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What changed in HERITAGE FINANCIAL CORP /WA/'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of HERITAGE FINANCIAL CORP /WA/'s 2022 and 2023 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 2023 report.

+315 added−364 removedSource: 10-K (2024-02-27) vs 10-K (2023-02-24)

Top changes in HERITAGE FINANCIAL CORP /WA/'s 2023 10-K

315 paragraphs added · 364 removed · 201 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

43 edited+13 added−64 removed77 unchanged
Biggest changeCommercial and multifamily construction loans also have a higher risk because of the construction element and lease-up, if 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.
Biggest changeAs 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.
The FDIC, as required under the Federal Deposit Insurance Act, established a plan in September 2020 to restore the Deposit Insurance 11 Table of Contents Fund reserve ratio to meet or exceed the statutory minimum of 1.35 percent within eight years. This plan did not include an increase in the deposit insurance assessment rate.
The FDIC, 11 Table of Contents as required under the Federal Deposit Insurance Act, established a plan in September 2020 to restore the Deposit Insurance Fund reserve ratio to meet or exceed the statutory minimum of 1.35 percent within eight years. This plan did not include an increase in the deposit insurance assessment rate.
To be considered “well capitalized,” a depository institution must have a common equity Tier 1 capital ratio of at least 6.5%, a leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.
To be considered “well capitalized,” a depository institution must have a common equity Tier 1 capital ratio of at least 6.5%, a leverage 10 Table of Contents ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.
Supervision and Regulation We are subject to extensive regulation, and supervision under federal law and the law of Washington State, which are both primarily intended to protect depositors and the FDIC, and not shareholders.
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.
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 Bank.
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.
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 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.
In addition to the minimum common equity Tier 1, Tier 1, leverage ratio and total capital ratios, the Company and the Bank must maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying 10 Table of Contents discretionary bonuses.
In addition to the minimum common equity Tier 1, Tier 1, leverage ratio and total capital ratios, the Company and the Bank must maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.
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.
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.
Deposits are interest bearing provided that a minimum balance is maintained to avoid service charges. 7 Table of Contents 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. 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 37,000 surcharge free Automated Teller Machines through the MoneyPass network.
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 strategic focus is to continuously grow deposits with emphasis on total relationship banking with our business and retail customers. We continue to seek to increase our market share in the communities we serve by providing exceptional customer service, focusing on relationship development with local businesses and strategic branch 6 Table of Contents expansion.
Our strategic focus is to continuously grow deposits with emphasis on total relationship banking with our business and retail customers. We continue to seek to increase our market share in the communities we serve by providing exceptional customer service, focusing on relationship development with local businesses and strategic branch expansion.
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 consumer loans, real estate construction and land development loans, and residential real estate loans both held for sale and investment.
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.
As of December 31, 2022, the Company and the Bank met all minimum capital requirements and the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. See Note (21) Regulatory Capital Requirements of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.
As of December 31, 2023, the Company and the Bank met all minimum capital requirements and the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. See Note (20) Regulatory Capital Requirements of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.
In addition to the approval of the Federal Reserve, prior 9 Table of Contents approval may for such acquisitions also be necessary from other agencies including the DFI and agencies that regulate the target. In July 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy.
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 Company’s and the Bank's required and actual capital levels as of December 31, 2022 are listed in Note (21) Regulatory Capital Requirements of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.
The Company’s and the Bank's required and actual capital levels as of December 31, 2023 are listed in Note (20) Regulatory Capital Requirements of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.
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.
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.
Commercial Business Lending At December 31, 2022 we had $3.22 billion, or 79.4% 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.
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.
As of December 31, 2022, the regulatory capital ratios of the Bank were well 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 12.8%, 9.7%, 13.2% and 14.0%, respectively. Focused deposit growth.
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.
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, 2022, our non-maturity deposits were 94.8% 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, 2023, our non-maturity deposits were 87.6% of our total deposits.
Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" of this Form 10-K.
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.
Federal Reserve policy also provides that a bank holding company may pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition.
Federal Reserve policy also provides that a bank holding company may pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. 9 Table of Contents Bank regulations also require bank holding companies and banks to maintain minimum capital ratios and a capital conservation buffer.
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.
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.
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, 2022, our liquidity position was $103.6 million in cash and cash equivalents and $2.10 billion in total investment securities. See also "Item 7.
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.
We have a well-developed credit approval structure that has enabled us to maintain a standard of asset quality that we believe has moderate risk while at the same time allowing us to achieve our lending objectives. We will continue to focus on loan types and markets that we know well and where we have a historical record of success.
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.
In 1992, the Bank converted to a state-chartered mutual savings bank under the name Heritage Savings Bank. 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 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.
Our commitment defines our relationships, sets expectations for our actions and directs decision-making in these four fundamental areas. 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 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.
It also may prohibit any FDIC-insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the institution and the Deposit Insurance Fund.
As insurer, the FDIC imposes deposit insurance assessments and is authorized to conduct examinations of and to require reporting by institutions insured by the FDIC. It also may prohibit any FDIC-insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the institution and the Deposit Insurance Fund.
Heritage Bank is headquartered in Olympia, Washington and conducts business from its 50 branch offices located throughout Washington State, the greater Portland, Oregon area and Eugene, Oregon as of December 31, 2022. On January 10, 2023, the Company opened its 51st branch in Boise, Idaho which is the first branch in Idaho.
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.
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.
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.
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. We further endeavor to limit our construction lending risk through adherence to strict underwriting guidelines and procedures.
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.
As insurer of the Bank's deposits, the FDIC has supervisory and enforcement authority over the Bank and this insurance is backed by the full faith and credit of the United States government. As insurer, the FDIC imposes deposit insurance assessments and is authorized to conduct examinations of and to require reporting by institutions insured by the FDIC.
The FDIC is an independent federal agency that insures the deposits, up to applicable limits, of depository institutions. As insurer of the Bank's deposits, the FDIC has supervisory and enforcement authority over the Bank and this insurance is backed by the full faith and credit of the United States government.
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.
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.
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 we inspect the project prior to paying any draw requests.
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.
The deposits of the Bank are insured by the FDIC. 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.
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.
During the three months ended March 31, 2020, we ceased indirect auto loan originations, which are classified as consumer loans within loans receivable. 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.
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.
The Bank 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.
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.
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. 8 Table of Contents Real Estate Construction and Land Development At December 31, 2022, we had $294.1 million, or 7.3% of our loans receivable, in real estate construction and land development loans, including residential construction loans and commercial and multifamily construction loans.
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.
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. Business Strategy We are committed to being the leading commercial community bank in the Pacific Northwest by continuously improving customer satisfaction, employee empowerment, community investment and shareholder value.
Business Strategy We are committed to being the leading commercial community bank in the Pacific Northwest by continuously improving customer satisfaction, employee empowerment, community investment and shareholder value. Our commitment defines our relationships, sets expectations for our actions and directs decision-making in these four fundamental areas.
Deposit Insurance and Other FDIC Programs The deposits of the Bank are insured up to $250,000 per separately insured category by the Deposit Insurance Fund, which is administered by the FDIC. The FDIC is an independent federal agency that insures the deposits, up to applicable limits, of depository institutions.
In addition, at December 31, 2023, the Bank’s loans on commercial real estate, as defined by the FDIC, were 271% of regulatory capital. Deposit Insurance and Other FDIC Programs The deposits of the Bank are insured up to $250,000 per separately insured category by the Deposit Insurance Fund, which is administered by the FDIC.
In addition, the indirect loans purchased were made to only prime borrowers. At December 31, 2022, we had $62.9 million, or 1.6% of our loans receivable, in indirect auto loans remaining which is a decrease of $54.4 million or 46.4% from $117.3 million as of December 31, 2021.
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.
In addition, we review a majority of the individual loans within our commercial real estate loan portfolio annually for various performance related criteria and stress-test loans for potential changes in interest rates, occupancy and collateral values. See also, Item 1A. Risk Factors—Our loan portfolio is concentrated in loans with a higher risk of loss.
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.
We originate residential construction loans for the construction of single-family custom homes (where the homeowner is the borrower). We also provide financing to builders for the construction of pre-sold homes and speculative residential property.
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.
Residential Real Estate Loans, Originations and Sales At December 31, 2022, residential real estate loans totaled $343.6 million, or 8.5% of our loans receivable. The majority of our residential real estate loans are secured by single-family residences located in our primary market areas.
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.
Removed
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.
Added
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.
Removed
There have been no material changes to our business strategy during the years ended December 31, 2022 and 2021, except for our participation in the SBA's PPP program which expired on May 31,2021. History The Bank was established in 1927 as a federally-chartered mutual savings bank.
Added
History The Bank was established in 1927 as a federally-chartered mutual savings bank. In 1992, the Bank converted to a state-chartered mutual savings bank under the name Heritage Savings Bank.
Removed
The Bank may enter into non-hedging interest rate swap contracts with commercial customers to accommodate their business needs. For additional information, see Note (8) Derivative Financial Instruments of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data. We participated in the PPP which is administered by the SBA.
Added
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.
Removed
The CARES Act initially amended the SBA’s loan program to create a guaranteed, unsecured loan program, the PPP, to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the COVID-19 Pandemic.
Added
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.
Removed
Through the conclusion of the program on May 31, 2021, the Bank had funded 7,184 SBA PPP loans totaling $1.28 billion with an average loan size of $178,000.
Added
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%.
Removed
As of December 31, 2022, total funded SBA PPP loans decreased to $1.5 million, net of unamortized net deferred fees of $103,000, due primarily to principal and interest forgiveness payments from the SBA as the Bank began accepting and processing the forgiveness applications during the three months ended December 31, 2020.
Added
Institutions with capital meeting or exceeding the ratio and otherwise complying with the specified requirements (including off-balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements.
Removed
See also Item 1A. Risk Factors—Our loan portfolio is concentrated in loans with a higher risk of loss. Consumer At December 31, 2022, we had $195.9 million, or 4.8% of our loans receivable, in consumer loans. We originate consumer loans and lines of credit that are both secured and unsecured.
Added
The CBLR was established at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two-quarter grace period to again achieve compliance.
Removed
Bank regulations also require bank holding companies and banks to maintain minimum capital ratios and a capital conservation buffer. For additional information, see “Capital Adequacy” below.
Added
Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements. The Bank has not elected to use the CBLR framework as of December 31, 2023.
Removed
Other Regulatory Developments The following summarizes some of the significant federal legislation affecting banking in recent years. Economic Growth Act. In May 2018 the Economic Growth Act was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act.
Added
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be considered in supervisory guidance on evaluation of capital adequacy. As of December 31, 2023, the Bank’s aggregate recorded loan balances for construction, land development and land loans were 53% of regulatory capital.
Removed
While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.
Added
In November 2023, the FDIC issued a Final Rule on Special Assessment Pursuant to Systemic Risk Determination to implement a special assessment to recover the loss to the Deposit Insurance Fund (DIF) associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank.
Removed
The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures, risk weights for certain high-risk commercial real estate loans and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a Community Bank Leverage Ratio, which became effective January 1, 2020.
Added
The assessment base for the special assessment is equal to an insured depository institution’s (IDI’s) estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion. The Company did not have more than $5 billion in uninsured deposits as of December 31, 2022 and therefore is not subject to this special assessment.
Removed
The new ratio is an optional framework that is designed to reduce regulatory burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework starting in the first quarter of 2020.
Added
Further, on July 26, 2023, the SEC adopted final rules that require public companies to promptly disclose material cybersecurity incidents in a Current Report on Form 8-K (“Form 8-K”) and detailed information regarding their cybersecurity risk management and governance on an annual basis in an Annual Report on Form 10-K (Form 10-K”).
Removed
Qualifying community banking organizations that elect to use the Community Bank Leverage Ratio framework and that maintain a leverage ratio of greater than nine percent are considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rule.
Added
Companies will be required to report on Form 8-K any cybersecurity incident they determine to be material within four business days of making that determination. See
Removed
Additionally, such insured depository institutions are considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. The leverage ratio required for purposes of the new framework is calculated as Tier 1 capital divided by average total consolidated assets, consistent with how banking organizations calculate their leverage ratio under the current rules.
Removed
As of December 31, 2022, the Company and the Bank had not elected to be subject to the Community Bank Leverage Ratio. CECL. The FASB issued a new accounting standard the Bank adopted on January 1, 2020.
Removed
This standard, referred to as CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. CECL covers a broader range of assets than the prior method of recognizing credit losses and generally results in earlier recognition of credit losses.
Removed
Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL.
Removed
Concurrent with enactment of the CARES Act, federal banking agencies issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL.
Removed
The interim final rule provided banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory 12 Table of Contents capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.
Removed
The changes in the final rule apply only to those banking organizations that elected the CECL transition relief provided under the rule. The Company and the Bank elected this option.
Removed
See discussion of CECL Adoption in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements of the Notes to Consolidated Financial Statements included in Item 8.
Removed
Financial Statements And Supplementary Data 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. The required reports are available free of charge through our website.
Removed
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. Any significant changes or waivers of the Code of Ethics will be publicly disclosed to shareholders.
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 with financial technology companies that rely on technology to provide financial services. Many of our competitors have substantially greater resources than we do.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected; or if 19 Table of Contents we do not raise interest rates we are paying on deposits to effectively compete with other banks or alternative investment options, we may see deposits decline leading to either a lower level of earning assets or higher borrowings, either of which would could potentially cause a decline in earnings.
Biggest changeConversely, if we do not adjust our deposit interest rates to remain competitive with other banks or alternative investment options, we might experience a decrease in deposits, potentially leading to either reduced earning assets or higher borrowings. Both scenarios could potentially cause a decline in earnings.
We are an entity separate and distinct from our subsidiary, the Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary.
We are an entity separate and distinct from our subsidiary, the Bank, and derive substantially all our revenue at the holding company level in the form of dividends from that subsidiary.
Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries and 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.
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.
However, 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.
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.
Risks Related to Economic Conditions The current economic condition in the market areas we serve may adversely impact our earnings and could increase the credit risk associated with our loan portfolio. Substantially all of our loans are to businesses and individuals in the states of Washington and Oregon.
Risks Related to Economic Conditions The current economic condition in the market areas we serve may adversely impact our earnings and could increase the credit risk associated with our loan portfolio. Substantially all of our loans are to businesses and individuals in the states of Washington, Oregon and Idaho.
Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action. We rely on dividends from the Bank for substantially all of our revenue at the holding company level.
Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action. We rely on dividends from the Bank for substantially all our revenue at the holding company level.
Although 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, 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.
Although 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.
A deterioration in economic conditions in our market areas of the Pacific Northwest as a result of inflation, a recession, the effects of COVID-19 variants or other factors could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations: • loan delinquencies, problem assets and foreclosures may increase; • we may increase our ACL on loans and provision for credit losses; • the sale of foreclosed assets may be slow; • demand for our products and services may decline, possibly resulting in a decrease in our total loans; • collateral for loans made may decline further in value, exposing us to increased risk of loss on existing loans; • the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and • the amount of our deposits may decrease and the composition of our deposits may be adversely affected.
A deterioration in economic conditions in our market areas of the Pacific Northwest as a result of inflation, a recession, or other factors could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations: • Loan delinquencies, problem assets and foreclosures may increase; • We may increase our ACL on loans and provision for credit losses; • The sale of foreclosed assets may be slow; • Demand for our products and services may decline, possibly resulting in a decrease in our total loans; • Collateral for loans made may decline further in value, exposing us to increased risk of loss on existing loans; • The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and • The amount of our deposits may decrease and the composition of our deposits may be adversely affected.
We performed our annual impairment assessment for goodwill as of December 31, 2022, and concluded there was no impairment. The Company’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses in the future.
We performed our annual impairment assessment for goodwill as of December 31, 2023, and concluded there was no impairment. The Company’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses in the future.
In addition, bank regulatory agencies periodically review our ACL on loans and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on their judgments about information available to them at the time of their examination.
Bank regulatory agencies also periodically review our ACL on loans and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on their judgments about information available to them at the time of their examination.
Interest rates are highly sensitive to many factors that are beyond our control, including general and forecasted economic conditions reflected in the rates offered along the yield curve and the FHLB's fixed-rate advance index, and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.
Interest rates are highly sensitive to many factors that are beyond our control, including general and forecasted economic conditions reflected in the rates offered along the yield curve and the FHLB's fixed-rate advance index, and policies of various governmental and regulatory agencies and, particularly the Federal Reserve.
Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change.
Congress, state legislatures and federal and state regulatory agencies continue to propose initiatives to supplement the global effort to combat climate change.
Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk 20 Table of Contents assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change.
Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change.
Furthermore, in the case of speculative construction loans, there is added risk associated with identifying an end-tenant or end-purchaser for the finished project. Land development loans also pose additional risk because of the lack of income being produced by the property and potential illiquid nature of the collateral. These risks can be significantly impacted by supply and demand conditions.
In the case of speculative construction loans, there is added risk associated with identifying an end-tenant or end-purchaser for the finished project. Land development loans also pose additional risk because of the lack of income being produced by the property and potentially illiquid nature of the collateral. These risks can be significantly impacted by supply and demand conditions.
If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock.
If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock.
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.
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.
If our estimates are incorrect, the ACL on loans may not be sufficient to cover credit losses inherent in our loan portfolio, resulting in the need for increases in our ACL on loans through the provision for credit losses.
If our estimates are incorrect, the ACL on loans may not be sufficient to cover expected losses in our loan portfolio, resulting in the need for increases in our ACL on loans through the provision for credit losses.
Our security measures may not protect us from system failures or interruptions. We have established policies and procedures to prevent or limit the impact of system breaches, failures, and interruptions. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers.
Our security measures may not protect us from system failures or interruptions. We have established policies and procedures to identify threats and vulnerabilities and prevent or limit the impact of system breaches, failures, and interruptions. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers.
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 16 Table of Contents enable us to fully recover unpaid loan funds and associated construction and liquidation costs.
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.
The ACL on loans is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. Loans are charged-off through the ACL on loans when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are recorded to the ACL on loans.
The ACL on loans is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. Loans are charged-off through the ACL on loans when management believes the uncollectibility of a loan balance is considered probable. Subsequent recoveries, if any, are recorded to the ACL on loans.
Changes in interest rates also affect the value of our interest earning assets and in particular our investment securities portfolio. Generally, the fair value of fixed-rate investment securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on investment securities available for sale are reported as a separate component of equity, net of tax.
Changes in interest rates also affect the value of our available for sale investment securities portfolio. Generally, the fair value of fixed-rate investment securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on investment securities available for sale are reported as a separate component of equity, net of tax.
The Bank records the changes in the ACL on loans through earnings as a "(Reversal of) provision for credit losses" on the Consolidated Statements of Income.
The Company records the changes in the ACL on loans through earnings as a "Provision for (reversal of) credit losses" on the Consolidated Statements of Income.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if interest rates decrease as assets tend to reprice more quickly than liabilities.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely 19 Table of Contents affected if interest rates decrease as assets tend to reprice more quickly than liabilities.
Although these 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.
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.
Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information 21 Table of Contents through various other vendors and their personnel.
Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
Increased ESG related compliance costs could result in increases to our 24 Table of Contents overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price.
Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price.
In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock. Also, our right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors.
In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock. Also, our right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. 24 Table of Contents ITEM 1B.
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.
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.
As a result, these 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.
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.
If the FOMC further increases the targeted federal funds rate, overall interest rates will likely rise, which will positively impact our net interest income but may negatively impact both the housing market, by reducing refinancing activity and new home purchases, and the U.S. economy.
If the FOMC further increases the targeted federal funds rate, overall interest rates will likely rise, which may negatively impact both the housing market, by reducing refinancing activity and new home purchases, and the U.S. economy.
The Company and the Bank 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.
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.
While we believe we have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance that suitable growth opportunities will be available or that we will successfully manage our growth.
While we believe in the strength of our executive management and internal systems to manage growth, there can be no assurance that suitable growth opportunities will be available or that we will successfully manage our growth.
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.
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.
Commercial real estate loans also expose us to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity.
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.
We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.
In the event of a security incident, significant additional resources may be expended to modify our protective measures or to investigate and remediate vulnerabilities or other exposures and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.
Construction lending involves additional risks when compared with permanent commercial and residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion.
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.
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.
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.
During the year ended December 31, 2022, in response to inflation, the FOMC of the Federal Reserve has increased the target range for the federal funds rate by 400 basis points to a range of 4.25% to 4.50% as of December 31, 2022 compared to a range of 0.00% to 0.25% at December 31, 2021 as it seeks to control inflation without creating a recession.
During the year ended December 31, 2023, in response to inflation, the FOMC of the Federal Reserve has increased the target range for the federal funds rate by 100 basis points to a range of 5.25% to 5.50% as of December 31, 2023 compared to a range of 0.00% to 0.25% at December 31, 2021 with the intention of controlling inflation without creating a recession.
We are subject to certain risks in connection with our use of technology . Our security measures may not be sufficient to mitigate the risk of a cyber-attack .
We are subject to certain risks in connection with our use of technology . Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Technology architecture, infrastructure, and information systems and platforms are essential to conduct our business.
The effects of such policies upon our business, financial condition and results of operations cannot be predicted. Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations. The potential effects of climate change are creating a heightened level of concern for the state of the global environment.
Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations. The potential effects of climate change are creating a heightened level of concern for the state of the environment.
Additionally, we may perform a qualitative assessment that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, and financial performance. Our evaluation of the fair value of goodwill involves a substantial amount of judgment.
Additionally, we may perform a qualitative assessment that considers macroeconomic conditions, industry and market conditions, cost or margin factors, and financial performance. Assessing the fair value of goodwill involves considerable judgment.
Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits.
Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. 20 Table of Contents government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits.
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 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.
We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands.
Ineffective liquidity management could adversely affect our financial results and condition. Liquidity is essential to our business. We rely on several sources to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands.
General economic conditions, including inflation, unemployment and money supply fluctuations, also may adversely affect our profitability. Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade and it is not known how changes in tariffs being imposed on international trade may also affect these businesses.
General economic conditions, including inflation, unemployment and money supply fluctuations, also may adversely affect our profitability. Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade. Changes in agreements or relationships between the United States and other countries may also affect these businesses.
Accordingly, the repayment of commercial business loans depends primarily on the cash flow and creditworthiness of the borrower and secondarily on the underlying collateral provided by the borrower. At December 31, 2022, our commercial business loans totaled $3.22 billion, or 79.4% of our total loan portfolio, of which $5.9 million, or 0.2%, were classified as nonaccrual at December 31, 2022.
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.
Regulatory authorities also have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and adequacy of an institution's ACL.
Regulatory authorities also have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and adequacy of an 22 Table of Contents institution's ACL. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition transactions.
Communications and information systems are essential to the conduct of our business as we use such systems to manage our customer relationships, our core operating systems, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks.
Systems to manage our customer relationships, our core operating systems, our general ledger,and virtually all other aspects of our business rely on the secure processing, storage, and transmission of confidential and private information in our computing environments.
Risks Related to Market and Interest Rate Changes Fluctuating interest rates can adversely affect our profitability. Our profitability is dependent to a large extent 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.
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.
As of December 31, 2022, our real estate construction and land development loans totaled $294.1 million, or 7.3% of our total loan portfolio, of which $80.1 million, or 2.0% of our total loan portfolio, were residential construction and $214.0 million, or 5.3% of our total loan portfolio, were commercial and multifamily construction.
As of December 31, 2023, our real estate construction and land development loans totaled $414.4 million, or 9.5% of our total loan portfolio, of which $78.6 million, or 1.8% of our total loan portfolio, were residential construction and $335.8 million, or 7.7% of our total loan portfolio, were commercial and multifamily construction.
Risks Related to Cybersecurity, Third-Parties and Technology We rely on other companies to provide key components of our business infrastructure. We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations.
Risks Related to Cybersecurity, Third-Parties and Technology We rely on third party services and products to provide key components of our technology and banking product business infrastructure. We rely on third party services to provide products and services in support of day-to-day operations.
Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data.
Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information.
Ultimately, we would expect our efficiency ratio to improve; however, if we are not successful in our integration process, this may not occur, and our acquisitions or branching activities may not be accretive to earnings in the short or long-term; • to the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill.
If we are unsuccessful in our integration process, this may not occur, and our acquisitions or branching activities may not be accretive to earnings in the short or long-term; • When acquisition costs exceed the fair value of the net assets acquired, goodwill is recorded. Any future impairment of goodwill could adversely affect our financial condition.
Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans.
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.
Accordingly, if we make any errors in judgment regarding the collectability of our commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
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.
Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters 18 Table of Contents such as earthquakes and flooding.
Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as earthquakes and flooding. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
We cannot assure that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third-parties on which we rely. Further, while we believe we maintain adequate insurance to cover these risks, our insurance coverage may not cover all losses resulting from breaches, system failures or other disruptions.
Further, while we believe we maintain adequate insurance to cover these risks, our insurance coverage may not cover all losses resulting from breaches, system failures or other disruptions.
We offer different types of commercial business loans to a variety of businesses in industries such as real estate and rental and leasing, healthcare, accommodation and food services, retail trade and construction. The primary types of commercial business loans offered are lines of credit, term equipment financing and term real estate loans.
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.
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 borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value.
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.
Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact.
Although we take every protective measure and endeavor to ensure the security of our computing environments and the data within the environments, systems, software and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service, misuse of information, viruses, malicious code and malware and/or ransomware cybercrime incidents.
The majority of the nonperforming commercial business loans were secured by real estate. Within commercial business loans, agricultural loans totaled $57.3 million, or 1.4% of our total loan portfolio and 1.8% of our commercial business loans at December 31, 2022 of which $2.6 million, or 4.5% were classified as nonaccrual loans at December 31, 2022.
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.
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.
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.
The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we may not be able to effectively compete. The financial services industry is experiencing rapid technological changes with frequent introductions of new technology-driven products and services.
While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur. The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we may not be able to effectively compete.
Within this category, $37,000 of our total real estate construction and land development loans, were classified as nonaccrual at December 31, 2022. 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.
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.
A downturn in housing, or the real estate market, could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of our borrowers are builders with more than one loan outstanding with us.
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.
Our owner and non-owner occupied commercial real estate loans, which include multifamily residential real estate loans, involve higher principal amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control of our borrowers.
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.
As of December 31, 2022, our owner and non-owner occupied commercial real estate loans totaled $2.52 billion, or 62.3% of our total loan portfolio, of which $212,000 were classified as nonaccrual at December 31, 2022.
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.
Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with GAAP, our goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate a potential impairment exists.
We may experience goodwill impairment, which could reduce our earnings. Accounting standards require that we use the purchase method of accounting for acquisitions and business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill.
To the extent we expand our lending beyond our current market areas, we also could incur additional risk related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.
In addition, the failure to identify and retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. To the extent we expand our lending beyond our current market areas, we could also incur additional risk related to those new market areas.
The evaluation may be based on a variety of quantitative factors, including the quoted price of our common stock, market prices of common stock of other banking organizations, common stock trading multiples, discounted cash flows and data from comparable acquisitions.
In accordance with GAAP, we assess our goodwill for impairment annually, or more frequently if specific events suggest potential impairment. This evaluation incorporates various quantitative factors, such as the quoted price of our common stock, market prices of common stock of other banking organizations, common stock trading multiples, discounted cash flows and data from comparable acquisitions.
If we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for residential real estate loans because there are fewer potential purchasers of the collateral. Additionally, commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers.
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.
We are pursuing a strategy of supplementing organic growth by acquiring other financial institutions or their businesses that we believe will help us fulfill our strategic objectives and enhance our earnings.
Risks Related to our Business Strategy Our strategy of pursuing acquisitions and de novo branching exposes us to financial and operational risks that could adversely affect us. As part of our business strategy, we seek to supplement our organic growth by acquiring other financial institutions or their businesses to achieve our strategic objectives and bolster earnings.
Our business strategy includes significant growth plans, and our financial condition and results of operations could be negatively affected if we are not successful in executing this strategy or if we fail to grow or manage our growth effectively. We intend to pursue a growth strategy for our business. We regularly evaluate potential acquisitions and expansion opportunities.
Our financial condition and results of operations could be negatively affected if we fail to execute our growth strategy or manage our growth effectively. Our intention is to supplement our growth through selective acquisitions of financial institutions, including branch expansions, and other growth opportunities.
Because of the uncertainties inherent in estimating construction costs, as well as the market value of the complete project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio.
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.
If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected; • higher than expected deposit attrition; • potential diversion of our management's time and attention; • we may be exposed to previously known or unknown regulatory compliance deficiencies from the acquired institution; • prices at which acquisitions are made can fluctuate with market conditions.
If these exceed our estimates, it could significantly impact our financial condition and operational results; • There is a risk of higher-than-anticipated deposit attrition following an acquisition, potentially affecting our funding base; • The acquisition process may divert our management's time and attention, impacting day-to-day operations and strategic initiatives; • Acquired entities might have known or unknown regulatory compliance deficiencies, exposing us to associated risks; • Market conditions can influence acquisition prices.
In addition, if charge-offs in future periods exceed the ACL on loans, we will need additional provisions to increase the ACL on loans. Risks Related to our Business Strategy Our strategy of pursuing acquisitions and de novo branching exposes us to financial and operational risks that could adversely affect us.
In addition, if charge-offs in future periods exceed the ACL on loans, we will need additional provisions to increase the ACL on loans. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
As discussed below under the risk factor heading “We may experience future goodwill impairment, which could reduce our earnings” we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition; and • we are required to record acquired loans through acquisitions at fair value, which may differ from the outstanding balance of such loans.
See, the risk factor titled “We may experience future goodwill impairment, which could reduce our earnings” below; and • Acquired loans are recorded at fair value, which may differ from their outstanding balance. Changes in yields and replacement of high-yielding loans can impact our net interest margins and interest income over time.
If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties.
If one or more of these events occur, systems, software and/or network availability, and integrity could be compromised resulting in the loss of the Company’s and/or customers’ confidential and private information.
Our growth initiatives may require us to recruit experienced personnel to assist in such initiatives, which will increase our compensation costs. In addition, the failure to identify and retain such personnel would place significant limitations on our ability to successfully execute our growth strategy.
However, there is no guarantee that we will identify suitable opportunities or effectively negotiate and finance these activities. Even if undertaken, the success of such undertakings cannot be assured. Our growth initiatives may require us to recruit experienced personnel to assist in such initiatives, which will increase our compensation costs.

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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 Bank has three back office locations in Tacoma, Lynnwood and Burlington, Washington. The Bank's branch network at December 31, 2022 was comprised of 50 branches located throughout Washington and Oregon.
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.
Added
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.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe graph assumes the value of the investment in Company’s common stock and each index was $100 on December 31, 2017, and all dividends were reinvested. . 26 Table of Contents Years Ended December 31, Index 2017 2018 2019 2020 2021 2022 Heritage Financial Corporation $ 100.00 $ 98.67 $ 96.67 $ 83.08 $ 89.62 $ 115.92 NASDAQ Composite Index 100.00 97.16 132.81 192.47 235.15 158.65 S&P U.S.
Biggest changeThe 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. .
Holders At December 31, 2022, we had approximately 1,133 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.
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.
SmallCap Banks Index during the five-year period beginning December 31, 2017 and ending December 31, 2022. 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.
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.
Payments of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors.
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.
On January 25, 2023, the Company’s 25 Table of Contents Board of Directors declared a regular quarterly dividend of $0.22 per common share payable on February 22, 2023 to shareholders of record on February 8, 2023.
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.
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, 2022: 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, 2022—October 31, 2022 — $ — 9,986,863 638,214 November 1, 2022— November 30, 2022 — — 9,986,863 638,214 December 1, 2022—December 31, 2022 664 30.06 9,986,863 638,214 Total 664 $ 30.06 (1) Of the common shares repurchased by the Company between October 1, 2022 and December 31, 2022, all shares represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units.
Management'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.
SmallCap Banks Index 100.00 83.44 104.69 95.08 132.32 116.69 *Information for the graph was provided by S&P Global Market Intelligence. ITEM 6. [RESERVED]
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]
Removed
Management's projections show an expectation that cash dividends will continue for the foreseeable future.
Added
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.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeDERIVATIVE FINANCIAL INSTRUMENTS 77 NOTE 9. DEPOSITS 77 NOTE 10. JUNIOR SUBORDINATED DEBENTURES 78 NOTE 11. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE 78 NOTE 12. OTHER BORROWINGS 78 NOTE 13. LEASES 79 NOTE 14. EMPLOYEE BENEFIT PLANS 80 NOTE 15. STOCKHOLDERS’ EQUITY 81 NOTE 16. FAIR VALUE MEASUREMENTS 82 NOTE 17. STOCK-BASED COMPENSATION 86 NOTE 18.
Biggest changeJUNIOR SUBORDINATED DEBENTURES 76 NOTE 10. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE 77 NOTE 11. OTHER BORROWINGS 77 NOTE 12. LEASES 78 NOTE 13. EMPLOYEE BENEFIT PLANS 78 NOTE 14. STOCKHOLDERS’ EQUITY 79 NOTE 15. FAIR VALUE MEASUREMENTS 80 NOTE 16. STOCK-BASED COMPENSATION 84 NOTE 17. CASH RESTRICTION 85 NOTE 18. INCOME TAXES 85 NOTE 19.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 173) 44 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—DECEMBER 31, 2022 AND DECEMBER 31, 2021 46 CONSOLIDATED STATEMENTS OF INCOME—FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 47 CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME—FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 48 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY—FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 49 CONSOLIDATED STATEMENTS OF CASH FLOWS—FOR THE YEARS ENDED DECEMBER 31, 2022, 202 1 AND 2020 50 2 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 52 NOTE 1.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 173) 44 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—DECEMBER 31, 2023 AND DECEMBER 31, 2022 46 CONSOLIDATED STATEMENTS OF INCOME—FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 47 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)—FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 48 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY—FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 49 CONSOLIDATED STATEMENTS OF CASH FLOWS—FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 50 2 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 52 NOTE 1.
DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 52 NOTE 2. INVESTMENT SECURITIES 60 NOTE 3. LOANS RECEIVABLE 63 NOTE 4. ALLOWANCE FOR CREDIT LOSSES ON LOANS 73 NOTE 5. OTHER REAL ESTATE OWNED 75 NOTE 6. PREMISES AND EQUIPMENT 76 NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS 76 NOTE 8.
DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 52 NOTE 2. INVESTMENT SECURITIES 60 NOTE 3. LOANS RECEIVABLE 64 NOTE 4. ALLOWANCE FOR CREDIT LOSSES ON LOANS 73 NOTE 5. PREMISES AND EQUIPMENT 75 NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS 75 NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS 76 NOTE 8. DEPOSITS 76 NOTE 9.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27 OVERVIEW 27 RESULTS OF OPERATIONS 28 AVERAGE BALANCES, YIELDS AND RATES PAID 28 NET INTEREST INCOME AND MARGIN OVERVIEW 28 PROVISION FOR CREDIT LOSSES OVERVIEW 30 NONINTEREST INCOME OVERVIEW 31 NONINTEREST EXPENSE OVERVIEW 31 INCOME TAX EXPENSE OVERVIEW 32 FINANCIAL CONDITION OVERVIEW 32 INVESTMENT ACTIVITIES OVERVIEW 33 LOAN PORTFOLIO OVERVIEW 34 ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW 36 DEPOSITS OVERVIEW 38 STOCKHOLDERS' EQUITY OVERVIEW 39 LIQUIDITY AND CAPITAL RESOURCES 39 CRITICAL ACCOUNTING POLICIES 40 RECONCILIATIONS OF NON-GAAP MEASURES 41 ITEM 7A.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28 OVERVIEW 28 RESULTS OF OPERATIONS 28 NET INTEREST INCOME AND MARGIN OVERVIEW 29 PROVISION FOR CREDIT LOSSES OVERVIEW 31 NONINTEREST INCOME OVERVIEW 32 NONINTEREST EXPENSE OVERVIEW 32 INCOME TAX EXPENSE OVERVIEW 33 FINANCIAL CONDITION OVERVIEW 33 INVESTMENT ACTIVITIES OVERVIEW 34 LOAN PORTFOLIO OVERVIEW 35 ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW 38 DEPOSITS OVERVIEW 39 STOCKHOLDERS' EQUITY OVERVIEW 40 LIQUIDITY AND CAPITAL RESOURCES 40 CRITICAL ACCOUNTING ESTIMATES 41 ITEM 7A.
CASH RESTRICTION 88 NOTE 19. INCOME TAXES 88 NOTE 20. COMMITMENTS AND CONTINGENCIES 90 NOTE 21. REGULATORY CAPITAL REQUIREMENTS 91 NOTE 22. HERITAGE FINANCIAL CORPORATION (PARENT COMPANY ONLY) 91
COMMITMENTS AND CONTINGENCIES 87 NOTE 20. REGULATORY CAPITAL REQUIREMENTS 88 NOTE 21. HERITAGE FINANCIAL CORPORATION (PARENT COMPANY ONLY) 88

Item 7. Management's Discussion & Analysis

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

59 edited+43 added−33 removed14 unchanged
Biggest changeThe following table provides the federal funds target rate history and changes from each period 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 % The following table provides the changes in net interest income for the periods indicated due to changes in average asset and liability balances (volume), changes in average rates (rate) and changes attributable to the combined effect of volume and interest rates allocated proportionately to the absolute value of changes due to volume and changes due to interest rates: 2022 Compared to 2021 Increase (Decrease) Due to changes in Volume Yield/Rate Total % Change (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 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) FHLB advances and other 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 % 2021 Compared to 2020 Increase (Decrease) Due to changes in Volume Yield/Rate $ % (Dollars in thousands) Interest Earning Assets: Loans receivable, net $ (6,934) $ 4,349 $ (2,585) (1.3) % Taxable securities 2,566 (2,615) (49) (0.3) Nontaxable securities 159 81 240 6.6 Interest earning deposits 1,278 (373) 905 128.7 Total interest income $ (2,931) $ 1,442 $ (1,489) (0.7) % Interest Bearing Liabilities: Certificates of deposit $ (1,082) $ (2,782) $ (3,864) (68.1) % Savings accounts 100 (259) (159) (30.2) 29 Table of Contents 2021 Compared to 2020 Increase (Decrease) Due to changes in Volume Yield/Rate $ % (Dollars in thousands) Interest bearing demand and money market accounts 803 (2,885) (2,082) (34.3) Total interest bearing deposits (179) (5,926) (6,105) (49.8) Junior subordinated debentures 12 (160) (148) (16.6) Securities sold under agreement to repurchase 75 (95) (20) (12.5) FHLB advances and other borrowings (4) (4) (8) (100.0) Total interest expense $ (96) $ (6,185) $ (6,281) (47.1) % Net interest income $ (2,835) $ 7,627 $ 4,792 2.4 % Total interest income increased $14.6 million, or 6.9%, to $227.5 million for the year ended December 31, 2022 compared to $212.8 million for the year ended December 31, 2021.
Biggest changeThe 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.
Our funding strategy has been to acquire non-maturity deposits from our retail accounts, acquire noninterest bearing demand deposits from our commercial customers and use our borrowing availability to fund growth in assets. We may also acquire brokered deposits when the cost of funds is advantageous to other funding sources.
Our funding strategy has been to acquire non-maturity deposits from our retail accounts, acquire noninterest bearing demand deposits from our commercial customers and use our borrowing availability to fund growth in assets. We may also acquire brokered deposits when the cost of funds is advantageous compared to other funding sources.
Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, including mostly 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, including recently significant changes as a result of inflation, and by governmental policies and actions of regulatory agencies.
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 Bank'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.
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.
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 Bank’s ACL on loans.
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.
ACL on Unfunded Commitments The allowance methodology for unfunded commitments is similar to the ACL on loans, but additionally includes considerations of the current utilization of the commitment, an estimate of the future utilization, an estimate of utilization of construction loans prior to completion and an estimate of construction loan advance rates as determined appropriate by historical commitment utilization and the Bank's estimates of future utilization given current economic forecasts.
ACL on Unfunded Commitments The allowance methodology for unfunded commitments is similar to the ACL on loans, but additionally includes considerations of the current utilization of the commitment, an estimate of the future utilization, an estimate of utilization of construction loans prior to completion and an estimate of construction loan advance rates as determined appropriate by historical commitment utilization and the Company's estimates of future utilization given current economic forecasts.
Such agencies may require the Bank 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.
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.
For additional information regarding goodwill, see Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (7) Goodwill and Other Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.
For additional information regarding goodwill, see Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (6) Goodwill and Other Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.
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.
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.
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 28 Table of Contents 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.
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.
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 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 41 Table of Contents financial condition or results of operations of the registrant.
(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 $7.4 million, $28.4 million and $14.4 million for the years ended December 31, 2022, 2021, and 2020, respectively.
(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.
Our business consists primarily of commercial lending and deposit relationships with small to medium sized businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and land development loans and consumer loans.
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.
Under these derivative contract arrangements, the Bank effectively earns a variable rate of interest based on the one-month LIBOR plus a margin, except for interest rate swap contracts on construction loans that earn fixed rates until the end of the construction period and the variable rate swap becomes effective.
Under these derivative contract arrangements, the Company effectively earns a variable rate of interest based on the one-month SOFR plus a margin, except for interest rate swap contracts on construction loans that earn fixed rates until the end of the construction period and the variable rate swap becomes effective.
For additional information regarding the ACL on unfunded commitments, see Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (20) Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8.
For additional information regarding the ACL on unfunded commitments, see Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements and Note (19) Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements And Supplementary Data.
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.
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.
The Company repurchased 100,090 and 904,972 shares of its common stock under the Company's stock repurchase plan during the years ended December 31, 2022 and December 31, 2021, respectively.
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.
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 the COVID-19 Pandemic and inflation and the governmental actions taken to address these issues.
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.
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.
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.
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 also contributed to the decrease in stockholders' equity, partly offset by net income earned during the year ended December 31, 2022.
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.
Total deposits include uninsured deposits of $2.37 billion and $2.68 billion at December 31, 2022 and 2021, respectively, calculated in accordance with FDIC guidelines. The Bank does not hold any foreign deposits.
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.
Assuming continued payment during 2023 at this rate of $0.22 per share, our average total dividend paid each quarter would be approximately $7.7 million based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares).
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.
This was partially offset by an increase in the average cost of interest bearing liabilities as a result of upward market pressure related to deposit rates.
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.
Our current quarterly common stock dividend rate is $0.22 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders.
We believe this dividend rate per share enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders.
Average Balances, Yields and Rates Paid The following table provides relevant net interest income information for the periods indicated: Year Ended December 31, 2022 2021 2020 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) $ 3,852,604 $ 174,275 4.52 % $ 4,181,464 $ 189,832 4.54 % $ 4,335,564 $ 192,417 4.44 % Taxable securities 1,646,058 40,627 2.47 846,892 17,492 2.07 731,378 17,541 2.40 Nontaxable securities (3) 135,004 3,488 2.58 158,968 3,899 2.45 152,447 3,659 2.40 Interest earning deposits 913,374 9,067 0.99 1,193,724 1,608 0.13 315,847 703 0.22 Total interest earning assets 6,547,040 227,457 3.47 % 6,381,048 212,831 3.34 % 5,535,236 214,320 3.87 % Noninterest earning assets 774,415 745,202 758,386 Total assets $ 7,321,455 $ 7,126,250 $ 6,293,622 Interest Bearing Liabilities: Certificates of Deposit $ 313,712 $ 1,407 0.45 % $ 372,279 $ 1,811 0.49 % $ 482,316 $ 5,675 1.18 % Savings accounts 646,565 381 0.06 598,492 367 0.06 489,471 526 0.11 Interest bearing demand and money market accounts 3,036,031 4,984 0.16 2,862,504 3,982 0.14 2,491,477 6,064 0.24 Total interest bearing deposits 3,996,308 6,772 0.17 3,833,275 6,160 0.16 3,463,264 12,265 0.35 Junior subordinated debentures 21,322 1,156 5.42 21,025 742 3.53 20,730 890 4.29 Securities sold under agreement to repurchase 46,209 138 0.30 45,655 140 0.31 27,805 160 0.58 FHLB advances and other borrowings 137 6 4.38 — — — 1,466 8 0.55 Total interest bearing liabilities 4,063,976 8,072 0.20 % 3,899,955 7,042 0.18 % 3,513,265 13,323 0.38 % Noninterest bearing demand deposits 2,326,178 2,269,921 1,847,387 Other noninterest bearing liabilities 119,359 114,307 127,390 Stockholders’ equity 811,942 842,067 805,580 Total liabilities and stock-holders’ equity $ 7,321,455 $ 7,126,250 $ 6,293,622 Net interest income and spread $ 219,385 3.27 % $ 205,789 3.16 % $ 200,997 3.49 % Net interest margin 3.35 % 3.23 % 3.63 % (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 % 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 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 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 changes are discussed in more detail in the sections below. 32 Table of Contents Investment Activities Overview Our investment policy is established by the Company's Board of Directors and monitored by the Risk Committee of the Board of Directors.
Total liabilities and stockholders' equity increased due primarily to an increase in borrowings offset partially by a decrease in deposits. The changes are discussed in more detail in the sections below. 33 Table of Contents Investment Activities Overview Our investment policy is established by the Company's Board of Directors and monitored by the Risk Committee of the Board of Directors.
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 "(Reversal of) provision for 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 reversal of provision for credit losses for the periods indicated: Year Ended December 31, Change 2022 2021 $ % (Dollars in thousands) Reversal of provision for credit losses on loans $ (563) $ (27,298) $ 26,735 (97.9) % Reversal of provision for credit losses on unfunded commitments (863) (2,074) 1,211 (58.4) Reversal of provision for credit losses $ (1,426) $ (29,372) $ 27,946 (95.1) % 30 Table of Contents The reversal of provision for credit losse s recognized during the year ended December 31, 2022 was due primarily to a $3.4 million reduction in the ACL on loans individually evaluated for losses offset partially by an increase related to the growth in balances of collectively evaluated loans.
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.
Financial Statements And Supplementary Data. 40 Table of Contents Goodwill The Company performed its annual goodwill impairment test during the fourth quarter of 2022 and determined, based on a qualitative assessment utilizing the Company's market capitalization, 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, 2022.
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.
Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits.
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.
The following table provides the changes to stockholders' equity during the periods indicated: Year Ended December 31, Change 2022 2021 $ % (In thousands) Balance, beginning of period $ 854,432 $ 820,439 $ 33,993 4.1 % Net income 81,875 98,035 (16,160) (16.5) Dividends declared (29,767) (29,197) (570) 2.0 Other comprehensive loss, net of tax (109,246) (15,622) (93,624) 599.3 Common stock repurchased (3,196) (22,889) 19,693 (86.0) Stock-based compensation expense 3,795 3,666 129 3.5 Balance, end of period $ 797,893 $ 854,432 $ (56,539) (6.6) % Stockholder's equity decreased due primarily to a decrease in AOCI as a result of an increase in other comprehensive loss, net of tax, following increases in market interest rates during the year ended December 31, 2022, which negatively 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 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 net interest margin increased 12 basis points to 3.35% for the year ended December 31, 2022 compared to 3.23% for the year ended December 31, 2021.
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.
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, 2022 2021 Change % Change (Dollars in thousands) ACL on loans at the beginning of the period $ 42,361 $ 70,185 $ (27,824) (39.6) % Charge-offs: Commercial business (316) (1,276) 960 (75.2) 36 Table of Contents At or For the Years Ended December 31, 2022 2021 Change % Change (Dollars in thousands) Residential real estate (30) — (30) 100.0 Real estate construction and land development — (1) 1 (100.0) Consumer (547) (669) 122 (18.2) Total charge-offs (893) (1,946) 1,053 (54.1) Recoveries: Commercial business 929 816 113 13.8 Residential real estate 3 — 3 100.0 Real estate construction and land development 384 32 352 1100.0 Consumer 765 572 193 33.7 Total recoveries 2,081 1,420 661 46.5 Net recoveries (charge-offs) 1,188 (526) 1,714 (325.9) (Reversal of) provision for credit losses on loans (563) (27,298) 26,735 (97.9) ACL on loans at the end of period $ 42,986 $ 42,361 $ 625 1.5 % Credit quality ratios: ACL on loans to loans receivable 1.06 % 1.11 % (0.05) % (4.5) % ACL on loans to loans receivable, excluding SBA PPP loans (1) 1.06 1.15 (0.09) (7.8) ACL on loans to nonaccrual loans 727.84 178.33 549.51 308.1 ACL on loans to nonperforming assets 727.84 % 178.33 % 549.51 % 308.1 % Average balances outstanding during the period: (2) Commercial business $ 3,188,238 $ 3,540,728 $ (352,490) (10.0) % Residential real estate 250,780 123,875 126,905 102.4 Real estate construction and land development 242,528 301,532 (59,004) (19.6) Consumer 212,306 271,834 (59,528) (21.9) Total $ 3,893,852 $ 4,237,969 $ (344,117) (8.1) % Net (recoveries) charge-offs during the period to average balances outstanding during the period: Commercial business (0.02) % 0.01 % (0.03) % (300) % Residential real estate 0.01 — 0.01 0.01 Real estate construction and land development (0.16) (0.01) (0.15) 1500 Consumer (0.10) 0.04 (0.14) (350) Total (0.03) % 0.01 % (0.04) % (400) % (1) The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.
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.
Noninterest Expense Overview The following table presents changes in the key components of noninterest expense for the periods indicated: Year Ended December 31, Change 2022 2021 $ % (Dollars in thousands) Compensation and employee benefits $ 92,092 $ 88,765 $ 3,327 3.7 % Occupancy and equipment 17,465 17,243 222 1.3 Data processing 16,800 16,533 267 1.6 Marketing 1,643 2,143 (500) (23.3) Professional services 2,497 3,846 (1,349) (35.1) State/municipal business and use tax 3,634 3,884 (250) (6.4) Federal deposit insurance premium 2,015 2,106 (91) (4.3) Amortization of intangible assets 2,750 3,111 (361) (11.6) Other expense 12,070 11,638 432 3.7 Total noninterest expense $ 150,966 $ 149,269 $ 1,697 1.1 % Noninterest expense increased due primarily to an increase in compensation and employee benefits as a result of an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in the second quarter of 2022 and 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 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.
This increase was offset partially by a decrease in professional services, which were elevated during the year ended December 31, 2021 due to costs associated with our participation in the SBA PPP, as well as a decrease in marketing expenses due to less activity. 31 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, Change 2022 2021 $ % (Dollars in thousands) Income before income taxes $ 99,436 $ 120,507 $ (21,071) (17.5) % Income tax expense $ 17,561 $ 22,472 $ (4,911) (21.9) % Effective income tax rate 17.7 % 18.6 % (0.9) % (4.8) % 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 LIHTC.
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.
Nonaccrual loans, accruing loans past due 90 days or more performing TDR loans and nonperforming assets The following table provides information about our nonaccrual loans, accruing loans past due 90 days or more, performing TDR loans and nonperforming assets for the dates indicated: Change December 31, 2022 December 31, 2021 $ % (Dollars in thousands) Nonaccrual loans: (1) Commercial business $ 5,869 $ 23,107 $ (17,238) (74.6) % 35 Table of Contents Change December 31, 2022 December 31, 2021 $ % Residential real estate — 47 (47) (100.0) Real estate construction and land development 37 571 (534) (93.5) Consumer — 29 (29) (100.0) Total nonaccrual loans 5,906 23,754 (17,848) (75.1) Other real estate owned — — — n/a Total nonperforming assets $ 5,906 $ 23,754 $ (17,848) (75.1) % Accruing loans past due 90 days or more $ 1,615 $ 293 $ 1,322 451.2 % Credit quality ratios: Nonaccrual loans to loans receivable 0.15 % 0.62 % (0.47) % (75.8) % Nonaccrual loans to total assets 0.08 0.32 (0.24) (75.0) Performing TDR loans: (1) Commercial business $ 43,395 $ 57,142 $ (13,747) (24.1) % Residential real estate 172 358 (186) (52.0) Real estate construction and land development 6,137 450 5,687 1,263.8 Consumer 737 1,160 (423) (36.5) Total performing TDR loans $ 50,441 $ 59,110 $ (8,669) (14.7) % (1) At December 31, 2022 and December 31, 2021, $1.5 million, and $1.4 million of nonaccrual loans, respectively, and $2.0 million and $1.6 million of performing TDR loans, respectively, were guaranteed by government agencies.
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.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. Net Interest Income and Margin Overview One of the Company's key sources of earnings is net interest income.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
T he economic forecast at December 31, 2022 considered the potential impact of inflation and potential recession; however, the December 31, 2021 considered a more significant impact as a result of COVID-19 and related variants. 37 Table of Contents The following table presents the ACL on loans by loan portfolio segment at the indicated dates: December 31, 2022 December 31, 2021 Change ACL on loans Percent of Total (1) ACL on loans Percent of Total (1) $ % (Dollars in thousands) Commercial business $ 30,718 79.4 % $ 33,049 83.7 % $ (2,331) (7.1) % Residential real estate 2,872 8.5 1,409 4.3 1,463 103.8 Real estate construction and land development 7,063 7.3 5,276 5.9 1,787 33.9 Consumer 2,333 4.8 2,627 6.1 (294) (11.2) Total ACL on loans $ 42,986 100.0 % $ 42,361 100.0 % $ 625 1.5 % (1) Represents the percent of loans receivable by loan category to loans receivable.
The following table presents the ACL on loans by loan portfolio segment at the indicated dates: December 31, 2023 December 31, 2022 Change ACL on loans Percent of Total (1) ACL on loans Percent of Total (1) $ % (Dollars in thousands) Commercial business $ 31,303 77.8 % $ 30,718 79.4 % $ 585 1.9 % Residential real estate 3,473 8.7 2,872 8.5 601 20.9 Real estate construction and land development 10,876 9.5 7,063 7.3 3,813 54.0 Consumer 2,347 4.0 2,333 4.8 14 0.6 Total ACL on loans $ 47,999 100.0 % $ 42,986 100.0 % $ 5,013 11.7 % (1) Represents the percent of loans receivable by loan category to loans receivable.
The decrease in the gain on sale of other assets, net, was due to a higher gain on sale of branches held for sale recognized during the year ended December 31, 2021 as a result of branch consolidations.
Bank owned life insurance income decreased due to the recognition of a death benefit of $1.0 million during the year ended December 31, 2022 which was not repeated during 2023, and gain on sale of other assets, net declined due to gain on sale of branches held for sale recognized during the year ended December 31, 2022 as a result of branch consolidations.
The following table provides the uninsured portion of certificates of deposit at December 31, 2022, by account, with a maturity of: (In thousands) Three months or less $ 15,250 Over three months through six months 13,999 Over six months through twelve months 26,855 Over twelve months 6,358 Total $ 62,462 38 Table of Contents Stockholders' Equity Overview The Company’s stockholders' equity to assets ratio was 11.4% and 11.5% at December 31, 2022 and December 31, 2021.
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 changes in nonaccrual loans during the periods indicated: Year Ended December 31, Change 2022 2021 $ % (In thousands) Balance, beginning of period $ 23,754 $ 58,092 $ (34,338) (59.1) % Additions to nonaccrual loan classification 1,325 1,495 (170) (11.4) Net principal payments and transfers to accruing status (14,612) (14,786) 174 (1.2) Payoffs (4,390) (19,857) 15,467 (77.9) Charge-offs (171) (1,190) 1,019 (85.6) Balance, end of period $ 5,906 $ 23,754 $ (17,848) (75.1) % Nonaccrual loans decreased $17.8 million, or 75.1%, to $5.9 million due primarily to ongoing collection efforts, including the partial payoff of two large commercial and industrial loan relationships totaling $1.9 million and the transfer of six commercial business loan relationships totaling $10.2 million back to accrual status.
The following table provides the changes in nonaccrual loans during the periods indicated: Year Ended December 31, Change 2023 2022 $ % (Dollars in thousands) Balance, beginning of period $ 5,906 $ 23,754 $ (17,848) (75.1) % Additions 3,057 1,325 1,732 130.7 37 Table of Contents Year Ended December 31, Change 2023 2022 $ % (Dollars in thousands) Net principal payments, sales and transfers to accruing status (1,508) (14,612) 13,104 (89.7) Payoffs (2,987) (4,390) 1,403 (32.0) Charge-offs — (171) 171 (100.0) Balance, end of period $ 4,468 $ 5,906 $ (1,438) (24.3) % Nonaccrual loans decreased $1.4 million, or 24.3%, due primarily to ongoing collection efforts including the payoff of a commercial business loan for $1.6 million which also included a recovery of $1.1 million.
Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “ 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, 2021 .
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.
(2) Includes FHLB borrowing availability of $1.23 billion at December 31, 2022 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.14 billion. 39 Table of Contents We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations.
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.
Deposits Overview The following table summarizes the Company's deposits at the dates indicated: December 31, 2022 December 31, 2021 Change Balance (1) Percent of Total Balance Percent of Total $ % (Dollars in thousands) Noninterest demand deposits $ 2,099,464 35.5 % $ 2,343,909 36.7 % $ (244,445) (10.4) % Interest bearing demand deposits 1,830,727 30.9 1,946,605 30.4 (115,878) (6.0) Money market accounts 1,063,243 17.9 1,120,174 17.5 (56,931) (5.1) Savings accounts 623,833 10.5 640,763 10.0 (16,930) (2.6) Total non-maturity deposits 5,617,267 94.8 6,051,451 94.6 (434,184) (7.2) Certificates of deposit 307,573 5.2 342,839 5.4 (35,266) (10.3) Total deposits $ 5,924,840 100.0 % $ 6,394,290 100.0 % $ (469,450) (7.3) % (1) Deposit balances includes deposits held for sale at December 31, 2022.
Deposits 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.
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, 2022 December 31, 2021 $ % (Dollars in thousands) Assets Cash and cash equivalents $ 103,590 $ 1,723,292 $ (1,619,702) (94.0) % Investment securities available for sale, at fair value, net 1,331,443 894,335 437,108 48.9 Investment securities held to maturity, at amortized cost, net 766,396 383,393 383,003 99.9 Loans held for sale — 1,476 (1,476) (100.0) Loans receivable, net 4,007,872 3,773,301 234,571 6.2 Premises and equipment, net 76,930 79,370 (2,440) (3.1) Federal Home Loan Bank stock, at cost 8,916 7,933 983 12.4 Bank owned life insurance 122,059 120,196 1,863 1.5 Accrued interest receivable 18,547 14,657 3,890 26.5 Prepaid expenses and other assets 296,181 183,543 112,638 61.4 Other intangible assets, net 7,227 9,977 (2,750) (27.6) Goodwill 240,939 240,939 — — Total assets $ 6,980,100 $ 7,432,412 $ (452,312) (6.1) % Liabilities and Stockholders' Equity Deposits $ 5,907,420 $ 6,394,290 $ (486,870) (7.6) % Deposits held for sale 17,420 — 17,420 100.0 Total Deposits 5,924,840 6,394,290 (469,450) (7.3) Junior subordinated debentures 21,473 21,180 293 1.4 Securities sold under agreement to repurchase 46,597 50,839 (4,242) (8.3) Accrued expenses and other liabilities 189,297 111,671 77,626 69.5 Total liabilities 6,182,207 6,577,980 (395,773) (6.0) Common stock 552,397 551,798 599 0.1 Retained earnings 345,346 293,238 52,108 17.8 Accumulated other comprehensive (loss) income, net (99,850) 9,396 (109,246) (1,162.7) Total stockholders' equity 797,893 854,432 (56,539) (6.6) Total liabilities and stockholders' equity $ 6,980,100 $ 7,432,412 $ (452,312) (6.1) % Total assets decreased due primarily to a decrease in cash and cash equivalents reflecting deployment of excess liquidity into purchases of higher yielding investment securities and loans.
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.
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 2022 2021 $ % (Dollars in thousands) Service charges and other fees $ 10,390 $ 9,207 $ 1,183 12.8 % Card revenue 8,885 8,325 560 6.7 Gain (loss) on sale of investment securities, net (256) 29 (285) (982.8) Gain on sale of loans, net 633 3,644 (3,011) (82.6) Interest rate swap fees 402 661 (259) (39.2) Bank owned life insurance income 3,747 2,520 1,227 48.7 Gain on sale of other assets, net 469 4,405 (3,936) (89.4) Other income 5,321 5,824 (503) (8.6) Total noninterest income $ 29,591 $ 34,615 $ (5,024) (14.5) % Nonintere st income decreased due primarily to lower gain on sale of other assets, net and lower gain on sale of loans, net.
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.
In addition to originating loans, the Bank may also acquire loans through pool purchases, participation purchases and syndicated loan purchases.
Loan Portfolio Overview Changes by loan type The Company originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases.
Net income is also impacted by growth of operations through organic growth or acquisitions. 27 Table of Contents Results of Operations Net income was $81.9 million, or $2.31 per diluted common share, for the year ended December 31, 2022 compared t o $98.0 million, or $2.73 per diluted common share, for the year ended December 31, 2021 .
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.
The Bank entered into a purchase and sale agreement with a third party to sell and transfer assets, deposits and other liabilities of its branch in Ellensburg during the three months ended September 30, 2022. As a result of entering into this purchase and sale agreement, $17.4 million in deposits are classified as held for sale.
Certificate of deposits increased due to increasing rates which attracted customers to this deposit type as well as the addition of $115.0 million in brokered deposits. The Company entered into a purchase and sale agreement with a third party to sell and transfer certain assets, deposits and other liabilities of its branch in Ellensburg, WA in September 2022.
The following table provides information about our loan portfolio by type of loan at the dates indicated: December 31, 2022 December 31, 2021 Change Amortized Cost % of Loans Receivable Amortized Cost % of Loans Receivable $ % (Dollars in thousands) Commercial business: Commercial and industrial $ 692,100 17.1 % $ 621,567 16.3 % $ 70,533 11.3 % SBA PPP 1,468 — 145,840 3.8 (144,372) (99.0) Owner-occupied CRE 937,040 23.1 931,150 24.4 5,890 0.6 Non-owner occupied CRE 1,586,632 39.2 1,493,099 39.2 93,533 6.3 Total commercial business 3,217,240 79.4 3,191,656 83.7 25,584 0.8 Residential real estate 343,631 8.5 164,582 4.3 179,049 108.8 Real estate construction and land development: Residential 80,074 2.0 85,547 2.2 (5,473) (6.4) Commercial and multifamily 214,038 5.3 141,336 3.7 72,702 51.4 Total real estate construction and land development 294,112 7.3 226,883 5.9 67,229 29.6 Consumer 195,875 4.8 232,541 6.1 (36,666) (15.8) Total $ 4,050,858 100.0 % $ 3,815,662 100.0 % $ 235,196 6.2 % Loans receivable increased due primarily to higher loan demand as well as increased utilization of commercial and industrial lines of credit and a decline in loan prepayments.
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 regarding our investment securities at the dates indicated: December 31, 2022 December 31, 2021 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Investment securities available for sale, at fair value: U.S. government and agency securities $ 63,859 3.0 % $ 21,373 1.7 % $ 42,486 198.8 % Municipal securities 153,026 7.3 % 221,212 17.3 % (68,186) (30.8) Residential CMO and MBS 424,386 20.2 % 306,884 24.0 % 117,502 38.3 Commercial CMO and MBS 664,421 31.8 % 315,861 24.7 % 348,560 110.4 Corporate obligations 3,834 0.2 % 2,014 0.2 % 1,820 90.4 Other asset-backed securities 21,917 1.0 % 26,991 2.1 % (5,074) (18.8) Total $ 1,331,443 63.5 % $ 894,335 70.0 % $ 437,108 48.9 % Investment securities held to maturity, at amortized cost: U.S. government and agency securities $ 150,936 7.2 % $ 141,011 11.0 % $ 9,925 7.0 % Residential CMO and MBS 290,318 13.8 % 24,529 1.9 265,789 1,083.6 Commercial CMO and MBS 325,142 15.5 % 217,853 17.1 107,289 49.2 Total $ 766,396 36.5 % $ 383,393 30.0 % $ 383,003 99.9 Total investment securities $ 2,097,839 100.0 % $ 1,277,728 100.0 % $ 820,111 64.2 % Total investment securities increased due primarily to purchases to deploy excess liquidity into higher yielding, longer duration assets.
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 reversal of provision for credit losses recognized during the year ended December 31, 2021 was due substantially to continued improvements in the economic forecast at December 31, 2021 as compared to the forecast at December 31, 2020.
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 Company pays dividends to our shareholders and the primary source of the Company's liquidity is cash obtained from dividends from the Bank.
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.
The increase in residential real estate loans included $139.0 million of purchased residential real estate loans. This increase was offset partially by repayments of SBA PPP loans and a decrease in consumer loans due primarily to repayments of $54.4 million in indirect loans as the Bank ceased indirect auto loan originations in 2020.
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 .
Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and intermediate-term cash requirements.
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.
Total interest expense increased $1.0 million, or 14.6%, to $8.1 million for the year ended December 31, 2022 compared to $7.0 million for the year ended December 31, 2021 due primarily to an increase in average rates paid on deposit accounts as a result of upward market pressure and an increase in average rates paid on junior subordinated debentures as a result of rising market interest rates.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the year ended December 31, 2022.
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.
Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on our methodology. Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees, card revenue and other income.
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.
These decreases were partially offset by an increase in bank owned life insurance income due to the recognition of a death benefit of $1.0 million during year ended December 31, 2022 as well as increases in service charges and other fees and card revenue reflecting increased customer transactions as businesses reopened in our market areas.
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.
Removed
The information contained in this section should be read together with the December 31, 2022 audited Consolidated Financial Statements and the accompanying Notes included in Item 8. Financial Statements And Supplementary Data of this Form 10-K. This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
Added
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.
Removed
We additionally originate for sale or for investment purposes residential real estate loans on single family properties located primarily in our markets. Our core profitability depends primarily on our net interest income.
Added
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.
Removed
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.
Added
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.
Removed
Net income decreased $16.2 million, or 16.5% compared to December 31, 2021 primarily due to decreases in reversal of provision for credit losses of $27.9 million and a $5.0 million decrease in noninterest income.
Added
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.
Removed
These decreases were partially offset by an increase of $13.6 million in net interest income to $219.4 million during the year ended December 31, 2022 compared to $205.8 million during the year ended December 31, 2021, primarily as a result of rising market interest rates and changes in the mix of total interest earning assets including an increase in higher yielding taxable securities.
Added
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.
Removed
The Company’s efficiency ratio was 60.63% for the year ended December 31, 2022 compared to 62.09% for the same period in 2021 .
Added
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.
Removed
The increase in total interest income was primarily due to an increase in average balances of taxable securities and secondarily due to increased yields on interest earning assets, offset partially by a $15.6 million decrease in interest earned on loans receivable, net resulting from a decrease in deferred SBA PPP loan fees recognized.
Added
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.
Removed
SBA PPP interest and fee income decreased $26.9 million, or 83.8%, to $5.2 million for the year ended December 31, 2022 compared to $32.1 million for the year ended December 31, 2021 due to a decline in the volume of forgiven SBA PPP loans.
Added
Service charges also increased due primarily to an increase in service charge income on commercial deposit accounts.
Removed
The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on acquired loans on this financial measure for the periods presented below: Year Ended December 31, 2022 2021 Loan yield (GAAP) 4.52 % 4.54 % Exclude impact from SBA PPP loans (0.09) % (0.20) % Exclude impact from incremental accretion on acquired loans (0.04) % (0.07) % Loan yield excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) 4.39 % 4.27 % (1) For additional information, see the "Reconciliations of Non-GAAP Measures." The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was three basis points during the year ended December 31, 2022 compared to seven basis points during the same period in 2021.
Added
Occupancy and equipment expense increased due to our expansion into Eugene, Oregon and Boise, Idaho. Data processing costs increased due to increased cost of service contracts, expansion of digital services offerings and a $320,000 accrual for the early termination of a technology-related contract.
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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 and the change in the mix of total interest earning assets to higher yielding assets, including an increase in higher yielding taxable securities.
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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.
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The decrease in gain on sale of loans, net was due to a decline in origination and sales volumes as a result of the higher interest rate environment.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeNet interest income simulation An income simulation model is the primary tool we use to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Modeling the sensitivity of net interest income is highly dependent on numerous assumptions incorporated into the modeling process.
Biggest changeThe policy guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. These guidelines establish limits for interest rate risk sensitivity. Net interest income simulation We use an income simulation model as the primary tool to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates.
Our primary market risk is interest rate risk, which is the risk of loss of net interest income or net interest margin resulting from changes in market interest rates. Interest rate risk results primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans.
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.
Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on our assets and the interest paid on our liabilities. Management regularly reviews our exposure to changes in interest rates.
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.
Key assumptions in the model include prepayment speeds on loans and investment securities, repricing betas on non-maturity deposits, and pricing on investment securities, loans, and borrowings.
Modeling the sensitivity of net interest income is highly dependent on numerous assumptions incorporated into the modeling process. Key assumptions in the model include prepayment speeds on loans and investment securities, repricing betas on non-maturity deposits, and repricing on investment securities, loans, and borrowings.
In order to measure the interest rate risk sensitivity as of December 31, 2022, this simulation model uses a “no balance sheet growth” assumption and assumes an instantaneous and sustained uniform change in market interest rates at all maturities.
The simulation also assumes an instantaneous and sustained uniform change in market interest rates at all maturities.
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Among the factors considered are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and repricing periods.
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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.
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The risk committee of the Board of Directors oversees market risk management, including the monitoring of risk measures and limits and policy guidelines, for the amount of interest rate risk and its effect on net interest income and capital.
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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.
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ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, ended publication of the one-week and two-month USD LIBOR tenors on December 31, 2021 and the remaining USD LIBOR tenors will end publication in June 2023.
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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.
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The market transition away from LIBOR to an alternative reference rates is complex and could have a range of adverse effects on our business, consolidated financial condition and consolidated results of operations.
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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.
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To mitigate the uncertainty surrounding the LIBOR transition, the Bank has been utilizing specific contract language in new loan agreements beginning in 2021 that provides for changes in the index used to calculate the loan's interest rate.
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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.
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Additionally, effective January 25, 2021, the Bank agreed to adhere to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc recommended by the Alternative Reference Rates Committee. For more information, see the risk factor “We will be required to transition from the use of the LIBOR in the future” in Item 1A.
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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.
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Risk Factors--Other Risks Related to Operational Matters. Neither we, nor the Bank, maintain a trading account for any class of financial instrument, nor do we, or the Bank, engage in hedging activities or purchase high risk derivative instruments. Moreover, neither we, nor the Bank, are subject to foreign currency exchange rate risk or commodity price risk.
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As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding table. For example, although certain of the Company’s assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates.
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These assumptions are inherently uncertain and, as a result, the net interest income projections should be viewed as an estimate of the net interest income sensitivity at the time of the analysis.
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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.
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Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. 42 Table of Contents Based on the results of the simulation model, the following table presents the change in our net interest income as a result of parallel rate shock scenarios for the presented periods after the dates shown: December 31, 2022 December 31, 2021 Amount % Change in Net Interest Income Amount % Change in Net Interest Income (Dollars in thousands) Modeled increase in market interest rates of 100 basis points Increase in net interest income in Year 1 $ 5,113 2.0 % $ 21,554 11.8 % Increase in net interest income in Year 2 11,147 4.1 28,307 15.9 Modeled increase in market interest rates of 200 basis points Increase in net interest income in Year 1 8,181 3.2 40,762 22.4 Increase in net interest income in Year 2 19,889 7.3 53,779 30.1 Modeled decrease in market interest rates of 100 basis points Decrease in net interest income in Year 1 (5,433) (2.1) (6,445) (3.5) Decrease in net interest income in Year 2 (10,534) (3.9) $ (18,261) (10.2) % Modeled decrease in market interest rates of 200 basis points Decrease in net interest income in Year 1 (16,840) (6.6) N/A (1) N/A (1) Decrease in net interest income in Year 2 $ (29,942) (11.0) % N/A (1) N/A (1) (1) Given the overall level of market interest rates at December 31, 2021, the "Down 200" results did not provide meaningful output and therefore were excluded.
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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
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These scenarios are based on market interest rates as of the last day of a reporting period published by independent sources that are actively traded in the open market.
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The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of reprice characteristics, future cash flows and customer behavior.
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These assumptions are inherently uncertain and actual results will differ, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower net interest income. 43 Table of Contents

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