasdaq"). The S&P U.S.
The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this Form 10-K is incorporated herein by reference. Performance Graph The following graph shows the five-year comparison of the total return to shareholders of the Company’s common stock as compared to the NASDAQ Composite Index and the S&P U.S.
Performance Graph The following graph shows the five-year comparison of the cumulative total return to shareholders of the Company’s common stock as compared to the Nasdaq Composite Index and the S&P U.S. SmallCap Banks Index during the five-year period beginning December 31, 2019 and ending December 31, 2024.
No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. 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.
It is management's expectation based on current projections that cash dividends will continue for the foreseeable future, however, no assurances can be given that any dividends will be paid or that, if paid, such dividends will not be reduced in amount in future periods.
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The repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares, unless terminated sooner by the Board of Directors. The repurchase program may be suspended or discontinued at any time by the Company’s Board of Directors. Equity Compensation Plan Information.
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The payment of dividends on the Company's common stock depends substantially upon receipt by the Company of dividends from the Bank, which is the Company’s predominant source of income. Dividend Restrictions As a Washington corporation, the Company is subject to certain restrictions on dividends under corporate law.
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The NASDAQ Composite Index is a broad equity market index comprised of all domestic and international common stocks listed on the Nasdaq Stock Market. The S&P U.S. SmallCap Banks Index is comparative peer index comprised of banks and related holding companies within the same market capitalization range as the Company.
Added
In general, these restrictions do not allow us to pay dividends if, after payment of such dividends, we would not be able to pay our liabilities as they become due in the usual course of business, or our total assets would be less than total liabilities.
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Years Ended December 31, Index 2018 2019 2020 2021 2022 2023 Heritage Financial Corporation $ 100 $ 97.98 $ 84.20 $ 90.83 $ 117.47 $ 85.89 NASDAQ Composite Index 100 136.69 198.10 242.03 163.28 236.17 S&P U.S.
Added
The FDIC and the DFI 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.
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SmallCap Banks Index 100 125.46 113.94 158.62 139.85 140.55 *Information for the graph was provided by S&P Global Market Intelligence. 27 Table of Contents ITEM 6. [RESERVED]
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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.
Added
See “Supervision And Regulation—Supervision and Regulation of the Company—Dividend Payments” and “Supervision And Regulation—Supervision and Regulation of the Bank—Dividend Payments” above, for additional detail regarding restrictions on the payment of dividends by the Company and the Bank. The Company also has certain contractual restrictions on its ability to pay dividends. The Company has acquired debt securities through transactions.
Added
Under the terms of the securities, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances existed through the date of filing of this Form 10-K. See Note (9) Junior Subordinated Debentures of the Notes to Consolidated Financial Statements included in Item 8.
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Years Ended December 31, Index 2019 2020 2021 2022 2023 2024 Heritage Financial Corporation $ 100 $ 85.94 $ 92.71 $ 119.90 $ 87.66 $ 105.05 Nasdaq Composite Index 100 144.92 177.06 119.45 172.77 223.87 S&P U.S. SmallCap Banks Index 100 90.82 126.43 111.47 112.03 132.44 *Information for the graph was provided by S&P Global Market Intelligence.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeDeposits Overview The following table summarizes the Company's deposits at the dates indicated: December 31, 2023 December 31, 2022 Change Balance (1) % of Total Balance (1) % of Total $ % (Dollars in thousands) Noninterest demand deposits $ 1,715,847 30.7 % $ 2,099,464 35.5 % $ (383,617) (18.3) % Interest bearing demand deposits 1,608,745 28.7 1,830,727 30.9 (221,982) (12.1) Money market accounts 1,094,351 19.5 1,063,243 17.9 31,108 2.9 Savings accounts 487,956 8.7 623,833 10.5 (135,877) (21.8) Total non-maturity deposits 4,906,899 87.6 5,617,267 94.8 (710,368) (12.6) Certificates of deposit 692,973 12.4 307,573 5.2 385,400 125.3 Total deposits $ 5,599,872 100.0 % $ 5,924,840 100.0 % $ (324,968) (5.5) % (1) Deposit balances at December 31, 2022 include deposits held for sale of $17.4 million, respectively.
Biggest changeThe following table presents the ACL on loans by loan portfolio segment at the indicated dates: December 31, 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 $ 38,293 1.02 % 78.3 % $ 31,303 0.93 % 77.8 % Residential real estate 3,464 0.86 8.4 3,473 0.93 8.7 Real estate construction and land development 8,656 1.81 9.9 10,876 2.62 9.5 Consumer 2,055 1.25 3.4 2,347 1.37 4.0 Total ACL on loans $ 52,468 1.09 % 100.0 % $ 47,999 1.11 % 100.0 % 45 Table of Contents Deposits Overview The following table summarizes the Company's deposits at the dates indicated: December 31, 2024 December 31, 2023 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Noninterest demand deposits $ 1,654,955 29.1 % $ 1,715,847 30.6 % $ (60,892) (3.5) % Interest bearing demand deposits 1,464,129 25.8 1,608,745 28.7 (144,616) (9.0) Money market accounts 1,166,901 20.5 1,094,351 19.5 72,550 6.6 Savings accounts 421,377 7.4 487,956 8.7 (66,579) (13.6) Total non-maturity deposits 4,707,362 82.8 4,906,899 87.5 (199,537) (4.1) Certificates of deposit 977,251 17.2 692,973 12.5 284,278 41.0 Total deposits $ 5,684,613 100.0 % $ 5,599,872 100.0 % $ 84,741 1.5 % Total deposits increased $84.7 million, or 1.5%, to $5.68 billion at December 31, 2024, compared to $5.60 billion at December 31, 2023.
In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.
In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such stock repurchase plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.
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.
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, consisting 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.
Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consists primarily of lease expenses, depreciation charges, maintenance and utilities.
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.
The Company considers its critical accounting estimates to be as follows: ACL on Loans Management's estimate of the ACL on loans relies on the identification, stratification and separate estimates of loss for loans individually evaluated for loss and loans collectively evaluated for loss.
The Company considers its critical accounting estimates to be as follows: ACL on Loans Management's estimate of the ACL on loans relies on the identification, stratification and separate estimates of loss for both loans individually evaluated for loss and loans collectively evaluated for loss.
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.
Data processing expense 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 expense consists primarily of third-party service providers such as auditors, consultants and lawyers.
At December 31, 2023, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $145.0 million. No balances were outstanding under these agreements as of December 31, 2023 or 2022. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility.
At December 31, 2024, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $145.0 million. No balances were outstanding under these agreements as of either December 31, 2024 or 2023. Availability of lines of credit is subject to federal funds balances available for loan and continued borrower eligibility.
The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the SEC, price, general business and market conditions, and alternative investment opportunities.
The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted under Rule 10b5-1 of the SEC, price, general business and market conditions, and alternative investment opportunities.
AOCI has no effect on our regulatory capital ratios as the Company opted to exclude it from our common equity tier 1 capital. Cash dividends and stock repurchases partially offset the increase in stockholders' equity during the year ended December 31, 2023.
AOCI has no effect on our regulatory capital ratios as the Company opted to exclude it from its common equity tier 1 capital. Cash dividends and stock repurchases partially offset the increase in stockholders' equity during the year ended December 31, 2024.
There are several factors that affect net interest income, including, but not limited to, the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.
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.
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.
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 customers in our market areas with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality.
Additionally, management considers other qualitative risk factors to further adjust the estimated ACL on loans through a qualitative allowance. Management's estimates for these inputs are based on past events and current conditions, are inherently subjective, and are susceptible to significant revision as more information becomes available.
Additionally, management considers other qualitative risk factors to further adjust the estimated ACL on loans through a qualitative allowance. Management's estimates for these inputs are based on past events and current conditions, are inherently subjective and are susceptible to significant revision as new or different information becomes available.
Risk Factors—Our ACL on loans may prove to be insufficient to absorb losses in our loan portfolio as well as Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (4) Allowance for Credit Losses on Loans of the Notes to Consolidated Financial Statements included in Item 8.
Risk Factors—The Company’s allowance for credit losses may prove to be insufficient to absorb potential losses in its loan portfolio, as well as Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (4) Allowance for Credit Losses on Loans of the Notes to Consolidated Financial Statements included in Item 8.
Critical Accounting Estimates Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the 41 Table of Contents financial condition or results of operations of the registrant.
Critical Accounting Estimates Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company's financial condition or results of operations.
The estimate of loss for loans collectively evaluated for loss particularly involves a significant level of estimation uncertainty due to its complexity and quantity of inputs including: management's determination of baseline loss rate multipliers based on a third-party forecast of economic conditions, an estimate of the reasonable and supportable forecast period, an estimate of the baseline loss rate lookback period, an estimate of the reversion period from the reasonable and supportable forecast period to the baseline loss rate, and an estimate of the prepayment rate and related lookback period.
The estimate of loss for loans collectively evaluated for loss in particular involves a significant level of estimation uncertainty due to its complexity and the quantity of relevant inputs, including: management's determination of baseline loss rate multipliers based on a third party forecast of economic conditions, estimates of the reasonable and supportable forecast period, estimates of the baseline loss rate lookback period, estimates of the reversion period from the reasonable and supportable forecast period to the baseline loss rate and estimates of the prepayment rate and related lookback period.
(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 $3.3 million, $7.4 million and $28.4 million for the years ended December 31, 2023, 2022, and 2021, respectively.
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 $3.6 million, $3.3 million and $7.4 million for the years ended December 31, 2024, 2023 and 2022, respectively.
The loss on the sale of investment securities was a consequence of strategically repositioning the investment portfolio, involving the sale of $219.7 million in investment securities, with the aim of enhancing future earnings. Card revenue declined due to lower deposit transaction volumes.
The loss on the sale of investment securities in 2024 was a consequence of strategically repositioning the Company's investment portfolio, involving the sale of $296.4 million in investment securities, with the aim of enhancing future earnings. Card revenue declined due to lower deposit transaction volumes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of our financial condition and results of operations and should be read in conjunction with our financial statements and notes thereto included in Item 8 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of our financial condition and results of operations and should be read in conjunction with our financial statements and notes thereto included in Item 8 Financial Statements and Supplementary Data of this Form 10-K.
Total deposits include uninsured deposits of approximately $2.10 billion and $2.37 billion at December 31, 2023 and 2022, respectively, calculated in accordance with FDIC guidelines. Uninsured deposits included $256.5 million fully collateralized deposits as of December 31, 2023, The Bank does not hold any foreign deposits.
Total deposits include uninsured deposits of approximately $2.27 billion and $2.10 billion at December 31, 2024 and 2023, respectively, calculated in accordance with FDIC guidelines. Uninsured deposits included $267.8 million and $256.4 of fully collateralized deposits as of December 31, 2024 and December 31, 2023. The Bank does not hold any foreign deposits.
Our business consists primarily of commercial lending and deposit relationships with small to medium sized businesses and their owners in our market areas and attracting deposits from the general public. We also originate real estate construction and land development loans, residential real estate loans and consumer loans, primarily in our markets.
Our business consists primarily of commercial lending and deposit relationships with small- to medium-sized businesses and their owners in our market areas, as well as 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.
Assuming continued payment during 2024 at this rate of $0.23 per share, our average total dividend paid each quarter would be approximately $8.0 million based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares). From time to time, our Board of Directors has authorized stock repurchase plans.
Assuming continued payment during 2025 at this rate, our average total dividend paid each quarter would be approximately $8.2 million based on the current number of our outstanding shares (assuming no increases or decreases in the number of shares). From time to time, our Board has authorized stock repurchase plans.
Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, including recently significant changes as a result of inflation, and by governmental policies and actions of regulatory agencies.
Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies.
See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” contained in Item 5, Part II of this Form 10-K for additional information relating to stock repurchases. Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and intermediate-term cash requirements.
See Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for additional information relating to stock repurchases. Management believes that the Company's capital sources are adequate to meet all of the Company's reasonably foreseeable short-term and intermediate-term requirements.
This decline was primarily driven by a pre-tax loss of $12.2 million incurred on the sale of investment securities available for sale during the year ended December 31, 2023.
This decline was primarily driven by a pre-tax loss of $22.7 million incurred on the sale of investment securities available for sale during the year ended December 31, 2024, compared to a pre-tax loss of $12.2 million incurred during the same period in 2023.
Total interest expense increased $51.2 million, or 634.8%, to $59.3 million for the year ended December 31, 2023 compared to $8.1 million for the year ended December 31, 2022 due primarily to increased costs of interest bearing deposits resulting from competitive rate pressures as well as customers transferring balances from non-maturity deposits to higher rate certificates of deposits and an increase in borrowings.
Total interest expense increased $41.0 million, or 69.2%, to $100.3 million for the year ended December 31, 2024 compared to $59.3 million for the year ended December 31, 2023 due primarily to increased costs of interest bearing deposits resulting from competitive rate pressures as well as customers transferring balances from non-maturity deposits to higher rate certificates of deposits and an increase in borrowing balances and rates.
The Company repurchased 330,424 and 100,090 shares of its common stock under the Company's stock repurchase plan during the years ended December 31, 2023 and December 31, 2022, respectively.
The Company repurchased 1,051,760 and 330,424 shares of its common stock under the Company's stock repurchase plan during the years ended December 31, 2024 and December 31, 2023, respectively.
Management’s discussion focuses on 2023 results compared to 2022. For a discussion of 2022 results compared to 2021, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 24, 2023.
For a discussion of 2023 results compared to 2022 results, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 27, 2024.
These decreases were partially offset by an increase in other income primarily due to a one-time sale of Visa Inc. Class B common stock of $1.6 million and a $610,000 gain on sale of the Ellensburg branch during the year ended December 31, 2023.
The decrease in other income during the year ended December 31, 2024 was primarily due to a one-time sale of Visa Inc. Class B common stock of $1.6 million and a $610,000 gain on sale of the Ellensburg branch recognized during the year ended December 31, 2023.
In addition to historical information, this discussion contains forward‑looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors.” The Company assumes no obligation to update any of these forward‑looking statements.
In addition to historical information, this discussion contains forward‑looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections of this Form 10-K entitled “Cautionary Note Regarding Forward Looking Statements” and Item 1A. Risk Factors.
The following table provides the federal funds target rate history and changes since December 31, 2021 : Change Date Rate (%) Rate Change (%) December 31, 2021 0.00% - 0.25% N/A March 17, 2022 0.25% - 0.50% 0.25 % May 5, 2022 0.75% - 1.00% 0.50 % June 16, 2022 1.50% - 1.75% 0.75 % July 28, 2022 2.25% - 2.50% 0.75 % September 22, 2022 3.00% - 3.25% 0.75 % November 3, 2022 3.75% - 4.00% 0.75 % December 15, 2022 4.25% - 4.50% 0.50 % February 2, 2023 4.50% - 4.75% 0.25 % March 23, 2023 4.75% - 5.00% 0.25 % May 4, 2023 5.00% - 5.25% 0.25 % July 27, 2023 5.25% - 5.50% 0.25 % Average Balances, Yields and Rates Paid The following table provides relevant net interest income information for the periods indicated: Year Ended December 31, 2023 2022 2021 Average Balance (1) Interest Earned/ Paid Average Yield/ Rate Average Balance (1) Interest Earned/ Paid Average Yield/ Rate Average Balance (1) Interest Earned/ Paid Average Yield/ Rate (Dollars in thousands) Interest Earning Assets: Loans receivable, net (2)(3) $ 4,155,722 $ 217,284 5.23 % $ 3,852,604 $ 174,275 4.52 % $ 4,181,464 $ 189,832 4.54 % Taxable securities 1,937,603 58,509 3.02 1,646,058 40,627 2.47 846,892 17,492 2.07 Nontaxable securities (3) 63,051 1,854 2.94 135,004 3,488 2.58 158,968 3,899 2.45 Interest earning deposits 129,807 6,818 5.25 913,374 9,067 0.99 1,193,724 1,608 0.13 Total interest earning assets 6,286,183 284,465 4.53 % 6,547,040 227,457 3.47 % 6,381,048 212,831 3.34 % Noninterest earning assets 853,841 774,415 745,202 Total assets $ 7,140,024 $ 7,321,455 $ 7,126,250 Interest Bearing Liabilities: Certificates of Deposit $ 491,653 $ 14,554 2.96 % $ 313,712 $ 1,407 0.45 % $ 372,279 $ 1,811 0.49 % Savings accounts 543,096 701 0.13 646,565 381 0.06 598,492 367 0.06 Interest bearing demand and money market accounts 2,771,981 24,095 0.87 3,036,031 4,984 0.16 2,862,504 3,982 0.14 Total interest bearing deposits 3,806,730 39,350 1.03 3,996,308 6,772 0.17 3,833,275 6,160 0.16 Junior subordinated debentures 21,615 2,074 9.60 21,322 1,156 5.42 21,025 742 3.53 29 Table of Contents Year Ended December 31, 2023 2022 2021 Average Balance (1) Interest Earned/ Paid Average Yield/ Rate Average Balance (1) Interest Earned/ Paid Average Yield/ Rate Average Balance (1) Interest Earned/ Paid Average Yield/ Rate (Dollars in thousands) Securities sold under agreement to repurchase 32,976 153 0.46 46,209 138 0.30 45,655 140 0.31 Borrowings 369,665 17,733 4.80 137 6 4.38 — — — Total interest bearing liabilities 4,230,986 59,310 1.40 % 4,063,976 8,072 0.20 % 3,899,955 7,042 0.18 % Noninterest bearing demand deposits 1,899,317 2,326,178 2,269,921 Other noninterest bearing liabilities 191,679 119,359 114,307 Stockholders’ equity 818,042 811,942 842,067 Total liabilities and stock-holders’ equity $ 7,140,024 $ 7,321,455 $ 7,126,250 Net interest income and spread $ 225,155 3.13 % $ 219,385 3.27 % $ 205,789 3.16 % Net interest margin 3.58 % 3.35 % 3.23 % (1) Average balances are calculated using daily balances.
The following table provides the federal funds target rate history and changes since December 31, 2021 : Change Date Rate (%) Rate Change (%) December 31, 2021 0.00% - 0.25% N/A March 17, 2022 0.25% - 0.50% 0.25 % May 5, 2022 0.75% - 1.00% 0.50 % June 16, 2022 1.50% - 1.75% 0.75 % July 28, 2022 2.25% - 2.50% 0.75 % September 22, 2022 3.00% - 3.25% 0.75 % November 3, 2022 3.75% - 4.00% 0.75 % December 15, 2022 4.25% - 4.50% 0.50 % February 2, 2023 4.50% - 4.75% 0.25 % March 23, 2023 4.75% - 5.00% 0.25 % May 4, 2023 5.00% - 5.25% 0.25 % July 27, 2023 5.25% - 5.50% 0.25 % September 19, 2024 4.75% - 5.00% (0.50) % November 8, 2024 4.50% - 4.75% (0.25) % December 19, 2024 4.25% - 4.50% (0.25) % Average Balances, Yields and Rates Paid The following table provides relevant net interest income information for the periods indicated: Year Ended December 31, 2024 2023 2022 Average Balance (1) Interest Earned/ Paid Average Yield/ Rate Average Balance (1) Interest Earned/ Paid Average Yield/ Rate Average Balance (1) Interest Earned/ Paid Average Yield/ Rate (Dollars in thousands) Interest Earning Assets: Loans receivable, net (2)(3) $ 4,485,531 $ 247,472 5.52 % $ 4,155,722 $ 217,284 5.23 % $ 3,852,604 $ 174,275 4.52 % Taxable securities 1,653,295 54,972 3.32 1,937,603 58,509 3.02 1,646,058 40,627 2.47 Nontaxable securities (3) 18,425 651 3.53 63,051 1,854 2.94 135,004 3,488 2.58 Interest earning deposits 125,036 6,617 5.29 129,807 6,818 5.25 913,374 9,067 0.99 Total interest earning assets 6,282,287 309,712 4.93 % 6,286,183 284,465 4.53 % 6,547,040 227,457 3.47 % Noninterest earning assets 850,759 853,841 774,415 Total assets $ 7,133,046 $ 7,140,024 $ 7,321,455 Interest Bearing Liabilities: Certificates of Deposit $ 857,079 $ 36,922 4.31 % $ 491,653 $ 14,554 2.96 % $ 313,712 $ 1,407 0.45 % Savings accounts 451,528 920 0.20 543,096 701 0.13 646,565 381 0.06 Interest bearing demand and money market accounts 2,640,487 37,227 1.41 2,771,981 24,095 0.87 3,036,031 4,984 0.16 Total interest bearing deposits 3,949,094 75,069 1.90 3,806,730 39,350 1.03 3,996,308 6,772 0.17 Junior subordinated debentures 21,910 2,139 9.76 21,615 2,074 9.60 21,322 1,156 5.42 35 Table of Contents Year Ended December 31, 2024 2023 2022 Average Balance (1) Interest Earned/ Paid Average Yield/ Rate Average Balance (1) Interest Earned/ Paid Average Yield/ Rate Average Balance (1) Interest Earned/ Paid Average Yield/ Rate (Dollars in thousands) Securities sold under agreement to repurchase — — — 32,976 153 0.46 46,209 138 0.30 Borrowings 456,448 23,140 5.07 369,665 17,733 4.80 137 6 4.38 Total interest bearing liabilities 4,427,452 100,348 2.27 % 4,230,986 59,310 1.40 % 4,063,976 8,072 0.20 % Noninterest bearing demand deposits 1,669,301 1,899,317 2,326,178 Other noninterest bearing liabilities 182,121 191,679 119,359 Stockholders’ equity 854,172 818,042 811,942 Total liabilities and stock-holders’ equity $ 7,133,046 $ 7,140,024 $ 7,321,455 Net interest income and spread $ 209,364 2.66 % $ 225,155 3.13 % $ 219,385 3.27 % Net interest margin 3.33 % 3.58 % 3.35 % (1) Average balances are calculated using daily balances.
The provision for credit losses on loans of $4.7 million recognized during the year ended December 31, 2023 was due primarily to growth in balances of collectively evaluated loans.
The provision for credit losses on loans of $7.0 million recognized during the year ended December 31, 2024 was due primarily to growth in balances of collectively evaluated loans and secondarily to $2.5 million in charge-offs.
The following table provides the estimated uninsured portion of certificates of deposit that are in excess of the FDIC insurance limit, by remaining time until maturity at December 31, 2023, by account, with a maturity of: (Dollars in thousands) Three months or less $ 121,833 Over three months through six months 46,294 Over six months through twelve months 75,392 Over twelve months 2,679 Total $ 246,198 Stockholders' Equity Overview The Company’s stockholders' equity to assets ratio was 11.9% and 11.4% at December 31, 2023 and December 31, 2022.
The following table provides the estimated uninsured portion of certificates of deposit that are in excess of the FDIC insurance limit, by remaining time until maturity at December 31, 2024, by account, with a maturity of: (Dollars in thousands) Three months or less $ 141,310 Over three months through six months 172,544 Over six months through twelve months 54,050 Over twelve months 4,880 Total $ 372,784 Stockholders' Equity Overview The Company’s stockholders' equity to assets ratio was 12.2% and 11.9% at December 31, 2024 and 2023, respectively.
The Company performed its annual goodwill impairment test during the fourth quarter of 2023 and determined that no material adverse changes had occurred since the quantitative assessment was performed as of May 31, 2023, and that it is more likely than not that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired for the year ended December 31, 2023.
The Company performed its annual goodwill impairment test during the fourth quarter of 2024 which consisted of a qualitative assessment and determined that it is more likely than not that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired for the year ended December 31, 2024.
Total losses on sale of $12.2 million were recognized during the year ended December 31, 2023 During the year ended December 31, 2023, the Company incurred a pre-tax loss of $12.2 million on the sale of investment securities available for sale due to the strategic repositioning of its investment portfolio.
During the year ended December 31, 2024, the Company incurred a pre-tax loss of $22.7 million on the sale of investment securities available for sale due to the aforementioned strategic repositioning of its investment portfolio.
Provision for Credit Losses Overview The aggregate of the provision for credit losses on loans and the provision for credit losses on unfunded commitments is presented on the Consolidated Statements of Income as the "Provision for (reversal of) credit losses." The ACL on unfunded commitments is included on the Consolidated Statements of Financial Condition within "Accrued expenses and other liabilities." The following table presents the provision for (reversal of) credit losses for the periods indicated: Year Ended December 31, Change 2023 2022 $ % (Dollars in thousands) Provision for (reversal of) credit losses on loans $ 4,736 $ (563) $ 5,299 (941.2) % (Reversal of) provision for credit losses on unfunded commitments (456) (863) 407 (47.2) Provision for (reversal of) credit losses $ 4,280 $ (1,426) $ 5,706 (400.1) % The provision for credit losses on loans recognized during the year ended December 31, 2023 was due primarily to growth in balances of collectively evaluated loans.
Provision for Credit Losses Overview The aggregate of the provision for (reversal of) credit losses on loans and on unfunded commitments is presented in the Consolidated Statements of Income as the "Provision for (reversal of) credit losses." The ACL on unfunded commitments is included in the Consolidated Statements of Financial Condition within "Accrued expenses and other liabilities." The following table presents the provision for (reversal of) credit losses for the periods indicated: Year Ended December 31, Change 2024 2023 $ % (Dollars in thousands) Provision for credit losses on loans $ 6,983 $ 4,736 $ 2,247 47.4 % Reversal of provision for credit losses on unfunded commitments (701) (456) (245) 53.7 Provision for credit losses $ 6,282 $ 4,280 $ 2,002 46.8 % 37 Table of Contents The provision for credit losses on loans recognized during the year ended December 31, 2024 was due primarily to growth in balances of collectively evaluated loans.
We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and we also 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.
In addition, as of December 31, 2024, we had $27.6 million of commitments under operating lease agreements. We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and also 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.
Allowance for Credit Losses on Loans Overview The following table provides information regarding changes in our ACL on loans for the years indicated: At or For the Years Ended December 31, 2023 2022 2021 (Dollars in thousands) ACL on loans at the beginning of the period $ 42,986 $ 42,361 $ 70,185 Charge-offs: Commercial business (719) (316) (1,276) Residential real estate — (30) — Real estate construction and land development — — (1) Consumer (586) (547) (669) Total charge-offs (1,305) (893) (1,946) Recoveries: Commercial business 1,372 929 816 Residential real estate — 3 — Real estate construction and land development — 384 32 Consumer 210 765 572 Total recoveries 1,582 2,081 1,420 Net recoveries (charge-offs) 277 1,188 (526) Provision for (reversal of) credit losses on loans 4,736 (563) (27,298) ACL on loans at the end of period $ 47,999 $ 42,986 $ 42,361 Credit quality ratios: ACL on loans to: Loans receivable 1.11 % 1.06 % 1.11 % Nonaccrual loans 1074.28 727.84 178.33 Nonaccrual loans to loans receivable 0.10 0.15 0.62 Balances at the end of the period: Loans receivable $ 4,335,627 $ 4,050,858 $ 3,815,662 Nonaccrual loans 4,468 5,906 23,754 Average balances outstanding during the period: (1) Commercial business $ 3,289,564 $ 3,188,238 $ 3,540,728 Residential real estate 369,297 250,780 123,875 Real estate construction and land development 362,919 242,528 301,532 38 Table of Contents At or For the Years Ended December 31, 2023 2022 2021 (Dollars in thousands) Consumer 179,454 212,306 271,834 Total $ 4,201,234 $ 3,893,852 $ 4,237,969 Net (recoveries) charge-offs during the period to average balances outstanding during the period: 2023 2022 2021 Commercial business (0.02) % (0.02) % 0.01 % Residential real estate — 0.01 — Real estate construction and land development — (0.16) (0.01) Consumer 0.21 (0.10) 0.04 Total (0.01) % (0.03) % 0.01 % (1) Average balances exclude the ACL on loans and loans held for sale, but include loans classified as nonaccrual.
Allowance for Credit Losses on Loans Overview The following table provides information regarding changes in our ACL on loans for the years indicated: At or For the Years Ended December 31, 2024 2023 2022 (Dollars in thousands) ACL on loans at the beginning of the period $ 47,999 $ 42,986 $ 42,361 Charge-offs: Commercial business (2,953) (719) (316) Residential real estate — — (30) Consumer (538) (586) (547) Total charge-offs (3,491) (1,305) (893) Recoveries: Commercial business 855 1,372 929 Residential real estate — — 3 Real estate construction and land development — — 384 Consumer 122 210 765 Total recoveries 977 1,582 2,081 Net (charge-offs) recoveries (2,514) 277 1,188 Provision for (reversal of) credit losses on loans 6,983 4,736 (563) ACL on loans at the end of period $ 52,468 $ 47,999 $ 42,986 44 Table of Contents At or For the Years Ended December 31, 2024 2023 2022 (Dollars in thousands) Credit quality ratios: ACL on loans to: Loans receivable 1.09 % 1.11 % 1.06 % Nonaccrual loans 1286.30 1074.28 727.84 Nonaccrual loans to loans receivable 0.08 % 0.10 % 0.15 % Balances at the end of the period: Loans receivable $ 4,802,123 $ 4,335,627 $ 4,050,858 Nonaccrual loans 4,079 4,468 5,906 Average balances outstanding during the period: (1) Commercial business $ 3,522,065 $ 3,289,564 $ 3,188,238 Residential real estate 399,857 369,297 250,780 Real estate construction and land development 446,713 362,919 242,528 Consumer 167,830 179,454 212,306 Total $ 4,536,465 $ 4,201,234 $ 3,893,852 Net charge-offs (recoveries) during the period to average balances outstanding during the period: 2024 2023 2022 Commercial business 0.06 % (0.02) % (0.02) % Residential real estate — — 0.01 Real estate construction and land development — — (0.16) Consumer 0.25 0.21 (0.10) Total 0.06 % (0.01) % (0.03) % (1) Average balances exclude the ACL on loans and loans held for sale, but include loans classified as nonaccrual.
We expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.23 per share, as approved by our Board of Directors.
We expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board's discretion to modify or terminate this practice at any time and for any reason without prior notice.
The increase in net interest margin was due primarily to increases in average yields on total interest earning assets as a result of increases in market interest rates. This was partially offset by increases in the average cost of interest bearing liabilities as a result of upward market pressure related to deposit rates and an increase in borrowings.
The decrease in net interest margin was due primarily to increases in the average cost of interest bearing liabilities as a result of upward market pressure related to deposit rates and an increase in borrowing balances and rates.
The current level of commitments is proportionally consistent with our historical experience and does not represent a departure from traditional operations. For the year ended December 31, 2023, we have $21.5 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts.
Loan commitments represent potential growth in the loan portfolio and lending activities. The current level of commitments is proportionally consistent with our historical experience and does not represent a departure from traditional operations. As of December 31, 2024, we had $17.8 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts.
The ACL on loans to Loans receivable increased to 1.11% as December 31, 2023, compared to 1.06% at December 31, 2022 due to changes in the loan mix as loan growth occurred in segments requiring a higher calculated reserve as a percentage of loans including real estate construction and land development loans.
The ACL on loans to loans receivable decreased to 1.09% at December 31, 2024, compared to 1.11% at December 31, 2023 due to changes in the loan mix as loan growth occurred in segments requiring a lower calculated reserve as a percentage of loans.
Total cost of interest bearing liabilities increased 120 basis points to 1.40% for the year ended December 31, 2023, compared to 0.20% for the year ended December 31, 2022. The net interest margin increased 23 basis points to 3.58% for the year ended December 31, 2023 compared to 3.35% for the year ended December 31, 2022.
The total cost of interest bearing liabilities increased 87 basis points to 2.27% for the year ended December 31, 2024, compared to 1.40% for the year ended December 31, 2023. The net interest margin decreased 25 basis points to 3.33% for the year ended December 31, 2024 compared to 3.58% for the year ended December 31, 2023.
The increase was primarily due to a 106 basis point increase in the yield on interest earning assets to 4.53% for the year ended December 31, 2023, compared to 3.47% for the year ended December 31, 2022 following increases in market interest rates.
The increase was primarily due to a 40 basis point increase in the yield on interest earning assets to 4.93% for the year ended December 31, 2024, compared to 4.53% for the year ended December 31, 2023 following increases in market interest rates and secondarily due to a change in the mix of earning assets to higher yielding loan balances.
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 these issues. Net income is also impacted by growth of operations through organic growth or acquisitions.
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, as well as changes in policies driven by the new presidential administration.
The following tables provide the changes in net interest income for the periods indicated 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: 2023 Compared to 2022 Increase (Decrease) Due to changes in Volume Yield/Rate Total % Change (Dollars in thousands) Interest Earning Assets: Loans receivable, net $ 14,429 $ 28,580 $ 43,009 24.7 % Taxable securities 7,907 9,975 17,882 44.0 Nontaxable securities (2,063) 429 (1,634) (46.8) Interest earning deposits (13,339) 11,090 (2,249) (24.8) Total interest income 6,934 50,074 57,008 25.1 Interest Bearing Liabilities: Certificates of deposit 1,209 11,938 13,147 934.4 Savings accounts (70) 390 320 84.0 Interest bearing demand and money market accounts (470) 19,581 19,111 383.4 Total interest bearing deposits 669 31,909 32,578 481.1 Junior subordinated debentures 16 902 918 79.4 Securities sold under agreement to repurchase (46) 61 15 10.9 Borrowings 17,727 — 17,727 100.0 Total interest expense 18,366 32,872 51,238 634.8 Net interest income $ (11,432) $ 17,202 $ 5,770 2.6 % 2022 Compared to 2021 Increase (Decrease) Due to changes in Volume Yield/Rate $ % (Dollars in thousands) Interest Earning Assets: Loans receivable, net $ (14,878) $ (679) $ (15,557) (8.2) % Taxable securities 19,174 3,961 23,135 132.3 30 Table of Contents 2022 Compared to 2021 Increase (Decrease) Due to changes in Volume Yield/Rate $ % Nontaxable securities (611) 200 (411) (10.5) Interest earning deposits (464) 7,923 7,459 463.9 Total interest income 3,221 11,405 14,626 6.9 Interest Bearing Liabilities: Certificates of deposit (270) (134) (404) (22.3) Savings accounts 28 (14) 14 3.8 Interest bearing demand and money market accounts 252 750 1,002 25.2 Total interest bearing deposits 10 602 612 9.9 Junior subordinated debentures 11 403 414 55.8 Securities sold under agreement to repurchase 2 (4) (2) (1.4) Borrowings 6 — 6 100.0 Total interest expense 29 1,001 1,030 14.6 Net interest income $ 3,192 $ 10,404 $ 13,596 6.6 % Total interest income increased $57.0 million, or 25.1%, to $284.5 million for the year ended December 31, 2023 compared to $227.5 million for the year ended December 31, 2022.
The following tables provide the changes in net interest income for the periods indicated 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: Year Ended December 31, 2024 Compared to 2023 Increase (Decrease) Due to changes in Volume Yield/Rate Total (Dollars in thousands) Interest Earning Assets: Loans receivable, net $ 17,806 $ 12,382 $ 30,188 Taxable securities (9,099) 5,562 (3,537) Nontaxable securities (1,518) 315 (1,203) Interest earning deposits (252) 51 (201) Total interest income 6,937 18,310 25,247 Interest Bearing Liabilities: Certificates of deposit 13,871 8,497 22,368 Savings accounts (134) 353 219 Interest bearing demand and money market accounts (1,193) 14,325 13,132 Total interest bearing deposits 12,544 23,175 35,719 Junior subordinated debentures 28 37 65 Securities sold under agreement to repurchase (77) (76) (153) Borrowings 4,354 1,053 5,407 Total interest expense 16,849 24,189 41,038 Net interest income $ (9,912) $ (5,879) $ (15,791) 36 Table of Contents Year Ended December 31, 2023 Compared to 2022 Increase (Decrease) Due to changes in Volume Yield/Rate Total (Dollars in thousands) Interest Earning Assets: Loans receivable, net $ 14,429 $ 28,580 $ 43,009 Taxable securities 7,907 9,975 17,882 Nontaxable securities (2,063) 429 (1,634) Interest earning deposits (13,339) 11,090 (2,249) Total interest income 6,934 50,074 57,008 Interest Bearing Liabilities: Certificates of deposit 1,209 11,938 13,147 Savings accounts (70) 390 320 Interest bearing demand and money market accounts (470) 19,581 19,111 Total interest bearing deposits 669 31,909 32,578 Junior subordinated debentures 16 902 918 Securities sold under agreement to repurchase (46) 61 15 Borrowings 17,727 — 17,727 Total interest expense 18,366 32,872 51,238 Net interest income $ (11,432) $ 17,202 $ 5,770 Total interest income increased $25.2 million, or 8.9%, to $309.7 million for the year ended December 31, 2024 compared to $284.5 million for the year ended December 31, 2023.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees, card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services.
Noninterest income primarily consists of gains or losses on the sale of investment securities, service charges and other fees, card revenue and other income. Noninterest expense primarily consists of compensation and employee benefits, occupancy and equipment, data processing and professional services expense.
Market rates impact the results of the Company's net interest income, including the significant increases in the federal funds target rate by the Federal Reserve in response to inflation during 2022 and 2023.
Market rates impact the results of the Company's net interest income, including the significant changes in the federal funds target rate that have been made by the Federal Reserve since 2022 in response to inflationary pressures.
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 appropriate amount to provide for current expected credit losses in our loan portfolio based on the CECL methodology.
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.
The Company sold $219.7 million in investment securities with an estimated weighted average book yield of 2.42% and purchased $178.4 million of investment securities with an estimated weighted average book yield of 5.77%.
The Company sold $296.4 million in investment securities with an estimated weighted average book yield of 2.23% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05%.
The ACL on loans to Loans receivable increased to 1.11% as December 31, 2023, compared to 1.06% at December 31, 2022 due to changes in the loan mix as loan growth occurred in segments requiring a higher calculated reserve as a percentage of loans including real estate construction and land development loans.
The ACL on loans to loans receivable decreased to 1.09% as December 31, 2024, compared to 1.11% at December 31, 2023 due to changes in the loan mix as loan growth occurred in segments requiring a lower calculated reserve as a percentage of loans as well as a reduction in the baseline loss rates applied and weighted average life of the residential real estate and real estate construction and land development segments which contributed to a decrease in the ACL as a % of loans in these loan segments.
The following table provides the changes to stockholders' equity during the periods indicated: Year Ended December 31, Change 2023 2022 $ % (Dollars in thousands) Balance, beginning of period $ 797,893 $ 854,432 $ (56,539) (6.6) % Net income 61,755 81,875 (20,120) (24.6) Dividends declared (31,112) (29,767) (1,345) 4.5 Other comprehensive income (loss), net of tax 27,374 (109,246) 136,620 (125.1) Common stock repurchased (6,974) (3,196) (3,778) 118.2 Stock-based compensation expense 4,325 3,795 530 14.0 Balance, end of period $ 853,261 $ 797,893 $ 55,368 6.9 % Stockholder's equity increased due primarily to net income and an increase in AOCI as a result of a decrease in other comprehensive income (loss), net of tax, which positively impacted the fair value of our investment securities available for sale.
The following table provides the changes to stockholders' equity during the periods indicated: Year Ended December 31, Change 2024 2023 $ % (Dollars in thousands) Balance, beginning of period $ 853,261 $ 797,893 $ 55,368 6.9 % Net income 43,258 61,755 (18,497) (30.0) Dividends declared (32,150) (31,112) (1,038) 3.3 Other comprehensive income (loss), net of tax 17,232 27,374 (10,142) (37.0) Common stock repurchased (22,418) (6,974) (15,444) 221.5 Stock-based compensation expense 4,344 4,325 19 0.4 Balance, end of period $ 863,527 $ 853,261 $ 10,266 1.2 % Stockholders' equity increased for the year ended December 31, 2024 primarily as a result of net income and an increase in AOCI as a result of a decrease in other comprehensive income (loss), net of tax, which was positively impacted by the fair value of our investment securities available for sale and losses recognized on investment sales.
The Company's current stock repurchase program authorizes us to repurchase up to 1,799,054 shares of Company common stock, of which 307,790 shares remained available for future repurchases as of December 31, 2023.
The Company's current stock repurchase program authorizes us to repurchase up to 5% of the Company's outstanding common shares, or 1,734,492 in total, of which 990,522 shares remained available for future repurchases as of December 31, 2024.
Under these programs, based on pledged investment collateral, the Bank had available lines of credit of approximately $819.5 million as of December 31, 2023, subject to amount of pledged collateral. We had $500.0 million in borrowings from the FRB's BTFP at December 31, 2023, as discussed previously, and none at December 31, 2022.
Based on pledged investment collateral, the Bank had available lines of credit from the FRB of approximately $360.1 million as of December 31, 2024. The Bank had no outstanding borrowings from the FRB at December 31, 2024 and $500.0 million in outstanding borrowings under the BTFP at December 31, 2023.
For additional information regarding the ACL on loans, its relation to the provision for credit losses, its risk related to asset quality and lending activity, see Item 1A.
Unanticipated changes in any of these inputs could have a significant impact on our financial condition and results of operations. For additional information regarding the ACL on loans, its relation to the provision for credit losses and its risk related to asset quality and lending activity, see Item 1A.
The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated: December 31, 2023 December 31, 2022 Change Amortized Cost % of CRE Loans Amortized Cost % of CRE Loans $ % (Dollars in thousands) Owner occupied and non-owner occupied CRE loans by collateral type: Office $ 555,822 20.9 % $ 579,762 22.9 % $ (23,940) (4.1) % Industrial 418,651 15.8 366,947 14.6 51,704 14.1 Retail store / shopping center 285,926 10.8 291,799 11.6 (5,873) (2.0) Multi-family 305,499 11.5 256,661 10.2 48,838 19.0 Mini-storage 171,778 6.5 148,580 5.9 23,198 15.6 35 Table of Contents December 31, 2023 December 31, 2022 Change Amortized Cost % of CRE Loans Amortized Cost % of CRE Loans $ % (Dollars in thousands) Mixed use property 154,674 5.8 154,793 6.1 (119) (0.1) Warehouse 149,176 5.6 147,443 5.8 1,733 1.2 Motel / hotel 142,172 5.4 129,352 5.1 12,820 9.9 Single purpose 123,344 4.6 112,924 4.5 10,420 9.2 Recreational / school 67,791 2.6 70,565 2.8 (2,774) (3.9) Other 281,361 10.5 264,846 10.5 16,515 6.2 Total $ 2,656,194 100.0 % $ 2,523,672 100.0 % $ 132,522 5.3 % Office loans represented the l argest segment of owner-occupied and non-owner occupied CRE loans totaling $555.8 million, or 20.9% of the total owner-occupied CRE and non-owner occupied CRE, at December 31, 2023.
The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated: December 31, 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 $ 565,892 19.4 % $ 555,822 20.9 % $ 10,070 1.8 % Industrial 513,615 17.6 418,651 15.8 94,964 22.7 Multi-family 414,728 14.2 305,499 11.5 109,229 35.8 Retail store / shopping center 304,562 10.5 285,926 10.8 18,636 6.5 Mini-storage 161,390 5.5 171,778 6.5 (10,388) (6.0) Mixed use property 156,627 5.4 154,674 5.8 1,953 1.3 Warehouse 139,341 4.8 149,176 5.6 (9,835) (6.6) Motel / hotel 165,420 5.7 142,172 5.4 23,248 16.4 Single purpose 125,430 4.3 123,344 4.6 2,086 1.7 Recreational / school 68,416 2.3 67,791 2.6 625 0.9 Other 296,929 10.3 281,361 10.5 15,568 5.5 Total $ 2,912,350 100.0 % $ 2,656,194 100.0 % $ 256,156 9.6 % Office loans represented the l argest segment of owner-occupied and non-owner occupied CRE loans totaling $565.9 million, or 19.4% of the total owner-occupied CRE and non-owner occupied CRE at December 31, 2024.
Net income decreased $20.1 million, or 24.6%, compared to December 31, 2022 due to losses on sales of investment securities of $12.2 million largely as a result of investment portfolio repositioning, an increase in noninterest expense of $15.7 million including an $8.0 million increase in compensation and employee benefits, and an increase in the provision for credit losses of $5.7 million resulting from a provision for credit losses of $4.3 million for the year ended December 31, 2023 compared to a reversal of the provision for credit losses of 28 Table of Contents $1.4 million during 2022.
Net income decreased $18.5 million, or 30.0%, compared to the year ended December 31, 2023 due primarily to a decrease in net interest income of $15.8 million to $209.4 million from $225.2 million and an increase in losses on sales of investment securities of $10.5 million to $22.7 million from $12.2 million, largely as a result of investment portfolio repositioning, which decreased noninterest income.
At December 31, 2023, we had outstanding loan commitments of $1.27 billion, primarily relating to undisbursed loans in process and unused credit lines as discussed in Note 19 of the Consolidated Financial Statements. Loan commitments represent potential growth in the loan portfolio and lending activities.
At December 31, 2024, we had outstanding loan commitments of $1.18 billion, primarily relating to undisbursed loans in process and unused credit lines as discussed in Note (18) Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Form 10-K.
Liquidity may also be affected by liabilities as a result of changes in deposits and borrowings. These activities are included in financing activities in the Consolidated Statements of Cash Flows.
Net increases in loan balances from both loan originations and purchases used $464.6 million of cash, while investment securities sales and maturities, net of purchases provided $406.2 million in cash. Liquidity may also be affected by liabilities as a result of changes in deposits and borrowings. These activities are included in financing activities in the Consolidated Statements of Cash Flows.
While management utilizes its best judgment and information available to recognize credit losses on loans, future additions to the allowance may be necessary based on 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.
While management utilizes its best judgment and information available at the time of evaluation to recognize credit losses on loans, future additions to the allowance 48 Table of Contents may be necessary based on declines in local and national economic conditions or other factors.
These objectives can be met from either our assets or liabilities. Asset liquidity sources consist of the repayments and maturities of loans, sales of loans, maturities of investment securities and sales of investment securities available for sale. These activities are generally included as investing activities in the Consolidated Statements of Cash Flows.
Asset liquidity sources consist of the repayments and maturities of loans, sales of loans, maturities of investment securities and sales of investment securities available for sale. These activities are generally included as investing activities in the Consolidated Statements of Cash Flows. Net cash used by investing activities was $85.9 million during the year ended December 31, 2024.
Results of Operations Net income was $61.8 million, or $1.75 per diluted common share, for the year ended December 31, 2023 down from $81.9 million, or $2.31 per diluted common share, for the year ended December 31, 2022.
Net income is also impacted by growth of operations through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements." Results of Operations Net income was $43.3 million, or $1.24 per diluted common share, for the year ended December 31, 2024 down from $61.8 million, or $1.75 per diluted common share, for the year ended December 31, 2023.
The following table provides information regarding our investment securities at the dates indicated: December 31, 2023 December 31, 2022 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Investment securities available for sale, at fair value: U.S. government and agency securities $ 13,750 0.7 % $ 63,859 3.0 % $ (50,109) (78.5) % Municipal securities 79,525 4.2 153,026 7.3 (73,501) (48.0) Residential CMO and MBS (1) 512,049 27.3 424,386 20.2 87,663 20.7 Commercial CMO and MBS (1) 504,258 27.0 664,421 31.8 (160,163) (24.1) Corporate obligations 7,613 0.4 3,834 0.2 3,779 98.6 Other asset-backed securities 17,158 0.9 21,917 1.0 (4,759) (21.7) Total 1,134,353 60.5 1,331,443 63.5 (197,090) (14.8) Investment securities held to maturity, at amortized cost: U.S. government and agency securities $ 151,075 8.1 % $ 150,936 7.2 % $ 139 0.1 Residential CMO and MBS (1) 267,204 14.3 290,318 13.8 (23,114) (8.0) Commercial CMO and MBS (1) 321,163 17.1 325,142 15.5 (3,979) (1.2) Total 739,442 39.5 766,396 36.5 (26,954) (3.5) Total investment securities $ 1,873,795 100.0 % $ 2,097,839 100.0 % $ (224,044) (10.7) % (1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.
The following table provides information regarding our investment securities at the dates indicated: December 31, 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 $ 12,544 0.9 % $ 13,750 0.7 % $ (1,206) (8.8) % Municipal securities 50,942 3.5 79,525 4.2 (28,583) (35.9) Residential CMO and MBS (1) 369,331 25.2 512,049 27.3 (142,718) (27.9) Commercial CMO and MBS (1) 309,741 21.0 504,258 27.0 (194,517) (38.6) Corporate obligations 11,770 0.8 7,613 0.4 4,157 54.6 Other asset-backed securities 10,066 0.7 17,158 0.9 (7,092) (41.3) Total 764,394 52.1 1,134,353 60.5 (369,959) (32.6) Investment securities held to maturity, at amortized cost: U.S. government and agency securities $ 151,216 10.3 % $ 151,075 8.1 % $ 141 0.1 Residential CMO and MBS (1) 244,309 16.6 267,204 14.3 (22,895) (8.6) Commercial CMO and MBS (1) 307,760 21.0 321,163 17.1 (13,403) (4.2) Total 703,285 47.9 739,442 39.5 (36,157) (4.9) Total investment securities $ 1,467,679 100.0 % $ 1,873,795 100.0 % $ (406,116) (21.7) % (1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.
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: Change December 31, 2023 December 31, 2022 $ % (Dollars in thousands) Nonaccrual loans: (1) Commercial business $ 4,468 $ 5,869 $ (1,401) (23.9) % Real estate construction and land development — 37 (37) (100.0) Total nonaccrual loans 4,468 5,906 (1,438) (24.3) Accruing loans past due 90 days or more $ 1,293 $ 1,615 (322) (19.9) % Total nonperforming loans 5,761 7,521 $ (1,760) (23.4) % Other real estate owned — — — — Total nonperforming assets $ 5,761 $ 7,521 $ (1,760) (23.4) % Credit quality ratios: Nonaccrual loans to loans receivable 0.10 % 0.15 % Nonperforming loans to loans receivable 0.13 0.19 Nonperforming assets to total assets 0.08 0.11 Modified loans: (2) Commercial business $ 19,969 Residential real estate — Real estate construction and land development 9,643 Consumer 41 Total performing modified loans $ 29,653 (1) At December 31, 2023 and December 31, 2022, $3.2 million, and $1.5 million, respectively, of nonaccrual loans were guaranteed by government agencies.
Loans classified as nonaccrual, performing modified loans and nonperforming assets The following tables provide information about our nonaccrual loans, performing modified loans and nonperforming assets at the dates indicated: Change December 31, 2024 December 31, 2023 $ % (Dollars in thousands) Nonaccrual loans: (1) Commercial business $ 3,919 $ 4,468 $ (549) (12.3) % Consumer 160 — 160 100.0 Total nonaccrual loans 4,079 4,468 (389) (8.7) Accruing loans past due 90 days or more 1,195 1,293 (98) (7.6) Total nonperforming loans 5,274 5,761 (487) (8.5) Other real estate owned — — — — Total nonperforming assets $ 5,274 $ 5,761 $ (487) (8.5) % Credit quality ratios: Nonaccrual loans to loans receivable 0.08 % 0.10 % (0.02) % (20.0) % Nonperforming loans to loans receivable 0.11 0.13 (0.02) (15.4) Nonperforming assets to total assets 0.07 0.08 (0.01) (12.5) (1) At December 31, 2024 and December 31, 2023, $1.0 million, and $3.2 million, respectively, of nonaccrual loans were guaranteed by government agencies. 43 Table of Contents Year Ended December 31, Change 2024 2023 $ % (Dollars in thousands) Modified loans: Commercial business $ 21,162 $ 19,969 $ 1,193 6.0 % Real estate construction and land development 28,030 9,643 18,387 190.7 Consumer 44 41 3 7.3 Total performing modified loans $ 49,236 $ 29,653 $ 19,583 66.0 % The following table provides the changes in nonaccrual loans during the periods indicated: Year Ended December 31, Change 2024 2023 $ % (Dollars in thousands) Balance, beginning of period $ 4,468 $ 5,906 $ (1,438) (24.3) % Additions 6,292 3,057 3,235 105.8 Net principal payments, sales and transfers to accruing status (1,175) (1,508) 333 (22.1) Payoffs (2,733) (2,987) 254 (8.5) Charge-offs (2,773) — (2,773) 100.0 Balance, end of period $ 4,079 $ 4,468 $ (389) (8.7) % Nonaccrual loans decreased $0.4 million, or 8.7%, due primarily to ongoing collection efforts.
The reversal of provision for credit losses on unfunded commitments recognized during the year ended December 31, 2023 was due primarily to an increase in utilization rates on lines of credit and a decrease in the unfunded exposure on construction loans. 31 Table of Contents Noninterest Income Overview The following table presents the change in the key components of noninterest income for the periods indicated: Year Ended December 31, Change 2023 2022 $ % (Dollars in thousands) Service charges and other fees $ 10,966 $ 10,390 $ 576 5.5 % Card revenue 8,340 8,885 (545) (6.1) Loss on sale of investment securities, net (12,231) (256) (11,975) 4,677.7 Gain on sale of loans, net 343 633 (290) (45.8) Interest rate swap fees 230 402 (172) (42.8) Bank owned life insurance income 2,934 3,747 (813) (21.7) Gain on sale of other assets, net 2 469 (467) (99.6) Other income 8,079 5,321 2,758 51.8 Total noninterest income $ 18,663 $ 29,591 $ (10,928) (36.9) % Nonintere st income decreased $10.9 million, or 36.9%, during the year ended December 31, 2023 compared to the same period in 2022.
Noninterest Income Overview The following table presents the change in the key components of noninterest income for the periods indicated: Year Ended December 31, Change 2024 2023 $ % (Dollars in thousands) Service charges and other fees $ 11,285 $ 10,966 $ 319 2.9 % Card revenue 7,752 8,340 (588) (7.1) Loss on sale of investment securities, net (22,742) (12,231) (10,511) 85.9 Gain on sale of loans, net 26 343 (317) (92.4) Interest rate swap fees 409 230 179 77.8 Bank owned life insurance income 2,967 2,934 33 1.1 Gain on sale of other assets, net 1,552 2 1,550 77,500.0 Other income 6,224 8,079 (1,855) (23.0) Total noninterest income $ 7,473 $ 18,663 $ (11,190) (60.0) % Nonintere st income decreased $11.2 million, or 60.0%, during the year ended December 31, 2024 compared to the same period in 2023.
Financial Condition Overview The table below provides a comparison of the changes in the Company's financial condition for the periods indicated: Change December 31, 2023 December 31, 2022 $ % (Dollars in thousands) Assets Cash and cash equivalents $ 224,973 $ 103,590 $ 121,383 117.2 % Investment securities available for sale, at fair value, net 1,134,353 1,331,443 (197,090) (14.8) Investment securities held to maturity, at amortized cost, net 739,442 766,396 (26,954) (3.5) Loans receivable, net 4,287,628 4,007,872 279,756 7.0 Premises and equipment, net 74,899 76,930 (2,031) (2.6) Federal Home Loan Bank stock, at cost 4,186 8,916 (4,730) (53.1) Bank owned life insurance 125,655 122,059 3,596 2.9 Accrued interest receivable 19,518 18,547 971 5.2 Prepaid expenses and other assets 318,571 296,181 22,390 7.6 Other intangible assets, net 4,793 7,227 (2,434) (33.7) Goodwill 240,939 240,939 — — Total assets $ 7,174,957 $ 6,980,100 $ 194,857 2.8 % Liabilities and Stockholders' Equity Deposits $ 5,599,872 $ 5,907,420 $ (307,548) (5.2) % Deposits held for sale — 17,420 $ (17,420) (100.0) Total deposits 5,599,872 5,924,840 $ (324,968) (5.5) Borrowings 500,000 — 500,000 100.0 Junior subordinated debentures 21,765 21,473 292 1.4 Securities sold under agreement to repurchase — 46,597 (46,597) (100.0) Accrued expenses and other liabilities 200,059 189,297 10,762 5.7 Total liabilities 6,321,696 6,182,207 139,489 2.3 Common stock 549,748 552,397 (2,649) (0.5) Retained earnings 375,989 345,346 30,643 8.9 Accumulated other comprehensive loss, net (72,476) (99,850) 27,374 (27.4) Total stockholders' equity 853,261 797,893 55,368 6.9 Total liabilities and stockholders' equity $ 7,174,957 $ 6,980,100 $ 194,857 2.8 % Total assets increased due primarily to an increase in loans receivable and cash and cash equivalents offset partially by a decrease in investment securities.
Financial Condition Overview The table below provides a comparison of changes in key components of the Company's financial condition for the periods indicated: December 31, Change 2024 2023 $ % (Dollars in thousands) Assets Cash and cash equivalents $ 117,100 $ 224,973 $ (107,873) (47.9) % Investment securities available for sale, at fair value, net 764,394 1,134,353 (369,959) (32.6) Investment securities held to maturity, at amortized cost, net 703,285 739,442 (36,157) (4.9) Loans receivable, net 4,749,655 4,287,628 462,027 10.8 Premises and equipment, net 71,580 74,899 (3,319) (4.4) Federal Home Loan Bank stock, at cost 21,538 4,186 17,352 414.5 Bank owned life insurance 111,699 125,655 (13,956) (11.1) Accrued interest receivable 19,483 19,518 (35) (0.2) Prepaid expenses and other assets 303,452 318,571 (15,119) (4.7) Other intangible assets, net 3,153 4,793 (1,640) (34.2) Goodwill 240,939 240,939 — — Total assets $ 7,106,278 $ 7,174,957 $ (68,679) (1.0) % Liabilities and Stockholders' Equity Total deposits 5,684,613 5,599,872 $ 84,741 1.5 Borrowings 383,000 500,000 (117,000) (23.4) Junior subordinated debentures 22,058 21,765 293 1.3 Accrued expenses and other liabilities 153,080 200,059 (46,979) (23.5) Total liabilities 6,242,751 6,321,696 (78,945) (1.2) 39 Table of Contents December 31, Change 2024 2023 $ % Common stock 531,674 549,748 (18,074) (3.3) Retained earnings 387,097 375,989 11,108 3.0 Accumulated other comprehensive loss, net (55,244) (72,476) 17,232 (23.8) Total stockholders' equity 863,527 853,261 10,266 1.2 Total liabilities and stockholders' equity $ 7,106,278 $ 7,174,957 $ (68,679) (1.0) % Total assets decreased due primarily to decreases in investment securities and cash and cash equivalents offset partially by an increase in loans receivable.
It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Investment in non-investment grade bonds and stripped mortgage-backed securities is not permitted under the policy.
The changes are discussed in more detail in the sections below. Investment Activities Overview Our investment policy is established by the Board and monitored by the Risk Committee of the Board. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements the Company's lending activities.
During the year ended December 31, 2023, financing activities provided $105.3 million of funds resulting primarily from an increase in short-term borrowings of $500.0 million offset partially by declines of $310.3 million in deposits and $46.6 million in securities sold under agreements to repurchase, and $30.8 million in dividend payments.
During the year ended December 31, 2024, financing activities used $86.5 million of funds resulting primarily from a decrease in short-term borrowings of $117.0 million, $31.8 million in dividend payments and $22.4 million in repurchases of common stock, offset partially by an increase in deposits of $84.7 million.
At December 31, 2023, under these credit facilities based on pledged loan collateral, the Bank had $1.42 billion of available credit capacity. We had no funds borrowed from the FHLB at December 31, 2023 or 2022. In addition, the Bank has access to the FRB Discount Window and BTFP.
At December 31, 2024, under these credit facilities based on pledged loan collateral, the Bank had $976.3 million of available credit capacity. The Bank had $383.0 million in outstanding borrowings from the FHLB at December 31, 2024, and none at December 31, 2023.
The Company also repurchased 32,792 and 26,944 shares which represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units during the years ended December 31, 2023 and December 31, 2022, respectively Liquidity and Capital Resources Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources.
Liquidity and Capital Resources Liquidity Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either our assets or liabilities.
Of this total, $277.4 million, or 49.9%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile as there is less tenant rollover risk and generally have guarantees from the company occupying the space as well as the owners of the company.
Of this total, $291.5 million, or 51.5%, were owner-occupied CRE loans which have a lower risk profile as there is less tenant rollover risk, 81.0% have recourse to the owners and 24.6% of loans are borrowers in the health care and social assistance sectors, who are less likely to reduce office space.
The average individual loan balance of owner-occupied CRE and non-owner occupied CRE was $1.2 million at December 31, 2023. Commercial and multifamily construction loans increased $121.8 million or 56.9% due to new loan originations and advances on outstanding loans. New commitments for commercial and multifamily construction loans were $246.6 million during the year ended December 31, 2023.
Commercial and multifamily construction loans increased $59.7 million, or 17.8%, during the year ended December 31, 2024 due primarily to new loan commitments of $149.3 million and advances on new and outstanding commitments. Residential real estate loans increased $27.6 million, or 7.4%, due primarily to loan purchases during the year ended December 31, 2024.
Noninterest Expense Overview The following table presents changes in the key components of noninterest expense for the periods indicated: Year Ended December 31, Change 2023 2022 $ % (Dollars in thousands) Compensation and employee benefits $ 100,083 $ 92,092 $ 7,991 8.7 % Occupancy and equipment 19,156 17,465 1,691 9.7 Data processing 18,071 16,800 1,271 7.6 Marketing 1,930 1,643 287 17.5 Professional services 4,227 2,497 1,730 69.3 State/municipal business and use tax 4,059 3,634 425 11.7 Federal deposit insurance premium 3,312 2,015 1,297 64.4 Amortization of intangible assets 2,434 2,750 (316) (11.5) Other expense 13,351 12,070 1,281 10.6 Total noninterest expense $ 166,623 $ 150,966 $ 15,657 10.4 % Noninterest expense increased $15.7 million, or 10.4%, during the year ended December 31, 2023 compared to the same period in 2022 due primarily to an $8.0 million increase in compensation and employee benefits resulting from a 4.2% increase in the average number of full-time equivalent employees, which included the addition of commercial and relationship banking teams in Boise, Idaho in the first quarter of 2023 and Eugene, Oregon in the second quarter of 2022. as well as an increase in salaries and wages due to upward market pressure.
Noninterest Expense Overview The following table presents changes in the key components of noninterest expense for the periods indicated: Year Ended December 31, Change 2024 2023 $ % (Dollars in thousands) Compensation and employee benefits $ 98,527 $ 100,083 $ (1,556) (1.6) % Occupancy and equipment 19,289 19,156 133 0.7 Data processing 14,899 17,116 (2,217) (13.0) Marketing 988 1,930 (942) (48.8) Professional services 2,515 4,227 (1,712) (40.5) State/municipal business and use tax 4,889 4,059 830 20.4 Federal deposit insurance premium 3,260 3,312 (52) (1.6) Amortization of intangible assets 1,640 2,434 (794) (32.6) Other expense 12,289 14,306 (2,017) (14.1) Total noninterest expense $ 158,296 $ 166,623 $ (8,327) (5.0) % 38 Table of Contents Noninterest expense decreased $8.3 million, or 5.0%, during the year ended December 31, 2024 compared to the same period in 2023.
The following table provides information about our loan portfolio by type of loan at the dates indicated: December 31, 2023 December 31, 2022 Change Amortized Cost % of Loans Receivable Amortized Cost % of Loans Receivable $ % (Dollars in thousands) Commercial business: Commercial and industrial $ 718,291 16.6 % $ 693,568 17.1 % $ 24,723 3.6 % Owner-occupied CRE 958,620 22.1 937,040 23.1 21,580 2.3 Non-owner occupied CRE 1,697,574 39.1 1,586,632 39.2 110,942 7.0 Total commercial business 3,374,485 77.8 3,217,240 79.4 157,245 4.9 Residential real estate 375,342 8.7 343,631 8.5 31,711 9.2 Real estate construction and land development: Residential 78,610 1.8 80,074 2.0 (1,464) (1.8) Commercial and multifamily 335,819 7.7 214,038 5.3 121,781 56.9 Total real estate construction and land development 414,429 9.5 294,112 7.3 120,317 40.9 Consumer 171,371 4.0 195,875 4.8 (24,504) (12.5) Total $ 4,335,627 100.0 % $ 4,050,858 100.0 % $ 284,769 7.0 % Loans receivable increased due primarily to increased loan demand and a decline in loan prepayments as compared to the prior year, as well as an increase in advances on lines of credit.
The following table provides information about our loan portfolio by type of loan at the dates indicated: December 31, 2024 December 31, 2023 Change Amortized Cost % of Loans Receivable Amortized Cost % of Loans Receivable $ % (Dollars in thousands) Commercial business: Commercial and industrial $ 842,672 17.5 % $ 718,291 16.6 % $ 124,381 17.3 % Owner-occupied CRE 1,003,243 20.9 958,620 22.1 44,623 4.7 Non-owner occupied CRE 1,909,107 39.9 1,697,574 39.1 211,533 12.5 Total commercial business 3,755,022 78.3 3,374,485 77.8 380,537 11.3 Residential real estate 402,954 8.4 375,342 8.7 27,612 7.4 Real estate construction and land development: Residential 83,890 1.7 78,610 1.8 5,280 6.7 Commercial and multifamily 395,553 8.2 335,819 7.7 59,734 17.8 Total real estate construction and land development 479,443 9.9 414,429 9.5 65,014 15.7 Consumer 164,704 3.4 171,371 4.0 (6,667) (3.9) Total $ 4,802,123 100.0 % $ 4,335,627 100.0 % $ 466,496 10.8 % Loans receivable increased $466.5 million, or 10.8%, to $4.80 billion at December 31, 2024 from $4.34 billion at December 31, 2023.
These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements. The Company pays dividends to our shareholders and the primary source of the Company's liquidity is cash obtained from dividends from the Bank to the Company.
These lines of credit are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage.
Professional services increased due primarily to a $1.5 million expense related to renewal of the core vendor contract during the fourth quarter of 2023. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023.
Professional services expense decreased during the year ended December 31, 2024 due primarily to a $1.5 million expense related to renewal of the core vendor contract recognized during the prior year. Amortization of intangible assets decreased due to the full amortization of the core deposit intangible related to a prior acquisition.
Total investment securities decreased due to sales of investment securities available for sale and maturities and repayments, offset partially by purchases of investment securities available for sale.
Total investment securities decreased $406.1 million to $1.47 billion at December 31, 2024 from $1.87 billion at December 31, 2023 due to sales of investment securities available for sale in connection with a strategic repositioning of the Company's investment portfolio, as well as maturities and repayments of $165.7 million, offset partially by purchases of investment securities available for sale.
Such agencies may require the Company to make adjustments to the allowance based on their judgments about information available to them at the time of their examinations. Unanticipated changes in any of these inputs could have a significant impact on our financial condition and results of operations.
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 make adjustments to the allowance based on their interpretation of information available to them at the time of their examinations.
These decreases were partially offset by an increase in net interest income of $5.8 million and a decrease in income tax expense of $6.4 million. Net Interest Income and Margin Overview One of the Company's key sources of earnings is net interest income.
These decreases were partially offset by a decrease in noninterest expense of $8.3 million.
Other expense increased due to an increase in customer deposit loss expense and employee related expenses, which included additional expenses related to calling efforts for the newly added teams, as well as a general increase in operating costs. 32 Table of Contents Income Tax Expense Overview The following table presents the income tax expense and related metrics and the change for the periods indicated: Year Ended December 31, 2023 Compared to 2022 Change 2023 2022 2021 $ % (Dollars in thousands) Income before income taxes $ 72,915 $ 99,436 $ 120,507 $ (26,521) (26.7) % Income tax expense $ 11,160 $ 17,561 $ 22,472 $ (6,401) (36.5) % Effective income tax rate 15.3 % 17.7 % 18.6 % (2.4) % (13.6) % Income tax expense and the effective income tax rate both decreased due primarily to lower pre-tax income, which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and tax credits.
Income Tax Expense Overview The following table presents the income tax expense and related metrics and the change for the periods indicated: Year Ended December 31, 2024 Compared to 2023 Change 2024 2023 $ % (Dollars in thousands) Income before income taxes $ 52,259 $ 72,915 $ (20,656) (28.3) % Income tax expense $ 9,001 $ 11,160 $ (2,159) (19.3) % Effective income tax rate 17.2 % 15.3 % 1.9 % 12.4 % Income tax expense decreased during the year ended December 31, 2024 primarily due to lower pre-tax income.
This increase was offset partially by a decrease in consumer loans due primarily to repayments totaling $30.5 million in indirect consumer loans as the Company ceased indirect consumer loan originations in 2020. Owner-occupied CRE and non-owner occupied CRE loans increased $132.5 million to $2.66 billion at December 31, 2023, compared to $2.52 billion at December 31, 2022 .
Owner-occupied CRE and non-owner occupied CRE loans increased $256.2 million to $2.91 billion at December 31, 2024 compared to $2.66 billion at December 31, 2023 .

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

9 edited+12 added−2 removed4 unchanged
Biggest changeITEM 7A. 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.
Biggest changeWe incur direct 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.
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.
It is the responsibility of management to execute the approved policies, develop and implement risk management strategies and to report to the Board on a regular basis. We maintain an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk.
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 approve these policies and interest rate limits annually.
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 Risk and Technology Committee of the Board. It is the responsibility of the Board to establish policies and interest rate limits and to approve these policies and interest rate limits annually.
Treasury rates accompanied by a change in the shape of the treasury yield curve could 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. 43 Table of Contents
Further, a change in Treasury rates accompanied by a change in the shape of the treasury yield curve could 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.
In addition, the simulation results noted above contain various assumptions such as a static balance sheet, and the rate 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.
In addition, the simulation results noted above contain various assumptions such as a static balance sheet, and the rate that deposit interest rates change as market interest rates change. Therefore, these simulation results do not likely reflect actual results, but continue to serve as estimates of interest rate risk.
In order to measure the interest rate risk sensitivity as of December 31, 2023, 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.
In order to measure the interest rate risk sensitivity as of December 31, 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 49 Table of Contents are reinvested into the same categories at the current level of interest rates.
In addition, 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. Further, a change in U.S.
In addition, 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 table.
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: December 31, 2023 December 31, 2022 $ 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) +200(shock) $ 1,438 0.6 % $ 8,181 3.2 % +100(shock) 1,644 0.7 5,113 2.0 +0(flat) — — — — -100(shock) 1,861 0.8 (5,433) (2.1) -200(shock) 1,549 0.7 (16,840) (6.6) The Company’s balance sheet sensitivity to changes in market rates is somewhat neutral, meaning results are similar in the rates up and down scenarios over a twelve month time horizon.
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: December 31, 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) $ (8,112) (3.5) % $ (6,343) (2.8) % +200(shock) (218) (0.1) 1,438 0.6 +100(shock) 658 0.3 1,644 0.7 +0(flat) — — — — -100(shock) (72) — 1,861 0.8 -200(shock) (2,624) (1.1) 1,549 0.7 -300(shock) (8,195) (3.6) (1,233) (0.6) The Company’s balance sheet sensitivity to changes in market rates remains somewhat neutral, meaning results are similar in the rates up and down scenarios over a twelve month time horizon.
Many factors, including economic and financial conditions, movements in 42 Table of Contents interest rates and consumer preferences, affect the difference between the interest earned on our assets and the interest paid on our liabilities.
Interest rate risk results primarily from the traditional banking activities in which the Company engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on our assets and the interest paid on our liabilities.
Removed
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 gathering deposits and extending loans.
Added
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Like other financial institutions, the Company is subject to direct and indirect market risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities.
Removed
The Company is less asset sensitive than in the prior year due primarily to a decrease in interest earning deposits that reprice daily. The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of interest rate deviations.
Added
Current results are similar to prior year results when the Company's modeled balance sheet results first shifted from an asset sensitive position to more of a neutral position. The simulation results are within the Board-established policy limits for all listed scenarios.
Added
Additionally, for all of the various interest rate scenarios modeled and measured by management as presented in the preceding table, the results at December 31, 2024 were well within established risk tolerances as established by policy. The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of interest rate deviations.
Added
Liquidity risk Economic conditions have made liquidity risk, primarily funding liquidity risk, a more prevalent concern among financial institutions in recent years. In general, liquidity risk is the risk of being unable to fund obligations to creditors, including, in the case of financial institutions, obligations to depositors, as such obligations become due and/or fund the acquisition of assets.
Added
Liquidity refers to our ability to fund operations, meet depositor withdrawals, provide for our customers’ credit needs and meet maturing obligations and existing commitments as they come due. Our liquidity principally depends on cash flows from the Bank’s operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and our ability to borrow funds.
Added
To manage liquidity risk, the Bank has several sources of liquidity in place to maximize funding availability and increase the diversification of funding sources, including credit facilities with the FHLB, access to the FRB Discount Window and uncommitted federal funds line of credit agreements with other financial institutions. These sources of liquidity are described in more detail in Item 7.
Added
Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note (10) Other Borrowings of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data of this Form 10-K.
Added
The criteria for evaluating the use of these sources include volume concentration (percentage of liabilities), cost, volatility and the fit with the current asset/liability management plan.
Added
Other market risks In addition to the foregoing, the Company is also subject to operational risks, such as the risk of loss due to human behavior, inadequate or failed internal systems and controls or external influences such as market conditions, fraudulent activities, disasters and other security risks.
Added
The Company’s management engages in ongoing monitoring of and efforts to strengthen its system of internal controls, enterprise risk management, operating processes and employee awareness to improve oversight of the Company’s operational risk.
Added
The Company is also subject to compliance risks, including the risk of regulatory sanctions, reputational impact or financial loss resulting from failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice, and to strategic/operation risks, including the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business and other events not identified in the risk types mentioned previously.
Added
Mitigation of the various risk elements that represent 50 Table of Contents compliance, strategic and/or reputation risk is achieved through initiatives to help management better understand and report on various indicators and causes of these risks, including those related to the development of new products and business initiatives. 51 Table of Contents

Other HFWA 10-K year-over-year comparisons