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Heritage Financial
HFWA
#5804
Rank
$1.09 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$26.68
Share price
0.79%
Change (1 day)
27.66%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Heritage Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2022 Q1

Heritage Financial - 10-Q quarterly report FY2022 Q1


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from __________ to __________
Commission File Number 000-29480 
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
 
Washington 91-1857900
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification No.)
201 Fifth Avenue SW,OlympiaWA 98501
(Address of principal executive offices) (Zip Code)
(360) 943-1500
(Registrant’s telephone number, including area code) 
 Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock, no par value
HFWA
NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer  
☐
Non-accelerated filer  
☐
Smaller reporting company  
☐
Emerging growth company 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐    No  ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
As of April 25, 2022, there were 35,102,372 shares of the registrant's common stock, no par value per share, outstanding.


HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 2022
TABLE OF CONTENTS
Page
3
3
PART I.
5
ITEM 1.
5
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF MARCH 31, 2022 AND DECEMBER 31, 2021
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
6
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
7
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10
NOTE 1.
10
NOTE 2.
INVESTMENT SECURITIES
11
NOTE 3.
LOANS RECEIVABLE
13
NOTE 4.
ALLOWANCE FOR CREDIT LOSSES ON LOANS
21
NOTE 5.
GOODWILL AND OTHER INTANGIBLE ASSETS
22
NOTE 6.
DERIVATIVE FINANCIAL INSTRUMENTS
22
NOTE 7.
STOCKHOLDERS’ EQUITY
23
NOTE 8.
FAIR VALUE MEASUREMENTS
24
NOTE 9.
CASH RESTRICTION
28
NOTE 10.
COMMITMENTS AND CONTINGENCIES
28
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
29
OVERVIEW
29
RESULTS OF OPERATIONS
30
AVERAGE BALANCES, YIELDS AND RATES PAID
30
NET INTEREST INCOME AND MARGIN OVERVIEW
31
PROVISION FOR CREDIT LOSSES OVERVIEW
32
33
NONINTEREST EXPENSE OVERVIEW
33
INCOME TAX EXPENSE OVERVIEW
34
FINANCIAL CONDITION OVERVIEW
34
INVESTMENT ACTIVITIES OVERVIEW
35
LOAN PORTFOLIO OVERVIEW
35
ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW
37
DEPOSITS OVERVIEW
37
STOCKHOLDERS' EQUITY OVERVIEW
38
REGULATORY REQUIREMENTS OVERVIEW
38
LIQUIDITY AND CAPITAL RESOURCES
38
CRITICAL ACCOUNTING POLICIES
39
RECONCILIATIONS OF NON-GAAP MEASURES
39
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
40
2

ITEM 4.
CONTROLS AND PROCEDURES
40
PART II.
OTHER INFORMATION
40
ITEM 1.
LEGAL PROCEEDINGS
40
ITEM 1A.
RISK FACTORS
40
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
40
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
41
ITEM 4.
MINE SAFETY DISCLOSURES
41
ITEM 5.
OTHER INFORMATION
41
ITEM 6.
EXHIBITS
41
SIGNATURES
41

GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms “we”, “our”, or “us” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.
2021 Annual Form 10-KCompany's Annual Report on Form 10-K for the year ended December 31, 2021
ACLAllowance for credit losses
AOCIAccumulated other comprehensive income (loss), net
ASUAccounting Standards Update
BankHeritage Bank
CECLCurrent Expected Credit Loss
CMOCollateralized Mortgage Obligation
CompanyHeritage Financial Corporation
COVID-19 PandemicCoronavirus Disease of 2019 pandemic
CRECommercial real estate
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
Federal ReserveBoard of Governors of the Federal Reserve System
Federal Reserve BankFederal Reserve Bank of San Francisco
GAAPU.S. Generally Accepted Accounting Principles
LIBORLondon Interbank Offering Rate
LIHTCLow-Income Housing Tax Credit
MBSMortgage-backed security
PPPPaycheck Protection Program
SBASmall Business Administration
SECSecurities and Exchange Commission
SMSpecial Mention
SSSubstandard
TDRTroubled debt restructured

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from those expressed in
3

any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price performance including, but not limited to:
•the effect of the COVID-19 pandemic, including on the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;
•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our ACL on loans and provision for credit losses on loans that may be affected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;
•changes in general economic conditions, either nationally or in our market areas;
•changes in the levels of general interest rates, and the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
•risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar;
•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;
•results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;
•legislative or regulatory changes that adversely affect our business, including as a result of the COVID-19 Pandemic;
•implementing regulations, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;
•our ability to control operating costs and expenses;
•increases in premiums for deposit insurance;
•the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
•difficulties in reducing risk associated with the loans on our unaudited Condensed Consolidated Statements of Financial Condition;
•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
•our ability to retain key members of our senior management team;
•costs and effects of litigation, including settlements and judgments;
•our ability to implement our growth strategies;
•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;
•increased competitive pressures among financial service companies;
•changes in consumer spending, borrowing and savings habits;
•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
•adverse changes in the securities markets;
•inability of key third-party providers to perform their obligations to us;
•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, and the other risks detailed from time to time in our filings with the SEC including our 2021 Annual Form 10-K.
4

PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(In thousands, except shares)
March 31,
2022		December 31,
2021
ASSETS
Cash on hand and in banks$87,907 $61,377 
Interest earning deposits1,488,815 1,661,915 
Cash and cash equivalents1,576,722 1,723,292 
Investment securities available for sale, at fair value, net (amortized cost of $1,085,016 and $883,832, respectively)
1,039,924 894,335 
Investment securities held to maturity, at amortized cost, net (fair value of $384,822 and $376,331, respectively)
422,213 383,393 
Total investment securities1,462,137 1,277,728 
Loans held for sale1,142 1,476 
Loans receivable3,821,178 3,815,662 
Allowance for credit losses on loans(40,333)(42,361)
Loans receivable, net3,780,845 3,773,301 
Other real estate owned— — 
Premises and equipment, net78,737 79,370 
Federal Home Loan Bank stock, at cost8,916 7,933 
Bank owned life insurance119,929 120,196 
Accrued interest receivable14,582 14,657 
Prepaid expenses and other assets190,592 183,543 
Other intangible assets, net9,273 9,977 
Goodwill240,939 240,939 
Total assets$7,483,814 $7,432,412 
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits$6,491,500 $6,394,290 
Junior subordinated debentures21,253 21,180 
Securities sold under agreement to repurchase49,069 50,839 
Accrued expenses and other liabilities100,543 111,671 
Total liabilities6,662,365 6,577,980 
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively
— — 
Common stock, no par value, 50,000,000 shares authorized; 35,102,372 and 35,105,779 shares issued and outstanding, respectively
550,096 551,798 
Retained earnings305,581 293,238 
Accumulated other comprehensive (loss) income, net(34,228)9,396 
Total stockholders’ equity821,449 854,432 
Total liabilities and stockholders’ equity$7,483,814 $7,432,412 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
5

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts and shares outstanding)
Three Months Ended
March 31,
20222021
INTEREST INCOME:
Interest and fees on loans$41,025 $49,524 
Taxable interest on investment securities6,003 3,534 
Nontaxable interest on investment securities860 958 
Interest on interest earning deposits706 175 
Total interest income48,594 54,191 
INTEREST EXPENSE:
Deposits1,424 1,728 
Junior subordinated debentures194 187 
Other borrowings32 38 
Total interest expense1,650 1,953 
Net interest income46,944 52,238 
Reversal of provision for credit losses(3,577)(7,199)
Net interest income after reversal of provision for credit losses50,521 59,437 
NONINTEREST INCOME:
Service charges and other fees2,296 1,892 
Card revenue2,441 2,097 
Gain on sale of investment securities, net— 29 
Gain on sale of loans, net241 1,370 
Interest rate swap fees279 152 
Bank owned life insurance income1,695 656 
Gain on sale of other assets, net
204 22 
Other income1,382 2,033 
Total noninterest income8,538 8,251 
NONINTEREST EXPENSE:
Compensation and employee benefits21,252 22,201 
Occupancy and equipment4,331 4,454 
Data processing4,061 3,812 
Marketing266 513 
Professional services699 1,270 
State/municipal business and use taxes796 972 
Federal deposit insurance premium600 589 
Amortization of intangible assets704 797 
Other expense3,011 2,634 
Total noninterest expense35,720 37,242 
Income before income taxes23,339 30,446 
Income tax expense3,582 5,102 
Net income$19,757 $25,344 
Basic earnings per share$0.56 $0.70 
Diluted earnings per share$0.56 $0.70 
Dividends declared per share$0.21 $0.20 
Average number of basic shares outstanding35,094,725 35,926,950 
Average number of diluted shares outstanding35,412,098 36,232,204 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
6

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Three Months Ended
March 31,
20222021
Net income$19,757 $25,344 
Change in fair value of investment securities available for sale, net of tax of $(12,113) and $(3,204), respectively
(43,482)(11,534)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(39) and $0, respectively
(142)— 
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $0 and $(6), respectively
— (23)
Other comprehensive loss(43,624)(11,557)
Comprehensive (loss) income$(23,867)$13,787 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
7

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except shares and per share amounts)

Three Months Ended March 31, 2022
Number of
common
shares		Common
stock		Retained
earnings		AOCITotal
stockholders’
equity
Balance at December 31, 202135,105,779 $551,798 $293,238 $9,396 $854,432 
Restricted stock units vested101,683 — — — — 
Stock-based compensation expense— 950 — — 950 
Common stock repurchased(105,090)(2,652)— — (2,652)
Net income— — 19,757 — 19,757 
Other comprehensive loss, net of tax— — — (43,624)(43,624)
Cash dividends declared on common stock ($0.21 per share)
— — (7,414)— (7,414)
Balance at March 31, 202235,102,372 $550,096 $305,581 $(34,228)$821,449 

Three Months Ended March 31, 2021
Number of
common
shares		Common
stock		Retained
earnings		AOCITotal
stockholders’
equity
Balance at December 31, 202035,912,243 $571,021 $224,400 $25,018 $820,439 
Restricted stock units vested92,320 — — — — 
Stock-based compensation expense— 870 — — 870 
Common stock repurchased(23,246)(687)— — (687)
Net income— — 25,344 — 25,344 
Other comprehensive loss, net of tax— — — (11,557)(11,557)
Cash dividends declared on common stock ($0.20 per share)
— — (7,258)— (7,258)
Balance at March 31, 202135,981,317 $571,204 $242,486 $13,461 $827,151 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
8

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
March 31,
20222021
Cash flows from operating activities:
Net income$19,757 $25,344 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion(1,572)(6,796)
Reversal of provision for credit losses(3,577)(7,199)
Stock-based compensation expense950 870 
Amortization of intangible assets704 797 
Origination of mortgage loans held for sale(5,833)(32,254)
Proceeds from sale of mortgage loans held for sale6,408 31,755 
Bank owned life insurance income(1,695)(656)
Valuation adjustment on interest rate swaps(53)(244)
Gain on sale of mortgage loans held for sale, net(241)(1,370)
Gain on sale of investment securities available for sale, net— (29)
Gain on sale of assets held for sale(204)(22)
Other(3,716)(1,115)
Net cash provided by operating activities10,928 9,081 
Cash flows from investing activities:
Loan originations and purchases, net of payments(988)(117,892)
Maturities and repayments of investment securities available for sale42,327 62,675 
Maturities and repayments of investment securities held to maturity6,644 — 
Purchase of investment securities available for sale(244,409)(166,038)
Purchase of investment securities held to maturity(45,849)— 
Proceeds from sales of investment securities available for sale— 1,248 
Purchase of premises and equipment(724)(475)
Proceeds from sales of assets held for sale1,173 1,731 
Purchases of Federal Home Loan Bank stock(983)(1,272)
Purchases of bank owned life insurance(105)(105)
Capital contributions to low-income housing tax credit partnerships— (12,617)
Net cash used by investing activities(242,914)(232,745)
Cash flows from financing activities:
Net increase in deposits97,210 421,708 
Common stock cash dividends paid(7,372)(7,183)
Net (decrease) increase in securities sold under agreement to repurchase(1,770)820 
Repurchase of common stock(2,652)(687)
Net cash provided by financing activities85,416 414,658 
Net (decrease) increase in cash and cash equivalents(146,570)190,994 
Cash and cash equivalents at beginning of period1,723,292 743,322 
Cash and cash equivalents at end of period$1,576,722 $934,316 
Supplemental disclosures of cash flow information:
Cash paid for interest$1,555 $1,889 
Cash paid for income taxes, net of refunds— 64 
Investment in LIHTC partnership and related funding commitment670 — 
Right of use assets obtained in exchange for new operating lease liabilities55 7,381 
Purchase of investment securities available for sale not settled— 5,000 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
9

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements
(a) Description of Business
The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 49 branch offices located throughout Washington State and the greater Portland, Oregon area. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, consumer loans and originates first mortgage loans on residential properties primarily located in its market areas. The Bank's deposits are insured by the FDIC.
(b) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2021 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes the judgments, estimates and assumptions used in the preparation of the unaudited Condensed Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of the ACL on investment securities, management's estimate of the ACL on loans, management's estimate of the ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.
There have been reclassifications in certain prior year amounts in the unaudited Condensed Consolidated Statements of Financial Condition, the unaudited Condensed Consolidated Statements of Income and the unaudited Condensed Consolidated Statements of Cash Flows. Reclassifications had no effect on the prior year's net income or stockholders’ equity.
(c) Significant Accounting Policies
The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the 2021 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the 2021 Annual Form 10-K during the three months ended March 31, 2022.
(d) Recently Issued or Adopted Accounting Pronouncements
FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Bank’s interest rate swap-related transactions are the majority of the Company's LIBOR exposure. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. Additionally, effective January 1, 2022, the bank is no longer initiating or renewing loans using LIBOR as an index. The Company does not expect this ASU to have a material impact on its business operations and the Consolidated Financial Statements.
FASB ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, was issued in March 2022. The ASU eliminates the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. These amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, since Heritage previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020. Early adoption is permitted and should be applied prospectively; however, the transition method related to the recognition and
10

measurement of TDR loans may be applied under a modified retrospective transition method. The Company is evaluating the effect this ASU will have on its Consolidated Financial Statements and related disclosures.

(2)Investment Securities
The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.
There were no investment securities classified as trading at March 31, 2022 or December 31, 2021.
(a) Investment Securities by Classification, Type and Maturity
The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI:
March 31, 2022
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
(In thousands)
Investment securities available for sale:
U.S. government and agency securities$41,489 $— $(1,934)$39,555 
Municipal securities215,488 1,964 (7,213)210,239 
Residential CMO and MBS378,934 219 (20,744)358,409 
Commercial CMO and MBS421,696 615 (17,806)404,505 
Corporate obligations2,005 4 — 2,009 
Other asset-backed securities25,404 88 (285)25,207 
Total$1,085,016 $2,890 $(47,982)$1,039,924 
Investment securities held to maturity:
U.S. government and agency securities$150,973 $— $(14,344)$136,629 
Residential CMO and MBS54,486 — (2,936)51,550 
Commercial CMO and MBS216,754 — (20,111)196,643 
Total$422,213 $— $(37,391)$384,822 
December 31, 2021
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
(In thousands)
Investment securities available for sale:
U.S. government and agency securities$21,494 $55 $(176)$21,373 
Municipal securities213,158 8,908 (854)221,212 
Residential CMO and MBS307,366 2,111 (2,593)306,884 
Commercial CMO and MBS313,169 3,891 (1,199)315,861 
Corporate obligations2,007 7 — 2,014 
Other asset-backed securities26,638 369 (16)26,991 
Total$883,832 $15,341 $(4,838)$894,335 
Investment securities held to maturity:
U.S. government and agency securities$141,011 $120 $(1,768)$139,363 
Residential CMO and MBS24,529 — (153)24,376 
Commercial CMO and MBS217,853 — (5,261)212,592 
Total$383,393 $120 $(7,182)$376,331 
11

The amortized cost and fair value of investment securities at March 31, 2022, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for SaleSecurities Held to Maturity
Amortized CostFair ValueAmortized CostFair Value
(In thousands)
Due in one year or less$8,733 $8,777 $— $— 
Due after one year through five years55,551 55,075 — — 
Due after five years through ten years63,330 62,935 83,202 76,884 
Due after ten years131,368 125,016 67,771 59,745 
Total investment securities due at a single maturity date258,982 251,803 150,973 136,629 
Mortgage-backed securities (1)
826,034 788,121 271,240 248,193 
Total investment securities$1,085,016 $1,039,924 $422,213 $384,822 
(1) Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.
There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at March 31, 2022 and December 31, 2021.
(b) Unrealized Losses on Investment Securities Available for Sale
The following tables show the gross unrealized losses and fair value of the Company’s investment securities available for sale for which an ACL on investment securities available for sale has not been recorded, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at the dates indicated:
March 31, 2022
Less than 12 Months12 Months or LongerTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
(In thousands)
U.S. government and agency securities$38,002 $(1,764)$1,553 $(170)$39,555 $(1,934)
Municipal securities90,266 (5,206)16,837 (2,007)107,103 (7,213)
Residential CMO and MBS307,811 (19,312)24,731 (1,432)332,542 (20,744)
Commercial CMO and MBS307,598 (17,695)1,717 (111)309,315 (17,806)
Other asset-backed securities12,476 (274)1,004 (11)13,480 (285)
Total$756,153 $(44,251)$45,842 $(3,731)$801,995 $(47,982)
December 31, 2021
Less than 12 Months12 Months or LongerTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
(In thousands)
U.S. government and agency securities$14,828 $(176)$— $— $14,828 $(176)
Municipal securities29,774 (619)9,351 (235)39,125 (854)
Residential CMO and MBS204,039 (2,470)19,862 (123)223,901 (2,593)
Commercial CMO and MBS83,283 (1,161)1,936 (38)85,219 (1,199)
Other asset-backed securities2,763 (9)1,118 (7)3,881 (16)
Total$334,687 $(4,435)$32,267 $(403)$366,954 $(4,838)
(c) ACL on Investment Securities
The Company evaluated investment securities available for sale as of March 31, 2022 and December 31, 2021 and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of both March 31, 2022
12

and December 31, 2021. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of March 31, 2022 and December 31, 2021.
The Company also evaluated investment securities held to maturity for current expected credit losses as of March 31, 2022 and December 31, 2021. There were no investment securities held to maturity classified as nonaccrual or past due as of March 31, 2022 and December 31, 2021 and all were issued by the U.S. government and its agencies and either explicitly or implicitly guaranteed by the U.S. government, highly rated by major credit rating agencies and had a long history of no credit losses. Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Therefore, no ACL on investment securities held to maturity was recorded as of March 31, 2022 and December 31, 2021.
(d) Realized Gains and Losses
The following table presents the gross realized gains and losses on the sale of investment securities available for sale during the following periods:
Three Months Ended
March 31,
20222021
(In thousands)
Gross realized gains$— $29 
(e) Pledged Securities
The following table summarizes the amortized cost and fair value of investment securities that are pledged as collateral for the following obligations at the dates indicated:
March 31, 2022December 31, 2021
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
(In thousands)
Washington and Oregon state public deposits$139,817 $134,625 $128,216 $130,217 
Federal Reserve Bank credit facility60,966 54,962 61,057 59,674 
Securities sold under agreement to repurchase63,088 59,144 59,887 59,655 
Other securities pledged53,673 50,333 56,419 55,633 
Total$317,544 $299,064 $305,579 $305,179 
(f) Accrued Interest Receivable
Accrued interest receivable excluded from amortized cost on investment securities available for sale totaled $3.4 million and $3.5 million at March 31, 2022 and December 31, 2021, respectively. Accrued interest receivable excluded from amortized cost on investment securities held to maturity totaled $1.2 million and $1.1 million at March 31, 2022 and December 31, 2021.
No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities during the three months ended March 31, 2022 and 2021.

(3)Loans Receivable
The Bank originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Bank's amortized cost of loans receivable as it was deemed insignificant.
(a) Loan Origination/Risk Management
The Bank categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; real estate construction and land development; and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the 2021 Annual Form 10-K.
The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans. The Bank also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel.
13

The amortized cost of loans receivable, net of ACL on loans, consisted of the following portfolio segments and classes at the dates indicated:
March 31,
2022		December 31,
2021
(In thousands)
Commercial business:
Commercial and industrial$651,523 $621,567 
SBA PPP64,962 145,840 
Owner-occupied CRE935,705 931,150 
Non-owner occupied CRE1,505,483 1,493,099 
Total commercial business3,157,673 3,191,656 
Residential real estate223,442 164,582 
Real estate construction and land development:
Residential
83,529 85,547 
Commercial and multifamily
138,583 141,336 
Total real estate construction and land development222,112 226,883 
Consumer217,951 232,541 
Loans receivable3,821,178 3,815,662 
Allowance for credit losses on loans(40,333)(42,361)
Loans receivable, net$3,780,845 $3,773,301 
Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans$(3,354)$(3,938)
Unamortized net deferred fee$(5,310)$(7,952)
(b) Concentrations of Credit
Most of the Bank’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State and Multnomah County and Washington County in Oregon, as well as other contiguous markets and represents a geographic concentration. Additionally, the Bank's loan portfolio is concentrated in commercial loans, including commercial business loans and commercial and multifamily real estate construction and land development loans. Commercial loans are generally considered as having more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.
(c) Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, (v) past due status, and (vi) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon.
The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the 2021 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.
Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The SM loan grade is transitory in that the Bank is waiting on additional information to determine the likelihood and extent of any potential loss. The likelihood of loss for SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a SS grade are generally accrual loans at risk of being classified as nonaccrual loans and includes all of
14

our loans classified as nonaccrual. For Doubtful and Loss graded loans, the Bank is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value.
The following table presents the amortized cost of loans receivable by risk grade at the dates indicated:
March 31, 2022
Term Loans
Amortized Cost Basis by Origination Year		Revolving Loans
Revolving Loans Converted (2)
Loans Receivable
2022
2021(1)
202020192018Prior
(In thousands)
Commercial business:
Commercial and industrial
Pass$39,162 $98,276 $95,753 $80,825 $43,389 $98,840 $152,708 $— $608,953 
SM245 1,090 957 5,350 1,306 3,108 1,350 — 13,406 
SS882 283 1,131 4,787 9,415 8,827 2,788 1,051 29,164 
Total40,289 99,649 97,841 90,962 54,110 110,775 156,846 1,051 651,523 
SBA PPP
Pass— 64,379 583 — — — — — 64,962 
Owner-occupied CRE
Pass30,659 177,833 91,600 181,568 75,692 327,070 — — 884,422 
SM— 262 2,707 3,627 5,803 16,704 — — 29,103 
SS— — 683 — 3,770 17,727 — — 22,180 
Total30,659 178,095 94,990 185,195 85,265 361,501 — — 935,705 
Non-owner occupied CRE
Pass62,126 190,931 175,900 244,550 142,711 612,820 — — 1,429,038 
SM— — — 3,686 — 16,802 — — 20,488 
SS— — — — 3,298 52,659 — — 55,957 
Total62,126 190,931 175,900 248,236 146,009 682,281 — — 1,505,483 
Total commercial business
Pass131,947 531,419 363,836 506,943 261,792 1,038,730 152,708 — 2,987,375 
SM245 1,352 3,664 12,663 7,109 36,614 1,350 — 62,997 
SS882 283 1,814 4,787 16,483 79,213 2,788 1,051 107,301 
Total133,074 533,054 369,314 524,393 285,384 1,154,557 156,846 1,051 3,157,673 
Residential real estate
Pass(1)
24,214 129,511 26,840 19,330 4,766 18,602 — — 223,263 
SS— — — — — 179 — — 179 
Total24,214 129,511 26,840 19,330 4,766 18,781 — — 223,442 
Real estate construction and land development:
Residential
Pass8,874 44,379 13,267 12,422 2,898 1,689 — — 83,529 
Commercial and multifamily
Pass5,197 68,477 39,826 18,620 3,188 1,860 — — 137,168 
SM— — — 60 — 212 — — 272 
SS— — 571 — — 572 — — 1,143 
Total5,197 68,477 40,397 18,680 3,188 2,644 — — 138,583 
Total real estate construction and land development
Pass14,071 112,856 53,093 31,042 6,086 3,549 — — 220,697 
SM— — — 60 — 212 — — 272 
SS— — 571 — — 572 — — 1,143 
Total14,071 112,856 53,664 31,102 6,086 4,333 — — 222,112 
15

March 31, 2022
Term Loans
Amortized Cost Basis by Origination Year		Revolving Loans
Revolving Loans Converted (2)
Loans Receivable
2022
2021(1)
202020192018Prior
Consumer
Pass937 1,141 13,991 40,242 25,342 22,871 110,749 1 215,274 
SS— — 175 534 419 1,549 — — 2,677 
Total937 1,141 14,166 40,776 25,761 24,420 110,749 1 217,951 
Loans receivable
Pass171,169 774,927 457,760 597,557 297,986 1,083,752 263,457 1 3,646,609 
SM245 1,352 3,664 12,723 7,109 36,826 1,350 — 63,269 
SS882 283 2,560 5,321 16,902 81,513 2,788 1,051 111,300 
Total$172,296 $776,562 $463,984 $615,601 $321,997 $1,202,091 $267,595 $1,052 $3,821,178 
(1) The 2021 origination year includes $42.2 million of pass grade residential real estate loans purchased during the three months ended March 31, 2022 which were originated during the year ended December 31, 2021.
(2) Represents the loans receivable balance at March 31, 2022 which was converted from a revolving loan to an amortizing loan during the three months ended March 31, 2022.

December 31, 2021
Term Loans
Amortized Cost Basis by Origination Year		Revolving Loans
Revolving Loans Converted (1)
Loans Receivable
20212020201920182017Prior
(In thousands)
Commercial business:
Commercial and industrial
Pass$95,960 $100,193 $94,657 $54,707 $28,558 $77,294 $127,651 $1,035 $580,055 
SM326 884 5,998 1,425 2,223 2,401 2,048 353 15,658 
SS1,443 1,287 5,912 2,809 2,526 6,907 4,402 568 25,854 
Total97,729 102,364 106,567 58,941 33,307 86,602 134,101 1,956 621,567 
SBA PPP
Pass139,253 6,587 — — — — — — 145,840 
Owner-occupied CRE
Pass182,742 90,609 188,380 73,714 66,039 273,518 — 72 875,074 
SM264 — 3,079 7,521 3,937 16,724 — — 31,525 
SS— 1,332 — 3,787 3,014 16,418 — — 24,551 
Total183,006 91,941 191,459 85,022 72,990 306,660 — 72 931,150 
Non-owner-occupied CRE
Pass187,860 185,650 244,863 149,090 144,896 499,486 — — 1,411,845 
SM— — 5,674 — 15,482 2,400 — — 23,556 
SS— — — 3,379 — 54,319 — — 57,698 
Total187,860 185,650 250,537 152,469 160,378 556,205 — — 1,493,099 
Total commercial business
Pass605,815 383,039 527,900 277,511 239,493 850,298 127,651 1,107 3,012,814 
SM590 884 14,751 8,946 21,642 21,525 2,048 353 70,739 
SS1,443 2,619 5,912 9,975 5,540 77,644 4,402 568 108,103 
Total607,848 386,542 548,563 296,432 266,675 949,467 134,101 2,028 3,191,656 
Residential real estate
Pass85,089 27,090 23,295 5,672 6,141 16,891 — — 164,178 
SS— — — — — 404 — — 404 
Total85,089 27,090 23,295 5,672 6,141 17,295 — — 164,582 
16

December 31, 2021
Term Loans
Amortized Cost Basis by Origination Year		Revolving Loans
Revolving Loans Converted (1)
Loans Receivable
20212020201920182017Prior
(In thousands)
Real estate construction and land development:
Residential
Pass44,892 23,728 12,266 2,921 389 1,351 — — 85,547 
Commercial and multifamily
Pass56,448 41,616 34,117 5,794 710 1,379 — — 140,064 
SM— — 68 — — 213 — — 281 
SS— 571 — — — 420 — — 991 
Total56,448 42,187 34,185 5,794 710 2,012 — — 141,336 
Total real estate construction and land development
Pass101,340 65,344 46,383 8,715 1,099 2,730 — — 225,611 
SM— — 68 — — 213 — — 281 
SS— 571 — — — 420 — — 991 
Total101,340 65,915 46,451 8,715 1,099 3,363 — — 226,883 
Consumer
Pass1,286 15,737 46,041 29,819 15,068 13,026 108,492 120 229,589 
SS— 181 657 476 542 1,043 36 17 2,952 
Total1,286 15,918 46,698 30,295 15,610 14,069 108,528 137 232,541 
Loans receivable
Pass793,530 491,210 643,619 321,717 261,801 882,945 236,143 1,227 3,632,192 
SM590 884 14,819 8,946 21,642 21,738 2,048 353 71,020 
SS1,443 3,371 6,569 10,451 6,082 79,511 4,438 585 112,450 
Total$795,563 $495,465 $665,007 $341,114 $289,525 $984,194 $242,629 $2,165 $3,815,662 
(1) Represents the loans receivable balance at December 31, 2021 which was converted from a revolving loan to an amortizing loan during the year ended December 31, 2021.
(d) Nonaccrual Loans
The following tables present the amortized cost of nonaccrual loans for the dates indicated:
March 31, 2022
Nonaccrual without ACLNonaccrual with ACLTotal Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial$4,694 $1,921 $6,615 
Owner-occupied CRE1,820 4,223 6,043 
Non-owner occupied CRE— 3,298 3,298 
Total commercial business6,514 9,442 15,956 
Real estate construction and land development:
Commercial and multifamily
— 571 571 
Total$6,514 $10,013 $16,527 
December 31, 2021
Nonaccrual without ACLNonaccrual with ACLTotal Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial$6,454 $3,827 $10,281 
Owner-occupied CRE3,036 5,138 8,174 
17

December 31, 2021
Nonaccrual without ACLNonaccrual with ACLTotal Nonaccrual
(In thousands)
Non-owner occupied CRE1,273 3,379 4,652 
Total commercial business10,763 12,344 23,107 
Residential real estate
— 47 47 
Real estate construction and land development:
Commercial and multifamily
— 571 571 
Consumer— 29 29 
Total$10,763 $12,991 $23,754 
The following table presents the reversal of interest income on loans due to the write-off of accrued interest receivable upon the initial classification of loans as nonaccrual loans and the interest income recognized due to payment in full or sale of previously classified nonaccrual loans during the following periods:
Three Months Ended
March 31, 2022		Three Months Ended
March 31, 2021
Interest Income ReversedInterest Income RecognizedInterest Income ReversedInterest Income Recognized
(In thousands)
Commercial business:
Commercial and industrial$(2)$139 $(2)$63 
Owner-occupied CRE— 53 — 114 
Non-owner occupied CRE— 774 — 313 
Total commercial business(2)966 (2)490 
Residential real estate
— 19 — — 
Real estate construction and land development:
Residential
— — — 73 
Consumer— 68 — — 
Total$(2)$1,053 $(2)$563 
For the three months ended March 31, 2022 and 2021, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.
(e) Past due loans
The Bank performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The amortized cost of past due loans as of March 31, 2022 and December 31, 2021 were as follows:
March 31, 2022
30-89 Days90 Days or
Greater		Total Past 
Due		CurrentLoans Receivable
(In thousands)
Commercial business:
Commercial and industrial$2,139 $6,069 $8,208 $643,315 $651,523 
SBA PPP150 — 150 64,812 64,962 
Owner-occupied CRE— 188 188 935,517 935,705 
Non-owner occupied CRE— — — 1,505,483 1,505,483 
Total commercial business2,289 6,257 8,546 3,149,127 3,157,673 
Residential real estate
994 — 994 222,448 223,442 
Real estate construction and land development:
Residential
— — — 83,529 83,529 
Commercial and multifamily
— 571 571 138,012 138,583 
Total real estate construction and land development— 571 571 221,541 222,112 
18

March 31, 2022
30-89 Days90 Days or
Greater		Total Past 
Due		CurrentLoans Receivable
(In thousands)
Consumer575 — 575 217,376 217,951 
Total$3,858 $6,828 $10,686 $3,810,492 $3,821,178 
December 31, 2021
30-89 Days90 Days or
Greater		Total Past 
Due		CurrentLoans Receivable
(In thousands)
Commercial business:
Commercial and industrial$1,858 $6,821 $8,679 $612,888 $621,567 
SBA PPP223 293 516 145,324 145,840 
Owner-occupied CRE2,397 112 2,509 928,641 931,150 
Non-owner occupied CRE— — — 1,493,099 1,493,099 
Total commercial business4,478 7,226 11,704 3,179,952 3,191,656 
Residential real estate
420 10 430 164,152 164,582 
Real estate construction and land development:
Residential
792 — 792 84,755 85,547 
Commercial and multifamily
3,474 571 4,045 137,291 141,336 
Total real estate construction and land development4,266 571 4,837 222,046 226,883 
Consumer1,026 — 1,026 231,515 232,541 
Total$10,190 $7,807 $17,997 $3,797,665 $3,815,662 
There was one customer relationship and one SBA PPP loan 90 days or more past due and still accruing interest as of March 31, 2022 and December 31, 2021, respectively, with an amortized cost of $1.3 million and $293,000, respectively.
(f) Collateral-dependent Loans
The type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral as of March 31, 2022 and December 31, 2021 was as follows, with balances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:
March 31, 2022
CREFarmlandResidential Real EstateTotal
(In thousands)
Commercial business:
Commercial and industrial$1,379 $2,492 $695 $4,566 
Owner-occupied CRE1,820 — — 1,820 
Total commercial business3,199 2,492 695 6,386 
Real estate construction and land development:
Commercial and multifamily
571 — — 571 
Total$3,770 $2,492 $695 $6,957 
December 31, 2021
CREFarmlandResidential Real EstateOtherTotal
(In thousands)
Commercial business:
Commercial and industrial$1,499 $4,362 $1,036 $245 $7,142 
Owner-occupied CRE3,035 — — — 3,035 
Non-owner occupied CRE1,273 — — — 1,273 
Total commercial business5,807 4,362 1,036 245 11,450 
19

December 31, 2021
CREFarmlandResidential Real EstateOtherTotal
(In thousands)
Real estate construction and land development:
Commercial and multifamily
571 — — — 571 
Total$6,378 $4,362 $1,036 $245 $12,021 
There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the three months ended March 31, 2022, except changes due to additions or removals of loans from this classification.
(g) Troubled Debt Restructured Loans
Loans that were modified as TDR loans are set forth in the following table for the periods indicated:
Three Months Ended March 31,
20222021
Number of
Contracts (1)
Amortized Cost (1) (2)
Number of
Contracts (1)
Amortized Cost (1) (2)
(Dollars in thousands)
Commercial business:
Commercial and industrial4$2,438 24$12,102 
Owner-occupied CRE—— 24,660 
Non-owner occupied CRE—— 11,979 
Total commercial business42,438 2718,741 
Residential real estate
—— 1180 
Real estate construction and land development:
Commercial and multifamily
— — 1 450 
Consumer555 15379 
Total9$2,493 44$19,750 
(1) Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the three months ended March 31, 2022 and 2021.
(2) As the Bank did not forgive any principal or interest balance as part of the loan modifications, the Bank’s amortized cost in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification).
The Bank had an ACL on loans of $56,000 and $2.4 million at March 31, 2022 and March 31, 2021, respectively, related to these TDR loans which were restructured during the three months ended March 31, 2022 and March 31, 2021, respectively.
The unfunded commitment to borrowers related to TDR loans was $3.8 million and $5.7 million at March 31, 2022 and December 31, 2021, respectively.
The following table presents loans that were modified in a TDR and subsequently defaulted within twelve months from the modification date during the periods indicated:
Three Months Ended March 31,
20222021
Number of
Contracts (1)
Amortized Cost (1)
Number of
Contracts (1)
Amortized Cost (1)
(Dollars in thousands)
Commercial business:
Commercial and industrial—$— 2$2,792 
Owner-occupied CRE1189 —— 
(1) Number of contracts and amortized cost represent TDR loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the three months ended March 31, 2022 and 2021.
During the three months ended March 31, 2022 the TDR loan defaulted because the borrower was more than 90 days delinquent on their scheduled loan payment. During the three months ended March 31, 2021 both TDR loans defaulted because each was past its modified maturity date and the borrower had not subsequently repaid the credits. The Bank chose not to
20

further extend the maturity date on these TDR loans. The Bank had no ACL on loans at March 31, 2022 and $94,000 at March 31, 2021 related to these TDR loans which defaulted during the three months ended March 31, 2022 and 2021.
(h) Accrued interest receivable on loans receivable
Accrued interest receivable on loans receivable totaled $9.9 million and $10.1 million at March 31, 2022 and December 31, 2021, respectively. It is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.
(i) Foreclosure proceedings in process
At March 31, 2022, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

(4)Allowance for Credit Losses on Loans
The baseline loss rates used to calculate the ACL on loans at March 31, 2022 utilized the Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date. There were no changes to this assumption during the three months ended March 31, 2022. The Bank believes the historic loss rates are viable inputs to the current CECL model as the Bank's lending practice and business has remained relatively stable throughout the periods. While the Bank's assets have grown, the credit culture has stayed relatively consistent.
Prepayments included in the CECL model at March 31, 2022 were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation of future prepayment activity. There were no changes to this assumption during the three months ended March 31, 2022.
The reasonable and supportable period and subsequent reversion period used in the CECL model was five quarters and two quarters, respectively, at December 31, 2021. There were no changes to these assumptions during the three months ended March 31, 2022. Management believes forecasts beyond this seven quarter time period tend to diverge in economic assumptions and may be less comparable to actual future events. As the length of the reasonable and supportable period increases, the degree of judgment involved in estimating the allowance increases.
During the three months ended March 31, 2022, the ACL on loans decreased $2.0 million, or 4.8%, due primarily to a reversal of provision for credit losses on loans of $2.5 million driven by a reduction in the ACL on loans individually evaluated for losses and their related ACL as well as changes in the loan mix and continued improvement in forecasted economic indicators used to calculate credit losses. The ACL on loans at March 31, 2022 and December 31, 2021 did not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.
A summary of the changes in the ACL on loans during the three months ended March 31, 2022 and 2021 is as follows:
Three Months Ended
March 31,
20222021
(In thousands)
Balance at the beginning of the year$42,361 $70,185 
Charge-offs(355)(187)
Recoveries of loans previously charged-off849 362 
Reversal of provision for credit losses on loans(2,522)(6,135)
Balance at the end of the year$40,333 $64,225 
The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:
Three Months Ended March 31, 2022
Beginning BalanceCharge-offs Recoveries(Reversal of) Provision for Credit LossesEnding Balance
(In thousands)
Commercial business:
Commercial and industrial$17,777 $(163)$272 $(2,621)$15,265 
Owner-occupied CRE6,411 (36)— 710 7,085 
Non-owner occupied CRE8,861 — — 721 9,582 
Total commercial business33,049 (199)272 (1,190)31,932 
Residential real estate
1,409 (30)3 421 1,803 
Real estate construction and land development:
Residential
1,304 — 8 (188)1,124 
21

Three Months Ended March 31, 2022
Beginning BalanceCharge-offs Recoveries(Reversal of) Provision for Credit LossesEnding Balance
(In thousands)
Commercial and multifamily
3,972 — — (797)3,175 
Total real estate construction and land development5,276 — 8 (985)4,299 
Consumer2,627 (126)566 (768)2,299 
Total$42,361 $(355)$849 $(2,522)$40,333 
Three Months Ended March 31, 2021
Beginning BalanceCharge-offs Recoveries(Reversal of) Provision for Credit LossesEnding Balance
(In thousands)
Commercial business:
Commercial and industrial$30,010 $(1)$205 $(8,444)$21,770 
Owner-occupied CRE9,486 — 2 976 10,464 
Non-owner occupied CRE10,112 — — 2,858 12,970 
Total commercial business49,608 (1)207 (4,610)45,204 
Residential real estate1,591 — — (189)1,402 
Real estate construction and land development:
Residential1,951 — 16 81 2,048 
Commercial and multifamily
11,141 (1)— 83 11,223 
Total real estate construction and land development13,092 (1)16 164 13,271 
Consumer5,894 (185)139 (1,500)4,348 
Total$70,185 $(187)$362 $(6,135)$64,225 

(5)Goodwill and Other Intangible Assets
(a) Goodwill
There were no additions to goodwill during the three months ended March 31, 2022 and 2021. Additionally, management analyzes its goodwill on an annual basis on December 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2021 and concluded that there was no impairment.
(b) Other Intangible Assets
Other intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets during the three months ended March 31, 2022 and 2021.

(6)Derivative Financial Instruments
The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate and the Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third-party. These interest rate swaps are not designated as hedging instruments.
The Company is exposed to interest rate risk as part of the transaction. However, the Company acts as an intermediary for its customer therefore changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.
Fee income related to interest rate swap derivative contract transactions is recorded in Interest rate swap fees on the unaudited Condensed Consolidated Statements of Income. The fair value of derivative positions outstanding is included in Prepaid expenses and other assets and Accrued expenses and other liabilities in the unaudited Condensed Consolidated Statements of Financial Condition. The gains and losses due to changes in fair value and all cash flows are included in Other income in the unaudited Condensed Consolidated Statements of Income, but typically net to zero based on the identical back-to-
22

back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at the dates indicated:
March 31, 2022December 31, 2021
Notional AmountsEstimated Fair ValueNotional AmountsEstimated Fair Value
(In thousands)
Non-hedging interest rate derivatives
Interest rate swap asset (1)
$319,526 $12,975 $322,726 $15,219 
Interest rate swap liability (1)
319,526 (12,989)322,726 (15,286)
 (1) The estimated fair value of derivatives with customers was $(8.7) million and $9.8 million as of March 31, 2022 and December 31, 2021, respectively. The estimated fair value of derivatives with third-parties was $8.7 million and $(9.8) million as of March 31, 2022 and December 31, 2021, respectively.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk for derivatives with the customer is controlled through the credit approval process, amount limits, and monitoring procedures and is concentrated within our primary market areas. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.

(7)Stockholders’ Equity
(a) Earnings Per Common Share
The following table illustrates the calculation of weighted average shares used for earnings per common share computations for the periods indicated:
Three Months Ended
March 31,
20222021
(In thousands, except shares)
Net income$19,757 $25,344 
Basic:
Weighted average common shares outstanding35,094,725 35,926,950 
Diluted:
Basic weighted average common shares outstanding35,094,725 35,926,950 
Effect of potentially dilutive common shares (1)
317,373 305,254 
Total diluted weighted average common shares outstanding35,412,098 36,232,204 
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)
17,041 15,538 
(1)Represents the effect of the vesting of restricted stock units.
(2) Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock unit exceeds the market price of the Company’s stock.
(b) Dividends
The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.
The following table summarizes the dividend activity during the three months ended March 31, 2022 and the calendar year 2021:
DeclaredCash Dividend per ShareRecord DatePaid Date
January 27, 2021$0.20February 10, 2021February 24, 2021
April 21, 2021$0.20May 5, 2021May 19, 2021
July 21, 2021$0.20August 4, 2021August 18, 2021
October 20, 2021$0.21November 3, 2021November 17, 2021
January 26, 2022$0.21February 9, 2022February 23, 2022
23

The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.
(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan. The number, timing and price of shares repurchased under the twelfth stock repurchase plan will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.
The following table provides total repurchased shares and average share prices under the applicable plans for the periods indicated:
Three Months Ended
March 31,
20222021
Plan Total(1)
Repurchased shares80,559 — 1,141,309 
Stock repurchase average share price$25.17 $— $23.92 
(1)Represents shares repurchased and average price per share paid during the duration of the plan.
In addition to the stock repurchases under a stock repurchase plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units. The following table provides total shares repurchased to pay withholding taxes during the periods indicated:
Three Months Ended
March 31,
20222021
Repurchased shares to pay withholding taxes24,531 23,246 
Stock repurchase to pay withholding taxes average share price$25.46 $29.54 

(8)Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
(a) Recurring and Nonrecurring Basis
The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:
Investment Securities:
The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third-party pricing services.
Collateral-Dependent Loans:
Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single
24

valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Bank also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.
Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Bank. Once received, the Bank's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Derivative Financial Instruments:
The Bank obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2022 and December 31, 2021, the Bank assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.
Branches held for sale:
Branches held for sale are recorded at fair value less costs to sell when transferred from premises and equipment, net to prepaid expenses and other assets on the unaudited Condensed Consolidated Statements of Financial Condition with any valuation adjustment recorded within other noninterest expense on the unaudited Condensed Consolidated Statements of Income. The fair value of branches held for sale is determined based on a real estate appraisal or broker price opinion. Adjustments are routinely made in the appraisal and broker price opinion process by independent appraisers and commercial real estate brokers, respectively, to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value. Additionally, the fair value of branches held for sale can be adjusted based on executed agreements of sale to be completed at a future date.
Recurring Basis
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:
March 31, 2022
TotalLevel 1Level 2Level 3
(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities$39,555 $— $39,555 $— 
Municipal securities210,239 — 210,239 — 
Residential CMO and MBS358,409 — 358,409 — 
Commercial CMO and MBS404,505 — 404,505 — 
Corporate obligations2,009 — 2,009 — 
Other asset-backed securities25,207 — 25,207 — 
Total investment securities available for sale1,039,924 — 1,039,924 — 
Equity security224 224 — — 
Derivative assets - interest rate swaps12,975 — 12,975 — 
Liabilities
Derivative liabilities - interest rate swaps$12,989 $— 12,989 $— 
25

December 31, 2021
TotalLevel 1Level 2Level 3
(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities$21,373 $— $21,373 $— 
Municipal securities221,212 — 221,212 — 
Residential CMO and MBS306,884 — 306,884 — 
Commercial CMO and MBS315,861 — 315,861 — 
Corporate obligations2,014 — 2,014 — 
Other asset-backed securities26,991 — 26,991 — 
Total investment securities available for sale894,335 — 894,335 — 
Equity security240 240 — — 
Derivative assets - interest rate swaps15,219 — 15,219 — 
Liabilities
Derivative liabilities - interest rate swaps$15,286 $— $15,286 $— 
Nonrecurring Basis
The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following tables represent assets measured at fair value on a nonrecurring basis at the dates indicated:
Fair Value at March 31, 2022
Basis(1)
TotalLevel 1Level 2Level 3
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial$336 $215 $— $— $215 
Real estate construction and land development:
Commercial and multifamily
991 534 — — 534 
Total assets measured at fair value on a nonrecurring basis$1,327 $749 $— $— $749 
(1) Basis represents the outstanding principal balance of collateral-dependent loans.
Fair Value at December 31, 2021
Basis(1)
TotalLevel 1Level 2Level 3
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial$1,911 $1,049 $— $— $1,049 
Owner-occupied CRE613 189 — — 189 
 Total commercial business2,524 1,238 — — 1,238 
Real estate construction and land development:
Commercial and multifamily991 $534 — — 534 
Total3,515 1,772 — — 1,772 
Prepaid expenses and other assets:
Branch held for sale (2)
698 698 — — 698 
Total assets measured at fair value on a nonrecurring basis$4,213 $2,470 $— $— $2,470 
(1) Basis represents the outstanding principal balance of collateral-dependent loans and the carrying value of the branch held for sale.
(2) In December 2021, one branch was written down to its net realizable value concurrent with the signing of an agreement for sale at a future date.
26

The following table represents the net (loss) gain recorded in earnings as a result of nonrecurring fair value adjustments recorded during the periods indicated:
Three Months Ended
March 31,
20222021
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial$(12)$(34)
Real estate construction and land development:
Commercial and multifamily
— (14)
Total(12)(48)
Prepaid expenses and other assets:
Branch held for sale— 20 
Net loss from nonrecurring fair value adjustments$(12)$(28)
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the dates indicated:
March 31, 2022
Fair
Value		Valuation
Technique(s)		Unobservable Input(s)Range of Inputs; Weighted
Average
(Dollars in thousands)
Collateral-dependent loans$749 Market approachAdjustment for differences between the comparable sales
35.0% - (11.0)%; 13.8%
December 31, 2021
Fair
Value		Valuation
Technique(s)		Unobservable Input(s)Range of Inputs; Weighted
Average
(Dollars in thousands)
Collateral-dependent loans$1,772 Market approachAdjustment for differences between the comparable sales
35.0% - (11.0%); 13.8%
Branch held for sale$698 Market approachSale agreementNot applicable
(b) Fair Value of Financial Instruments
Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following tables present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated:
March 31, 2022
Carrying
Value		Fair
Value		Fair Value Measurements Using:
Level 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents$1,576,722 $1,576,722 $1,576,722 $— $— 
Investment securities available for sale1,039,924 1,039,924 — 1,039,924 — 
Investment securities held to maturity422,213 384,822 — 384,822 — 
Loans held for sale1,142 1,181 — 1,181 — 
Loans receivable, net3,780,845 3,808,897 — — 3,808,897 
Accrued interest receivable14,582 14,582 128 4,593 9,861 
27

March 31, 2022
Carrying
Value		Fair
Value		Fair Value Measurements Using:
Level 1Level 2Level 3
(In thousands)
Derivative assets - interest rate swaps12,975 12,975 — 12,975 — 
Equity security224 224 224 — — 
Financial Liabilities:
Non-maturity deposits$6,163,084 $6,163,084 $6,163,084 $— $— 
Certificates of deposit 328,416 329,358 — — 329,358 
Securities sold under agreement to repurchase49,069 49,069 49,069 — — 
Junior subordinated debentures21,253 18,750 — — 18,750 
Accrued interest payable75 75 33 15 27 
Derivative liabilities - interest rate swaps12,989 12,989 — 12,989 — 
December 31, 2021
Carrying
Value		Fair
Value		Fair Value Measurements Using:
Level 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents$1,723,292 $1,723,292 $1,723,292 $— $— 
Investment securities available for sale894,335 894,335 — 894,335 — 
Investment securities held to maturity383,393 376,331 — 376,331 — 
Loans held for sale1,476 1,527 — 1,527 — 
Loans receivable, net3,773,301 3,849,602 — — 3,849,602 
Accrued interest receivable14,657 14,657 14 4,582 10,061 
Derivative assets - interest rate swaps15,219 15,219 — 15,219 — 
Equity security240 240 240 — — 
Financial Liabilities:
Non-maturity deposits$6,038,498 $6,038,498 $6,038,498 $— $— 
Certificates of deposit 342,839 344,025 — 344,025 — 
Securities sold under agreement to repurchase50,839 50,839 50,839 — — 
Junior subordinated debentures21,180 18,750 — — 18,750 
Accrued interest payable73 73 33 19 21 
Derivative liabilities - interest rate swaps15,286 15,286 — 15,286 — 

(9)Cash Restriction
The Bank had no cash restrictions at March 31, 2022 and had restricted cash included in interest earning deposits of $9.8 million at December 31, 2021 relating to collateral required on interest rate swaps from third-parties as discussed in Note (6) Derivative Financial Instruments. The Bank does not have a collateral requirement with customers.

(10)Commitments and Contingencies
In the ordinary course of business, the Bank may enter into various types of transactions that include commitments to extend credit that are not included in its unaudited Condensed Consolidated Financial Statements. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The majority of the commitments presented below are variable rate. Loan commitments can be either revolving or non-revolving. The Bank’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.
28

The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:
 March 31,
2022		December 31, 2021
 (In thousands)
Commercial business:
Commercial and industrial$537,566 $570,156 
Owner-occupied CRE7,932 2,252 
Non-owner occupied CRE13,620 7,487 
Total commercial business559,118 579,895 
Real estate construction and land development:
Residential
55,599 51,838 
Commercial and multifamily
194,678 209,217 
Total real estate construction and land development250,277 261,055 
Consumer288,621 285,010 
Total outstanding commitments$1,098,016 $1,125,960 
The following table details the activity in the ACL on unfunded commitments during the periods indicated:
Three Months Ended
March 31,
2022		March 31,
2021
(In thousands)
Balance, beginning of period$2,607 $4,681 
Reversal of provision for credit losses on unfunded commitments(1,055)(1,064)
Balance, end of period$1,552 $3,617 

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three months ended March 31, 2022. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Forward-Looking Statements included herein and the December 31, 2021 audited Consolidated Financial Statements and the accompanying Notes included in our 2021 Annual Form 10-K.

Overview
Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our local communities with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.
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. We additionally originate for sale or for investment purposes residential real estate loans on single family properties located primarily in our markets. During the three months ended March 31, 2020, we ceased indirect auto loan originations, included in our consumer loan portfolio.
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. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.
Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan
29

portfolio as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on our methodology.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees, card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consists primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services consists primarily of third-party service providers such as auditors, consultants and lawyers.
Results of operations may also be significantly affected by general and local economic and competitive conditions, governmental policies and actions of regulatory authorities, including changes resulting from the COVID-19 Pandemic and the governmental actions taken to address it. Net income is also impacted by growth of operations through organic growth or acquisitions.
COVID-19 Pandemic Response
The Company maintains its commitment to supporting its community and customers during the COVID-19 Pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As of March 31, 2022, all Bank branches are open with normal hours and all employees have returned to their go-forward working environments. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.
Branch Consolidation Plan
The Company reduced the branch count to 49 from 61 branches during the year ended December 31, 2021, including the consolidation of eight branches and four branches during the three months ended March 31, 2021 and December 31, 2021, respectively. The Company integrated these locations into other branches within its network. These actions were the result of the Company’s increased focus on balancing physical locations and digital banking channels, driven by increased customer usage of online and mobile banking and a commitment to improve digital banking technology.

Results of Operations
Comparison of quarter ended March 31, 2022 to the comparable quarter in the prior year
Net income was $19.8 million, or $0.56 per diluted common share, for the three months ended March 31, 2022 compared to $25.3 million, or $0.70 per diluted common share, for the three months ended March 31, 2021. Net income decreased $5.6 million, or 22.0%, due primarily to lower interest income and fees on loans. The Company’s efficiency ratio was 64.38% for the three months ended March 31, 2022 compared to 61.57% for the three months ended March 31, 2021.

Average Balances, Yields and Rates Paid
The following table provides relevant net interest income information for the periods indicated:
 Three Months Ended March 31,
 20222021Change
 
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)
$3,773,325 $41,025 4.41 %$4,490,499 $49,524 4.47 %$(717,174)$(8,499)(0.06)%
Taxable securities1,271,557 6,003 1.91 674,268 3,534 2.13 597,289 2,469 (0.22)
Nontaxable securities (3)
146,409 860 2.38 163,914 958 2.37 (17,505)(98)0.01 
Interest earning deposits1,503,287 706 0.19 713,885 175 0.10 789,402 531 0.09 
Total interest earning assets6,694,578 48,594 2.94 %6,042,566 54,191 3.64 %652,012 (5,597)(0.70)%
Noninterest earning assets740,209 757,059 (16,850)
Total assets$7,434,787 $6,799,625 $635,162 
30

 Three Months Ended March 31,
 20222021Change
 
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 Bearing Liabilities:
Certificates of Deposit$336,353 $338 0.41 %$393,268 $559 0.58 %$(56,915)$(221)(0.17)%
Savings accounts646,684 87 0.05 560,094 95 0.07 86,590 (8)(0.02)
Interest bearing demand and money market accounts3,066,320 999 0.13 2,732,134 1,074 0.16 334,186 (75)(0.03)
Total interest bearing deposits4,049,357 1,424 0.14 3,685,496 1,728 0.19 363,861 (304)(0.05)
Junior subordinated debentures21,214 194 3.71 20,913 187 3.63 301 7 0.08 
Securities sold under agreement to repurchase50,017 32 0.26 40,074 38 0.38 9,943 (6)(0.12)
Total interest bearing liabilities4,120,588 1,650 0.16 %3,746,483 1,953 0.21 %374,105 (303)(0.05)%
Noninterest bearing demand deposits2,359,451 2,105,039 254,412 
Other noninterest bearing liabilities108,663 121,082 (12,419)
Stockholders’ equity846,085 827,021 19,064 
Total liabilities and stock-holders’ equity$7,434,787 $6,799,625 $635,162 
Net interest income and spread$46,944 2.78 %$52,238 3.43 %$(5,294)(0.65)%
Net interest margin2.84 %3.51 %(0.67)%
(1) Average balances are calculated using daily balances.
(2) Average loan 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 $3.4 million and $7.3 million for the three months ended March 31, 2022 and 2021, respectively.
(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. 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.
The following table provides the changes in net interest income for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 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:
 Increase (Decrease) Due to Changes In:
 VolumeRateTotal% Change
 (Dollars in thousands)
Interest Earning Assets:
Loans receivable, net$(7,774)$(725)$(8,499)(17.2)%
Taxable securities2,851 (382)2,469 69.9 
Nontaxable securities(103)5 (98)(10.2)
Interest earning deposits290 241 531 303.4 
Total interest income$(4,736)$(861)$(5,597)(10.3)%
Interest Bearing Liabilities:
Certificates of deposit$(73)$(148)$(221)(39.5)%
Savings accounts13 (21)(8)(8.4)
Interest bearing demand and money market accounts122 (197)(75)(7.0)
Total interest bearing deposits62 (366)(304)(17.6)
31

 Increase (Decrease) Due to Changes In:
 VolumeRateTotal% Change
 (Dollars in thousands)
Junior subordinated debentures3 4 7 3.7 
Securities sold under agreement to repurchase8 (14)(6)(15.8)
Total interest expense$73 $(376)$(303)(15.5)%
Net interest income$(4,809)$(485)$(5,294)(10.1)%
Comparison of quarter ended March 31, 2022 to the comparable quarter in the prior year
Net interest income decreased due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decrease in the volume of forgiven SBA PPP loans as well as a slightly lower loan yield. The decrease in net interest income was offset partially by a higher average balance of taxable investment securities.
Net interest margin decreased due primarily to the change in the mix of total interest earning assets, including a significant increase in the balance of lower yielding average interest earning deposits, and secondarily due to lower loan yield.
The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:
 Three Months Ended
 March 31,
2022		March 31,
2021
Loan yield (GAAP)4.41 %4.47 %
Exclude impact from SBA PPP loans(0.21)0.01 
Exclude impact from incremental accretion on purchased loans(0.06)(0.12)
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) (1)
4.14 %4.36 %
(1) For additional information, see the "Reconciliations of Non-GAAP Measures" section below.
The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was 11 basis points during the first quarter of 2022, including the recovery of $774,000 from a non-owner occupied CRE relationship, compared to five basis points for the same quarter in 2021.

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 unaudited Condensed Consolidated Statements of Income as the provision for credit losses. The ACL on unfunded commitments is included on the unaudited Condensed Consolidated Statements of Financial Condition within accrued expenses and other liabilities.
Comparison of quarter ended March 31, 2022 to the comparable quarter in the prior year
The following table presents the provision for credit losses for the periods indicated:
Three Months Ended
March 31,
20222021Change % Change
(Dollars in thousands)
Reversal of provision for credit losses on loans$(2,522)$(6,135)$3,613 (58.9)%
Reversal of provision for credit losses on unfunded commitments(1,055)(1,064)9 (0.8)
Reversal of provision for credit losses$(3,577)$(7,199)$3,622 (50.3)%
The reversal of provision for credit losses recognized during the three months ended March 31, 2022 was due primarily to a reduction of loans individually evaluated for losses and their related ACL as well as changes in the loan mix and continued improvement in forecasted economic indicators used to calculate credit losses.
The reversal of provision for credit losses recognized during the three months ended March 31, 2021 was due primarily to improvements in the economic forecast at March 31, 2021 as compared to the forecast for at December 31, 2020 and secondarily due to a decrease in total loans receivable, excluding SBA PPP loans.

32

Noninterest Income Overview
Comparison of quarter ended March 31, 2022 to the comparable quarter in the prior year
The following table presents the change in the key components of noninterest income for the periods indicated:
Three Months Ended
March 31,
20222021Change% Change
(Dollars in thousands)
Service charges and other fees$2,296 $1,892 $404 21.4 %
Card revenue2,441 2,097 344 16.4 
Gain on sale of investment securities, net— 29 (29)(100.0)
Gain on sale of loans, net241 1,370 (1,129)(82.4)
Interest rate swap fees279 152 127 83.6 
Bank owned life insurance income1,695 656 1,039 158.4 
Gain on sale of other assets, net204 22 182 827.3 
Other income1,382 2,033 (651)(32.0)
Total noninterest income$8,538 $8,251 $287 3.5 %
Noninterest income increased slightly due primarily to an increase in bank owned life insurance income due to the recognition of a death benefit of $1.0 million during the current quarter as well as increases in service charges and other fees and card revenue reflecting increased customer transactions as businesses reopened in our market areas, offset partially by reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined.

Noninterest Expense Overview
Comparison of quarter ended March 31, 2022 to the comparable quarter in the prior year
The following table presents changes in the key components of noninterest expense for the periods indicated:
Three Months Ended
March 31,
20222021Change% Change
(Dollars in thousands)
Compensation and employee benefits$21,252 $22,201 $(949)(4.3)%
Occupancy and equipment4,331 4,454 (123)(2.8)
Data processing4,061 3,812 249 6.5 
Marketing266 513 (247)(48.1)
Professional services699 1,270 (571)(45.0)
State/municipal business and use tax796 972 (176)(18.1)
Federal deposit insurance premium600 589 11 1.9 
Amortization of intangible assets704 797 (93)(11.7)
Other expense3,011 2,634 377 14.3 
Total noninterest expense$35,720 $37,242 $(1,522)(4.1)%
Noninterest expense decreased due primarily to a decrease in compensation and employee benefits from lower headcount and secondarily due to a decrease in professional services which was elevated during the first quarter of 2021 due to costs associated with our participation in the second tranche of the SBA PPP.

33

Income Tax Expense Overview
Comparison of quarter ended March 31, 2022 to the comparable quarter in the prior year
The following table presents the income tax expense, related metrics and their changes for the periods indicated:
Three Months Ended
March 31,
20222021Change% Change
(Dollars in thousands)
Income before income taxes$23,339 $30,446 $(7,107)(23.3)%
Income tax expense$3,582 $5,102 $(1,520)(29.8)%
Effective income tax rate15.3 %16.8 %(1.5)%(8.9)%
Income tax expense decreased due primarily to the change in income before income taxes earned between the periods. Additionally, the effective income tax rate was lower due primarily to lower estimated pre-tax income for the year ended December 31, 2022, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits.

Financial Condition Overview
The table below provides a comparison of the changes in the Company's financial condition at the periods indicated:
March 31,
2022		December 31, 2021Change% Change
(Dollars in thousands)
Assets
Cash and cash equivalents$1,576,722 $1,723,292 $(146,570)(8.5)%
Investment securities available for sale, at fair value, net1,039,924 894,335 145,589 16.3 
Investment securities held to maturity, at amortized cost, net
422,213 383,393 38,820 10.1 
Loans held for sale1,142 1,476 (334)(22.6)
Loans receivable, net3,780,845 3,773,301 7,544 0.2 
Premises and equipment, net78,737 79,370 (633)(0.8)
Federal Home Loan Bank stock, at cost8,916 7,933 983 12.4 
Bank owned life insurance119,929 120,196 (267)(0.2)
Accrued interest receivable14,582 14,657 (75)(0.5)
Prepaid expenses and other assets190,592 183,543 7,049 3.8 
Other intangible assets, net9,273 9,977 (704)(7.1)
Goodwill240,939 240,939 — — 
Total assets$7,483,814 $7,432,412 $51,402 0.7 %
Liabilities and Stockholders' Equity
Deposits$6,491,500 $6,394,290 $97,210 1.5 %
Junior subordinated debentures21,253 21,180 73 0.3 
Securities sold under agreement to repurchase49,069 50,839 (1,770)(3.5)
Accrued expenses and other liabilities100,543 111,671 (11,128)(10.0)
Total liabilities6,662,365 6,577,980 84,385 1.3 
Common stock550,096 551,798 (1,702)(0.3)
Retained earnings305,581 293,238 12,343 4.2 
Accumulated other comprehensive (loss) income, net(34,228)9,396 (43,624)(464.3)
Total stockholders' equity821,449 854,432 (32,983)(3.9)
Total liabilities and stockholders' equity$7,483,814 $7,432,412 $51,402 0.7 %
Total assets increased due primarily to an increase in total investment securities following an increase in total deposits, which is discussed in more detail in the "Deposit Activities Overview" section below. Partially offsetting this increase was a decrease in AOCI following an increase in market interest rates during the three months ended March 31, 2022 which negatively impacted the fair value of our investment securities available for sale at March 31, 2022.

34

Investment Activities Overview
The following table provides information regarding our investment securities at the dates indicated:
 March 31, 2022December 31, 2021
 Balance% of
Total		Balance% of
Total		Change% Change
 (Dollars in thousands)
Investment securities available for sale, at fair value:
U.S. government and agency securities$39,555 2.7 %$21,373 1.7 %$18,182 85.1 %
Municipal securities210,239 14.4 221,212 17.3 %(10,973)(5.0)
Residential CMO and MBS358,409 24.5 306,884 24.0 %51,525 16.8 
Commercial CMO and MBS404,505 27.7 315,861 24.7 %88,644 28.1 
Corporate obligations2,009 0.1 2,014 0.2 %(5)(0.2)
Other asset-backed securities25,207 1.7 26,991 2.1 %(1,784)(6.6)
Total$1,039,924 71.1 %$894,335 70.0 %$145,589 16.3 %
Investment securities held to maturity, at amortized cost:
U.S. government and agency securities$150,973 10.3 %$141,011 11.0 %$9,962 7.1 %
Residential CMO and MBS54,486 3.7 24,529 1.9 29,957 122.1 
Commercial CMO and MBS216,754 14.9 217,853 17.1 (1,099)(0.5)
Total$422,213 28.9 %$383,393 30.0 %$38,820 10.1 %
Total investment securities$1,462,137 100.0 %$1,277,728 100.0 %$184,409 14.4 %
Total investment securities increased due primarily to purchases to deploy excess liquidity into higher yielding assets, offset partially by a $55.6 million decrease in the fair value of investment securities available for sale resulting in an unrealized loss at March 31, 2022 compared to an unrealized gain at December 31, 2021 following an increase in market rates during the quarter.

Loan Portfolio Overview
Changes by loan type
The Bank originates a wide variety of loans with a focus on commercial business loans. The following table provides information about our loan portfolio by type of loan at the dates indicated:
March 31, 2022December 31, 2021
Amortized Cost% of Loans ReceivableAmortized Cost% of Loans ReceivableChange% Change
(Dollars in thousands)
Commercial business:
Commercial and industrial$651,523 17.1 %$621,567 16.3 %$29,956 4.8 %
SBA PPP64,962 1.7 145,840 3.8 (80,878)(55.5)
Owner-occupied CRE935,705 24.5 931,150 24.4 4,555 0.5 
Non-owner occupied CRE1,505,483 39.4 1,493,099 39.2 12,384 0.8 
Total commercial business3,157,673 82.7 3,191,656 83.7 (33,983)(1.1)
Residential real estate
223,442 5.8 164,582 4.3 58,860 35.8 
Real estate construction and land development:
Residential
83,529 2.2 85,547 2.2 (2,018)(2.4)
Commercial and multifamily
138,583 3.6 141,336 3.7 (2,753)(1.9)
Total real estate construction and land development 222,112 5.8 226,883 5.9 (4,771)(2.1)
Consumer217,951 5.7 232,541 6.1 (14,590)(6.3)
Total$3,821,178 100.0 %$3,815,662 100.0 %$5,516 0.1 %
35

Loans receivable increased due primarily to $42.2 million of purchased residential real estate loans and higher commercial business loan demand, offset partially by repayments of SBA PPP loans.
Loans classified as nonaccrual and performing TDR and nonperforming assets
The following table provides information about our nonaccrual loans, performing TDR loans and nonperforming assets for the dates indicated:
March 31,
2022		December 31, 2021Change% Change
(Dollars in thousands)
Nonaccrual loans: (1)
Commercial business$15,956 $23,107 $(7,151)(30.9)%
Residential real estate
— 47 (47)(100.0)
Real estate construction and land development571 571 — — 
Consumer— 29 (29)(100.0)
Total nonaccrual loans16,527 23,754 (7,227)(30.4)
Other real estate owned— — — n/a
Total nonperforming assets$16,527 $23,754 $(7,227)(30.4)%
Accruing loans past due 90 days or more$1,318 $293 $1,025 349.8 %
Credit quality ratios:
Nonaccrual loans to loans receivable0.43 %0.62 %(0.19)%(30.6)%
Nonaccrual loans to total assets0.22 0.32 (0.10)(31.3)
Performing TDR loans: (1)
Commercial business$61,111 $57,142 $3,969 6.9 %
Residential real estate179 358 (179)(50.0)
Real estate construction and land development450 450 — — 
Consumer887 1,160 (273)(23.5)
Total performing TDR loans$62,627 $59,110 $3,517 5.9 %
(1) At March 31, 2022 and December 31, 2021, $1.4 million and $1.4 million of nonaccrual loans, respectively, and $2.3 million and $1.6 million of performing TDR loans, respectively, were guaranteed by government agencies.
The following table provides the changes in nonaccrual loans during the three months ended March 31, 2022:
(In thousands)
Balance, beginning of period$23,754 
Additions to nonaccrual loan classification— 
Net principal payments, sales and transfers to accruing status(3,804)
Payoffs(3,369)
Charge-offs(54)
Balance, end of period$16,527 
Nonaccrual loans declined $7.2 million, or 30.4%, due primarily to ongoing collection efforts, including the partial payoff of two large commercial and industrial loan relationships, the payoff of one non-owner occupied CRE relationship, and the transfer of two commercial business loan relationships back to accruing status. The Bank also sold a pool of 14 nonaccrual loans during the period ending March 31, 2022 totaling $1.0 million.

36

Allowance for Credit Losses on Loans Overview
The following table provides information regarding our ACL on loans for the periods indicated:
At or For the Three Months Ended March 31,
20222021Change% Change
(Dollars in thousands)
ACL on loans at the end of period$40,333 $64,225 $(23,892)(37.2)%
Credit quality ratios:
ACL on loans to loans receivable1.06 %1.40 %(0.34)%(24.3)%
ACL on loans to loans receivable, excluding SBA PPP loans (1)
1.07 1.73 (0.66)(38.2)
ACL on loans to nonaccrual loans244.04 %121.48 %122.56 %100.9 %
Net recoveries494 175 319 182.3 
Average loans receivable, net during the period (2)
3,836,029 4,490,499 (654,470)(14.6)
Net recoveries on loans to average loans receivable, net (3)
(0.05)%(0.02)%(0.03)%150.0 %
(1) The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. See "Reconciliations of Non-GAAP Measures" section below.
(2) Average loan receivable, net includes loans held for sale.
(3) Annualized.
The ACL on loans decreased during the three months ended March 31, 2022 due primarily to a reduction of loans individually evaluated for losses and their related ACL as well as changes in the loan mix and continued improvement in forecasted economic indicators used to calculate credit losses.
The following table presents the ACL on loans by loan portfolio segment at the indicated dates:
 March 31, 2022December 31, 2021
 ACL on loans
% of
Total (1)
ACL on loans
% of
Total (1)
Change% Change
 (Dollars in thousands)
Commercial business$31,932 82.7 %$33,049 83.7 %$(1,117)(3.4)%
Residential real estate1,803 5.8 1,409 4.3 394 28.0 
Real estate construction and land development4,299 5.8 5,276 5.9 (977)(18.5)
Consumer2,299 5.7 2,627 6.1 (328)(12.5)
Total ACL on loans$40,333 100.0 %$42,361 100.0 %$(2,028)(4.8)%
(1) Represents the percent of loans receivable by loan category to loans receivable.

Deposits Overview
The following table summarizes the Company's deposits at the dates indicated:
March 31, 2022December 31, 2021
Balance% of TotalBalance% of TotalChange% Change
(Dollars in thousands)
Noninterest demand deposits$2,393,972 36.9 %$2,343,909 36.7 %$50,063 2.1 %
Interest bearing demand deposits2,018,032 31.1 1,946,605 30.4 71,427 3.7 
Money market accounts1,099,539 16.9 1,120,174 17.5 (20,635)(1.8)
Savings accounts651,541 10.0 640,763 10.0 10,778 1.7 
Total non-maturity deposits6,163,084 94.9 6,051,451 94.6 111,633 1.8 
Certificates of deposit328,416 5.1 342,839 5.4 (14,423)(4.2)
Total deposits$6,491,500 100.0 %$6,394,290 100.0 %$97,210 1.5 %
37

Stockholders' Equity Overview
The Company’s stockholders' equity to assets ratio was 11.0% and 11.5% at March 31, 2022 and December 31, 2021, respectively, and decreased due primarily to a decrease in accumulated other comprehensive income of $43.6 million following an increase in market interest rates during the first quarter, which negatively impacted the fair value of our investment securities available for sale at March 31, 2022.
The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. On April 20, 2022, the Company’s board of directors declared a regular quarterly dividend of $0.21 per common share payable on May 18, 2022 to shareholders of record on May 4, 2022.

Regulatory Requirements Overview
The Company is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Heritage Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the unaudited Condensed Consolidated Financial Statements. Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Management believes that as of March 31, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of March 31, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories. The following table presents the actual capital ratios of the Company and the Bank at the periods indicated:
 CompanyHeritage Bank
 March 31, 2022December 31, 2021March 31, 2022December 31, 2021
Common equity Tier 1 capital to risk-weighted assets13.4 %13.5 %13.7 %13.8 %
Tier 1 leverage capital to average assets8.8 8.7 8.7 8.6 
Tier 1 capital to risk-weighted assets13.9 13.9 13.7 13.8 
Total capital to risk-weighted assets14.7 14.8 14.6 14.7 
Capital conservation buffer6.7 6.8 6.6 6.7 
As of both March 31, 2022 and December 31, 2021, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allow the Bank the option to delay for two years until December 31, 2021 an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.

Liquidity and Capital Resources
We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has been to acquire non-maturity deposits from our retail accounts, 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. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position.
Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our liquidity and capital resources since the information disclosed in our 2021 Annual Form 10-K. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

38

Critical Accounting Policies
Our critical accounting policies are described in detail in the "Critical Accounting Policies" section within Item 7 of our 2021 Annual Form the Form 10-K. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's critical accounting policies include estimates of the ACL on investment securities, the ACL on loans, the ACL on unfunded commitments and goodwill. There have been no material changes in these policies during the three months ended March 31, 2022.

Reconciliations of Non-GAAP Measures
This Form 10-Q contains certain financial measures not presented in accordance with GAAP in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this Form 10-Q because it believes they provide useful and comparative information to assess trends in the Company’s performance and asset quality and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.
The Company believes presenting loan yield excluding the effect of discount accretion on purchased loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet. Incremental accretion on purchased loans represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of ASU 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that are anticipated to substantially decrease within a short time frame.
Three Months Ended
March 31,
 20222021
(Dollars in thousands)
Loan yield, excluding SBA PPP Loans and Incremental Accretion on Purchased Loans, annualized:
Interest and fees on loans (GAAP)$41,025 $49,524 
Exclude interest and fees on SBA PPP loans(3,081)(9,136)
Exclude incremental accretion on purchased loans(584)(1,075)
Adjusted interest and fees on loans (non-GAAP)$37,360 $39,313 
Average loans receivable, net (GAAP)$3,773,325 $4,490,499 
Exclude average SBA PPP loans(109,594)(832,148)
Adjusted average loans receivable, net (non-GAAP)$3,663,731 $3,658,351 
Loan yield, annualized (GAAP)4.41 %4.47 %
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP)4.14 %4.36 %
39

The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans is significant to the loan portfolio, and since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for SBA PPP loans.
March 31,
2022		December 31,
2021
(Dollars in thousands)
ACL on Loans to Loans Receivable, excluding SBA PPP Loans:
Allowance for credit losses on loans (GAAP)$40,333 $42,361 
Loans receivable (GAAP)$3,821,178 $3,815,662 
Exclude SBA PPP loans64,962 145,840 
Loans receivable, excluding SBA PPP (non-GAAP)$3,756,216 $3,669,822 
ACL on loans to loans receivable (GAAP)1.06 %1.11 %
ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP)1.07 %1.15 %

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2021 Annual Form 10-K. 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.

ITEM 4.     CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and the Company’s Disclosure Committee as of the end of the period covered by this quarterly report. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of March 31, 2022 are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the three months ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.    OTHER INFORMATION
ITEM 1.     LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material pending legal proceedings other than ordinary routine litigation incidental to the business of the Bank.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in Item 1A of the Company’s 2021 Annual Form 10-K.
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
40

(c) Repurchase Plans
The following table provides information about repurchases of common stock by the Company during the three months ended March 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)
January 1, 2022— January 31, 2022— $— 9,886,773 738,304 
February 1, 2022— February 28, 202230,602 24.84 9,917,332 707,745 
March 1, 2022— March 31, 202274,488 25.41 9,967,332 657,745 
Total105,090 $25.24 
(1)Of the common shares repurchased by the Company between January 1, 2022 and March 31, 2022, 24,531 shares represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units.
(2)On March 12, 2020 the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan.
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4.     MINE SAFETY DISCLOSURES
Not applicable
ITEM 5.    OTHER INFORMATION
None
ITEM 6.     EXHIBITS
Incorporated by Reference
Exhibit No.
Description of ExhibitFormExhibitFiling Date/Period End Date
31.1
31.2
32.1
101.INS 
XBRL Instance Document (1)
101.SCH
XBRL Taxonomy Extension Schema Document (1)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)
(1) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HERITAGE FINANCIAL CORPORATION
Date:
May 4, 2022/S/ JEFFREY J. DEUEL
Jeffrey J. Deuel
President and Chief Executive Officer
Date:
May 4, 2022/S/ DONALD J. HINSON
Donald J. Hinson
Executive Vice President and Chief Financial Officer
41

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