UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, ~~2021~~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,

Olympia

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 October ~~29, 2021,~~31, 2022, there were ~~35,166,599~~35,104,248 shares of the registrant's common stock, no par value per share, outstanding.

Table of Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

September 30, ~~2021~~2022

TABLE OF CONTENTS


				Page
GLOSSARY OF ACRONYMS, ABBREVIATIONS AND TERMS			3
CAUTIONARY NOTE REGARDING ~~FORWARD LOOKING~~FORWARD-LOOKING STATEMENTS			3

PART I.	FINANCIAL INFORMATION		5
ITEM 1.	FINANCIAL STATEMENTS		5
			CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF SEPTEMBER 30, ~~2021~~2022 AND DECEMBER 31, ~~2020~~2021		5
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022 AND ~~2020~~2021		6
			CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022 AND ~~2020~~2021		7
		CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022 AND ~~2020~~2021		8
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022 AND ~~2020~~2021		10
			NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		12
		NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	12
		NOTE 2.	INVESTMENT SECURITIES	13
		NOTE 3.	LOANS RECEIVABLE	1615
		NOTE 4.	ALLOWANCE FOR CREDIT LOSSES ON LOANS	2523

		NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	2825



		NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	2825
		NOTE 7.	STOCKHOLDERS’ EQUITY	2926
		NOTE 8.	FAIR VALUE MEASUREMENTS	3127
		NOTE 9.	CASH RESTRICTION	3532
		NOTE 10.	COMMITMENTS AND CONTINGENCIES	3532


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3632
	OVERVIEW		3632
	~~EARNINGS SUMMARY~~RESULTS OF OPERATIONS		3733
		AVERAGE BALANCES, YIELDS AND RATES PAID	33
		NET INTEREST INCOME AND ~~NET INTEREST~~ MARGIN OVERVIEW	3734
		PROVISION FOR CREDIT LOSSES OVERVIEW	4037
		NONINTEREST INCOME OVERVIEW	4138
		NONINTEREST EXPENSE OVERVIEW	4239
		INCOME TAX EXPENSE OVERVIEW	4340
	~~CONSOLIDATED~~ FINANCIAL CONDITION OVERVIEW		40
		INVESTMENT ACTIVITIES OVERVIEW	41
		LOAN PORTFOLIO OVERVIEW	42
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	43
		DEPOSITS OVERVIEW	44
		STOCKHOLDERS' EQUITY OVERVIEW	44
	~~LENDING ACTIVITIES~~REGULATORY REQUIREMENTS OVERVIEW		44
	~~NONPERFORMING ASSETS~~LIQUIDITY AND ~~CREDIT QUALITY METRICS~~CAPITAL RESOURCES		4645
	~~ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ON LOANS~~CRITICAL ACCOUNTING POLICIES		47
	~~DEPOSITS AND OTHER BORROWINGS OVERVIEW~~			48
	~~LIQUIDITY AND CASH FLOWS~~			48
	~~STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS OVERVIEW~~			4945
	RECONCILIATIONS OF NON-GAAP MEASURES		5045
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		5146
ITEM 4.	CONTROLS AND PROCEDURES		51
~~PART II.~~	~~OTHER INFORMATION~~			52
~~ITEM 1.~~	~~LEGAL PROCEEDINGS~~			52
~~ITEM 1A.~~	~~RISK FACTORS~~			5247

Table of Contents


PART II.	OTHER INFORMATION	47
ITEM 1.	LEGAL PROCEEDINGS	47
ITEM 1A.	RISK FACTORS	47
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5247
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	5247
ITEM 4.	MINE SAFETY DISCLOSURES	5247
ITEM 5.	OTHER INFORMATION	5247
ITEM 6.	EXHIBITS	5348
	SIGNATURES	5348

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.


~~2020~~2021 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021
ACL			Allowance for credit losses
AOCI			Accumulated other comprehensive income (loss), net
~~ASC~~			~~Accounting Standards Codification~~
ASU			Accounting Standards Update
Bank			Heritage Bank

~~CA Act~~			~~Consolidated Appropriations Act of 2021~~
~~CARES Act~~			~~Coronavirus Aid, Relief, and Economic Security Act of 2020~~
CECL			Current Expected Credit Loss
~~CECL Adoption~~			~~Company's adoption on January 1, 2020 of FASB ASU 2016-13 Financial Instruments -~~ ~~Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology~~
CMO			Collateralized Mortgage Obligation
Company			Heritage Financial Corporation
~~COVID Modifications~~			~~Loans with modifications made in compliance with the CARES Act, as amended, and related regulatory guidance~~
COVID-19 Pandemic			Coronavirus Disease of 2019 pandemic
CRE			Commercial real estate
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
Federal Reserve			Board of Governors of the Federal Reserve System
Federal Reserve Bank			Federal Reserve Bank of San Francisco
~~FHLB~~			~~Federal Home Loan Bank of Des Moines~~
GAAP			U.S. Generally Accepted Accounting Principles
LIBOR			London Interbank Offering Rate
LIHTC			Low-Income Housing Tax Credit
MBS			Mortgage-backed security


PPP			Paycheck Protection Program


SBA			Small Business Administration
SEC			Securities and Exchange Commission

SM			Special Mention
SS			Substandard
TDR			Troubled debt restructured

CAUTIONARY NOTE REGARDING ~~FORWARD LOOKING~~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

~~Table of Contents~~

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

Table of Contents

any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price ~~performance.~~performance including, but not limited to:

~~The COVID-19 pandemic is adversely affecting us,~~•potential adverse impacts to economic conditions in our ~~customers, counterparties, employees, and third-party service providers, and~~local market areas, other markets where the ~~ultimate extent~~Company has lending relationships, or other aspects of the ~~impacts on our~~Company’s business ~~financial position, results of~~ operations ~~liquidity, and prospects is uncertain. Deterioration in general business and economic conditions, including increases in unemployment rates,~~ or ~~turbulence in domestic or global~~ financial markets, could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practicesincluding, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or ~~in response~~slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal responses to the COVID-19 pandemic, ~~could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to:~~including the possibility of new COVID-19 variants

•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~~the impact of repricing and ~~may not be familiar;~~competitors' pricing initiatives on loan and deposit products;

•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

•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;~~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 ~~Condensed Consolidated Statements of Financial Condition;~~loans;

•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;

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

•increased competitive pressures among financial service companies;

•changes in consumer spending, borrowing and savings habits;

•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

•the quality and composition of our securities portfolio and the impact of any 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~~methods;

•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and ~~as a result~~other public health crises, acts of ~~the CARES Act~~war or terrorism, and ~~the CA Act;~~other external events on our business; and

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, ~~including as a result of the CARES Act, CA Act and recent COVID-19 pandemic vaccination efforts,~~ and the other risks detailed from time to time in our filings with the SEC including our ~~2020~~2021 Annual Form 10-K.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(In thousands, except shares)


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Cash on hand and in banks	Cash on hand and in banks	$	86,954	$	91,918	Cash on hand and in banks	$	100,428	$	61,377
Interest earning deposits	Interest earning deposits	1,547,785		651,404		Interest earning deposits	306,896		1,661,915
Cash and cash equivalents	Cash and cash equivalents	1,634,739		743,322		Cash and cash equivalents	407,324		1,723,292
Investment securities available for sale, at fair value, net (amortized cost of $744,336 and $770,195, respectively)		761,526		802,163
Investment securities held to maturity, at amortized cost, net (fair value of $307,330 and $0, respectively)		311,074		—
Investment securities available for sale, at fair value, net (amortized cost of $1,491,440 and $883,832, respectively)						Investment securities available for sale, at fair value, net (amortized cost of $1,491,440 and $883,832, respectively)	1,356,142		894,335
Investment securities held to maturity, at amortized cost, net (fair value of $677,335 and $376,331, respectively)						Investment securities held to maturity, at amortized cost, net (fair value of $677,335 and $376,331, respectively)	773,319		383,393
Total investment securities	Total investment securities	1,072,600		802,163		Total investment securities	2,129,461		1,277,728
Loans held for sale	Loans held for sale	2,636		4,932		Loans held for sale	—		1,476
Loans receivable	Loans receivable	3,953,884		4,468,647		Loans receivable	4,001,295		3,815,662
Allowance for credit losses on loans	Allowance for credit losses on loans	(48,317)		(70,185)		Allowance for credit losses on loans	(42,089)		(42,361)
Loans receivable, net	Loans receivable, net	3,905,567		4,398,462		Loans receivable, net	3,959,206		3,773,301
Other real estate owned		—		—

Premises and equipment, net	Premises and equipment, net	79,958		85,452		Premises and equipment, net	76,683		79,370
Federal Home Loan Bank stock, at cost	Federal Home Loan Bank stock, at cost	7,933		6,661		Federal Home Loan Bank stock, at cost	8,916		7,933
Bank owned life insurance	Bank owned life insurance	109,634		107,580		Bank owned life insurance	121,369		120,196
Accrued interest receivable	Accrued interest receivable	14,802		19,418		Accrued interest receivable	17,812		14,657
Prepaid expenses and other assets	Prepaid expenses and other assets	179,494		193,301		Prepaid expenses and other assets	230,704		183,543
Other intangible assets, net	Other intangible assets, net	10,736		13,088		Other intangible assets, net	7,898		9,977
Goodwill	Goodwill	240,939		240,939		Goodwill	240,939		240,939
Total assets	Total assets	$	7,259,038	$	6,615,318	Total assets	$	7,200,312	$	7,432,412
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	Deposits	$	6,215,558	$	5,597,990	Deposits	$	6,214,964	$	6,394,290

Deposits held for sale						Deposits held for sale	22,771		—
Total deposits						Total deposits	6,237,735		6,394,290
Federal Home Loan Bank advances						Federal Home Loan Bank advances	—		—
Junior subordinated debentures	Junior subordinated debentures	21,107		20,887		Junior subordinated debentures	21,399		21,180
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	44,096		35,683		Securities sold under agreement to repurchase	40,449		50,839
Accrued expenses and other liabilities	Accrued expenses and other liabilities	129,873		140,319		Accrued expenses and other liabilities	124,027		111,671
Total liabilities	Total liabilities	6,410,634		5,794,879		Total liabilities	6,423,610		6,577,980
Commitments and contingencies (Note 10)						Commitments and contingencies (Note 10)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively	Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively	—		—		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; 35,166,599 and 35,912,243 shares issued and outstanding, respectively		552,385		571,021
Common stock, no par value, 50,000,000 shares authorized; 35,104,248 and 35,105,779 shares issued and outstanding, respectively						Common stock, no par value, 50,000,000 shares authorized; 35,104,248 and 35,105,779 shares issued and outstanding, respectively	551,419		551,798
Retained earnings	Retained earnings	281,285		224,400		Retained earnings	330,284		293,238
Accumulated other comprehensive income, net		14,734		25,018
Accumulated other comprehensive (loss) income, net						Accumulated other comprehensive (loss) income, net	(105,001)		9,396
Total stockholders’ equity	Total stockholders’ equity	848,404		820,439		Total stockholders’ equity	776,702		854,432
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	7,259,038	$	6,615,318	Total liabilities and stockholders’ equity	$	7,200,312	$	7,432,412

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share amounts and shares outstanding)

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
INTEREST INCOME:
Interest and fees on loans $ 46,863 $ 47,647 $ 147,137 $ 142,328
Taxable interest on investment securities 4,711 3,865 12,295 14,068
Nontaxable interest on investment securities 931 953 2,836 2,686
Interest on interest earning deposits 537 98 975 561
Total interest income 53,042 52,563 163,243 159,643
INTEREST EXPENSE:
Deposits 1,444 2,639 4,696 10,272
Junior subordinated debentures 184 196 557 699
Other borrowings 36 50 109 130
Total interest expense 1,664 2,885 5,362 11,101
Net interest income 51,378 49,678 157,881 148,542
(Reversal of) provision for credit losses (3,149) 2,730 (24,335) 39,239
Net interest income after (reversal of) provision for credit losses 54,527 46,948 182,216 109,303
NONINTEREST INCOME:
Service charges and other fees 4,566 4,039 12,988 12,015
Gain on sale of investment securities, net — 40 29 1,463
Gain on sale of loans, net 765 1,443 3,138 3,125
Interest rate swap fees 126 396 487 1,461
Bank owned life insurance income 647 909 2,020 2,439
Other income 2,124 1,383 6,114 5,441
Total noninterest income 8,228 8,210 24,776 25,944
NONINTEREST EXPENSE:
Compensation and employee benefits 22,176 21,416 66,725 65,849
Occupancy and equipment 4,373 4,348 12,918 13,247
Data processing 4,029 3,691 11,839 10,735
Marketing 775 755 2,336 2,317
Professional services 816 1,086 3,249 4,632
State/municipal business and use taxes 1,071 964 3,034 2,626
Federal deposit insurance premium 550 848 1,478 1,086
Other real estate owned, net — — — (145)
Amortization of intangible assets 758 860 2,352 2,666
Other expense 2,618 2,077 6,873 7,365
Total noninterest expense 37,166 36,045 110,804 110,378
Income before income taxes 25,589 19,113 96,188 24,869
Income tax expense 4,997 2,477 17,550 2,181
Net income $ 20,592 $ 16,636 $ 78,638 $ 22,688
Basic earnings per share $ 0.58 $ 0.46 $ 2.19 $ 0.63
Diluted earnings per share $ 0.58 $ 0.46 $ 2.18 $ 0.63
Dividends declared per share $ 0.20 $ 0.20 $ 0.60 $ 0.60
Average number of basic shares outstanding 35,644,192 35,908,845 35,854,258 36,049,369
Average number of diluted shares outstanding 35,929,518 35,988,734 36,152,052 36,193,615


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
INTEREST INCOME:
Interest and fees on loans	$	43,847	$	46,863	$	125,762	$	147,137
Taxable interest on investment securities	12,362		4,711		25,972		12,295
Nontaxable interest on investment securities	892		931		2,645		2,836
Interest on interest earning deposits	4,009		537		7,057		975
Total interest income	61,110		53,042		161,436		163,243
INTEREST EXPENSE:
Deposits	1,478		1,444		4,315		4,696
Junior subordinated debentures	312		184		745		557
Other borrowings	34		36		98		109
Total interest expense	1,824		1,664		5,158		5,362
Net interest income	59,286		51,378		156,278		157,881
Provision for (reversal of) credit losses	1,945		(3,149)		(2,836)		(24,335)
Net interest income after provision for (reversal of) credit losses	57,341		54,527		159,114		182,216
NONINTEREST INCOME:
Service charges and other fees	2,688		2,400		7,739		6,728
Card revenue	2,365		2,150		6,774		6,216
Gain on sale of investment securities, net	—		—		—		29
Gain on sale of loans, net	133		765		593		3,138
Interest rate swap fees	78		126		383		487
Bank owned life insurance income	723		647		3,182		2,020
Gain on sale of other assets, net	265		942		469		1,688
Other income	1,201		1,198		3,867		4,470
Total noninterest income	7,453		8,228		23,007		24,776
NONINTEREST EXPENSE:
Compensation and employee benefits	24,206		21,963		67,236		65,967
Occupancy and equipment	4,422		4,373		12,924		12,918
Data processing	4,185		4,029		12,431		11,839
Marketing	358		486		968		1,566
Professional services	639		776		1,867		3,083
State/municipal business and use taxes	963		1,071		2,626		3,034
Federal deposit insurance premium	500		550		1,525		1,478

Amortization of intangible assets	671		758		2,079		2,352
Other expense	3,203		3,160		8,918		8,567
Total noninterest expense	39,147		37,166		110,574		110,804
Income before income taxes	25,647		25,589		71,547		96,188
Income tax expense	4,657		4,997		12,216		17,550
Net income	$	20,990	$	20,592	$	59,331	$	78,638
Basic earnings per share	$	0.60	$	0.58	$	1.69	$	2.19
Diluted earnings per share	$	0.59	$	0.58	$	1.67	$	2.18
Dividends declared per share	$	0.21	$	0.20	$	0.63	$	0.60
Average number of basic shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258
Average number of diluted shares outstanding	35,468,890		35,929,518		35,438,672		36,152,052

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

(In thousands)

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Net income $ 20,592 $ 16,636 $ 78,638 $ 22,688
Change in fair value of investment securities available for sale, net of tax of $(362), $(206), $(2,844) and $4,437, respectively (1,305) (741) (10,239) 15,975
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $0, $(8), $(6) and $(318), respectively — (32) (23) (1,145)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(6), $0, $(6) and $0, respectively (22) — (22) —
Other comprehensive (loss) income (1,327) (773) (10,284) 14,830
Comprehensive income $ 19,265 $ 15,863 $ 68,354 $ 37,518


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net Income	$	20,990	$	20,592	$	59,331	$	78,638
Change in fair value of investment securities available for sale, net of tax of $(12,027), $(362), $(31,778) and $(2,844), respectively	(43,143)		(1,305)		(114,022)		(10,239)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(20), $(6), $(103) and $(6), respectively	(75)		(22)		(375)		(22)
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $0, $0, $0 and $(6), respectively	—		—		—		(23)
Other comprehensive loss	(43,218)		(1,327)		(114,397)		(10,284)
Comprehensive (loss) income	$	(22,228)	$	19,265	$	(55,066)	$	68,354

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

Table of Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(In thousands, except shares and per share amounts)

Three Months Ended September 30, 2021
Number of
common
shares Common
stock Retained
earnings Accumulated other comprehensive income (loss), net Total
stockholders’
equity
Balance at June 30, 2021 36,006 $ 572,060 $ 267,863 $ 16,061 $ 855,984
Restricted stock units vested 2 — — — —
Stock-based compensation expense — 966 — — 966
Common stock repurchased (841) (20,641) — — (20,641)
Net income — — 20,592 20,592
Other comprehensive loss, net of tax — — — (1,327) (1,327)
Cash dividends declared on common stock ($0.20 per share) — — (7,170) — (7,170)
Balance at September 30, 2021 35,167 $ 552,385 $ 281,285 $ 14,734 $ 848,404


		Nine Months Ended September 30, 2021										Three Months Ended September 30, 2022
		Number of common shares	Common stock		Retained earnings		Accumulated other comprehensive income (loss), net		Total stockholders’ equity			Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2020		35,912	$	571,021	$	224,400	$	25,018	$	820,439
Balance at June 30, 2022											Balance at June 30, 2022	35,103,929	$	550,417	$	316,732	$	(61,783)	$	805,366

Restricted stock units vested	Restricted stock units vested	122	—		—		—		—		Restricted stock units vested	419	—		—		—		—

Stock-based compensation expense	Stock-based compensation expense	—	2,762		—		—		2,762		Stock-based compensation expense	—	1,004		—		—		1,004
Common stock repurchased	Common stock repurchased	(867)	(21,398)		—		—		(21,398)		Common stock repurchased	(100)	(2)		—		—		(2)
Net income	Net income	—	—		78,638		—		78,638		Net income	—	—		20,990		—		20,990
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(10,284)		(10,284)		Other comprehensive loss, net of tax	—	—		—		(43,218)		(43,218)

Cash dividends declared on common stock ($0.60 per share)		—	—		(21,753)		—		(21,753)
Balance at September 30, 2021		35,167	$	552,385	$	281,285	$	14,734	$	848,404
Cash dividends declared on common stock ($0.21 per share)											Cash dividends declared on common stock ($0.21 per share)	—	—		(7,438)		—		(7,438)
Balance at September 30, 2022											Balance at September 30, 2022	35,104,248	$	551,419	$	330,284	$	(105,001)	$	776,702


		Three Months Ended September 30, 2020										Nine Months Ended September 30, 2022
		Number of common shares	Common stock		Retained earnings		Accumulated other comprehensive income (loss), net		Total stockholders’ equity			Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at June 30, 2020		35,909	$	569,329	$	198,342	$	25,981	$	793,652
Balance at December 31, 2021											Balance at December 31, 2021	35,105,779	$	551,798	$	293,238	$	9,396	$	854,432

Restricted stock units vested	Restricted stock units vested	2	—		—		—		—		Restricted stock units vested	124,839	—		—		—		—

Stock-based compensation expense	Stock-based compensation expense	—	848		—		—		848		Stock-based compensation expense	—	2,797		—		—		2,797
Common stock repurchased	Common stock repurchased	(1)	(7)		—		—		(7)		Common stock repurchased	(126,370)	(3,176)		—		—		(3,176)
Net income	Net income	—	—		16,636				16,636		Net income	—	—		59,331		—		59,331
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(773)		(773)		Other comprehensive loss, net of tax	—	—		—		(114,397)		(114,397)

Cash dividends declared on common stock ($0.20 per share)		—	—		(7,227)		—		(7,227)
Balance at September 30, 2020		35,910	$	570,170	$	207,751	$	25,208	$	803,129
Cash dividends declared on common stock ($0.63 per share)											Cash dividends declared on common stock ($0.63 per share)	—	—		(22,285)		—		(22,285)
Balance at September 30, 2022											Balance at September 30, 2022	35,104,248	$	551,419	$	330,284	$	(105,001)	$	776,702


	Three Months Ended September 30, 2021
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at June 30, 2021	36,006,560	$	572,060	$	267,863	$	16,061	$	855,984

Restricted stock units vested	1,347	—		—		—		—
Stock-based compensation expense	—	966		—		—		966
Common stock repurchased	(841,308)	(20,641)		—		—		(20,641)
Net income	—	—		20,592		—		20,592
Other comprehensive loss, net of tax	—	—		—		(1,327)		(1,327)

Cash dividends declared on common stock ($0.20 per share)	—	—		(7,170)		—		(7,170)
Balance at September 30, 2021	35,166,599	$	552,385	$	281,285	$	14,734	$	848,404

Table of Contents

Nine Months Ended September 30, 2020
Number of
common
shares Common
stock Retained
earnings Accumulated other comprehensive income, net Total
stockholders’
equity
Balance at December 31, 2019 36,619 $ 586,459 $ 212,474 $ 10,378 $ 809,311
Cumulative effect from change in accounting policy (1)
— — (5,615) — (5,615)
Restricted stock units vested 108 — — — —
Exercise of stock options 8 122 — — 122
Stock-based compensation expense — 2,694 — — 2,694
Common stock repurchased (825) (19,105) — — (19,105)
Net income — — 22,688 — 22,688
Other comprehensive income, net of tax — — — 14,830 14,830
Cash dividends declared on common stock ($0.60 per share) — — (21,796) — (21,796)
Balance at September 30, 2020 35,910 $ 570,170 $ 207,751 $ 25,208 $ 803,129

~~(1)~~ ~~Effective January 1, 2020, Company adopted ASU 2016-13,~~ ~~Financial Instruments - Credit Losses~~.


	Nine Months Ended September 30, 2021
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2020	35,912,243	$	571,021	$	224,400	$	25,018	$	820,439

Restricted stock units vested	121,467	—		—		—		—
Stock-based compensation expense	—	2,762		—		—		2,762
Common stock repurchased	(867,111)	(21,398)		—		—		(21,398)
Net income	—	—		78,638		—		78,638
Other comprehensive loss, net of tax	—	—		—		(10,284)		(10,284)

Cash dividends declared on common stock ($0.60 per share)	—	—		(21,753)		—		(21,753)
Balance at September 30, 2021	35,166,599	$	552,385	$	281,285	$	14,734	$	848,404

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

Table of Contents

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2021		2020			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	78,638	$	22,688	Net income	$	59,331	$	78,638
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	Depreciation, amortization and accretion	(18,356)		(5,926)		Depreciation, amortization and accretion	(620)		(18,356)
(Reversal of) provision for credit losses		(24,335)		39,239
Net change in accrued interest receivable, prepaid expenses and other assets, and accrued expenses and other liabilities		11,043		(12,298)
Reversal of provision for credit losses						Reversal of provision for credit losses	(2,836)		(24,335)
Stock-based compensation expense	Stock-based compensation expense	2,762		2,694		Stock-based compensation expense	2,797		2,762
Amortization of intangible assets	Amortization of intangible assets	2,352		2,666		Amortization of intangible assets	2,079		2,352
Origination of mortgage loans held for sale	Origination of mortgage loans held for sale	(74,325)		(93,422)		Origination of mortgage loans held for sale	(15,190)		(74,325)
Proceeds from sale of mortgage loans held for sale	Proceeds from sale of mortgage loans held for sale	79,759		93,830		Proceeds from sale of mortgage loans held for sale	17,259		79,759
Bank owned life insurance income	Bank owned life insurance income	(2,020)		(2,439)		Bank owned life insurance income	(3,182)		(2,020)

Valuation adjustment on interest rate swaps	Valuation adjustment on interest rate swaps	(296)		—		Valuation adjustment on interest rate swaps	(67)		(296)
Gain on sale of other real estate owned, net		—		(179)
Gain on sale of mortgage loans held for sale, net	Gain on sale of mortgage loans held for sale, net	(3,138)		(3,125)		Gain on sale of mortgage loans held for sale, net	(593)		(3,138)
Gain on sale of investment securities available for sale, net	Gain on sale of investment securities available for sale, net	(29)		(1,463)		Gain on sale of investment securities available for sale, net	—		(29)

Gain on sale of assets held for sale	Gain on sale of assets held for sale	(1,691)		(9)		Gain on sale of assets held for sale	(403)		(1,691)
Impairment of assets held for sale		38		—
Impairment of right of use asset		160		102
Loss (gain) on sale or write-off of premises and equipment, net		91		(25)
Other						Other	3,865		11,332
Net cash provided by operating activities	Net cash provided by operating activities	50,653		42,333		Net cash provided by operating activities	62,440		50,653
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Loan repayments (originations), net		555,784		(890,667)
Loan originations and purchases, net of payments						Loan originations and purchases, net of payments	(176,700)		555,784
Maturities and repayments of investment securities available for sale	Maturities and repayments of investment securities available for sale	200,242		207,955		Maturities and repayments of investment securities available for sale	132,854		200,242
Maturities and repayments of investment securities held to maturity	Maturities and repayments of investment securities held to maturity	423		—		Maturities and repayments of investment securities held to maturity	21,620		423
Purchase of investment securities available for sale	Purchase of investment securities available for sale	(421,566)		(117,456)		Purchase of investment securities available for sale	(742,801)		(421,566)
Purchase of investment securities held to maturity	Purchase of investment securities held to maturity	(66,821)		—		Purchase of investment securities held to maturity	(412,835)		(66,821)
Proceeds from sales of investment securities available for sale		1,248		44,970
Purchase of premises and equipment	Purchase of premises and equipment	(2,148)		(6,136)		Purchase of premises and equipment	(2,295)		(2,148)

Proceeds from sales of other real estate owned		—		1,290
Proceeds from sales of assets held for sale		5,642		394
Proceeds from redemption of Federal Home Loan Bank stock		—		2,560
Purchases of Federal Home Loan Bank stock		(1,272)		(2,844)
Proceeds from sales of premises and equipment		12		53
Purchases of bank owned life insurance	Purchases of bank owned life insurance	(104)		(3,580)		Purchases of bank owned life insurance	(105)		(104)
Proceeds from bank owned life insurance death benefit	Proceeds from bank owned life insurance death benefit	—		1,324		Proceeds from bank owned life insurance death benefit	2,114		—
Purchases of Federal Home Loan Bank stock						Purchases of Federal Home Loan Bank stock	(985)		(1,272)

Proceeds from sales of investment securities available for sale						Proceeds from sales of investment securities available for sale	—		1,248
Proceeds from redemption of Federal Home Loan Bank stock						Proceeds from redemption of Federal Home Loan Bank stock	2		—
Proceeds from sales of assets held for sale						Proceeds from sales of assets held for sale	2,102		5,642
Proceeds from sales of premises and equipment						Proceeds from sales of premises and equipment	106		12
Capital contributions to low-income housing tax credit partnerships						Capital contributions to low-income housing tax credit partnerships	(9,245)		(23,349)
Cash received from return of New Market Tax Credit equity method investment	Cash received from return of New Market Tax Credit equity method investment	9,642		—		Cash received from return of New Market Tax Credit equity method investment	—		9,642
Capital contributions to low-income housing tax credit partnerships		(23,349)		(7,109)

Net cash provided (used) by investing activities		257,733		(769,246)

Net cash (used) provided by investing activities						Net cash (used) provided by investing activities	(1,186,168)		257,733
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net increase in deposits		617,568		1,106,372
Net (decrease) increase in deposits						Net (decrease) increase in deposits	(156,555)		617,568
Federal Home Loan Bank advances	Federal Home Loan Bank advances	10		19,000		Federal Home Loan Bank advances	50		10
Repayment of Federal Home Loan Bank advances	Repayment of Federal Home Loan Bank advances	(10)		(19,000)		Repayment of Federal Home Loan Bank advances	(50)		(10)
Common stock cash dividends paid	Common stock cash dividends paid	(21,552)		(21,676)		Common stock cash dividends paid	(22,119)		(21,552)
Net increase in securities sold under agreement to repurchase		8,413		8,874
Net (decrease) increase in securities sold under agreement to repurchase						Net (decrease) increase in securities sold under agreement to repurchase	(10,390)		8,413
Repurchase of common stock						Repurchase of common stock	(3,176)		(21,398)
Net cash (used) provided by financing activities						Net cash (used) provided by financing activities	(192,240)		583,031
Net (decrease) increase in cash and cash equivalents						Net (decrease) increase in cash and cash equivalents	(1,315,968)		891,417
Cash and cash equivalents at beginning of period						Cash and cash equivalents at beginning of period	1,723,292		743,322
Cash and cash equivalents at end of period						Cash and cash equivalents at end of period	$	407,324	$	1,634,739

Table of Contents

Nine Months Ended
September 30,
2021 2020
Proceeds from exercise of stock options — 122
Repurchase of common stock (21,398) (19,105)
Net cash provided by financing activities 583,031 1,074,587
Net increase in cash and cash equivalents 891,417 347,674
Cash and cash equivalents at beginning of period 743,322 228,568
Cash and cash equivalents at end of period $ 1,634,739 $ 576,242
Supplemental disclosures of cash flow information:
Cash paid for interest $ 5,162 $ 10,972
Cash paid for income taxes, net of refunds 10,944 8,279
Supplemental non-cash disclosures of cash flow information:
Transfers of loans receivable to other real estate owned $ — $ 270
Transfer of investment securities available for sale to held to maturity 244,778 —
Loans received from return of New Market Tax Credit equity method investment 15,596 —
Transfers of properties classified as held for sale to prepaid expenses and other assets from premises and equipment, net 3,556 —
Investment in low-income housing tax credit partnership and related funding commitment 17,458 10,237
Cumulative effect from change in accounting policy (1)
— 7,175
Right of use assets obtained in exchange for new operating lease liabilities 12,134 273

~~(1)~~ ~~Effective January 1, 2020, the Company adopted ASU 2016-13,~~ ~~Financial Instruments - Credit Losses~~.


	Nine Months Ended September 30,
	2022		2021

Supplemental disclosures of cash flow information:
Cash paid for interest	$	4,939	$	5,162
Cash paid for income taxes, net of refunds	1,987		10,944

Supplemental non-cash disclosures of cash flow information:

Transfer of investment securities available for sale to held to maturity	—		244,778
Investment in LIHTC partnership and related funding commitment	10,728		17,458
Right of use assets obtained in exchange for new operating lease liabilities	2,869		12,134

Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net	910		3,556
Loans received from return of New Market Tax Credit equity method investment	—		15,596


Transfer of deposits to deposits held for sale	22,771		—

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

Table of Contents

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, ~~Heritage~~the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 5350 branch offices ~~as of September 30, 2021~~ located throughout Washington State, ~~and~~ the greater Portland, Oregon ~~area.~~area, and Eugene, Oregon. 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.

The Company consolidated 4 branches during October 2021 to create a more efficient branch footprint. This consolidation reduced the number of branches from 53 to 49. The Company integrated these locations into other branches within its network.

(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 ~~that~~ these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the ~~2020~~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 nine months ended September 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~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 ~~that~~ 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.

~~Certain~~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 have been reclassified to conform to the current year’s presentation.~~Flows. Reclassifications had no effect on the prior year's net income or stockholders’ equity.

The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the ~~2020~~2021 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the ~~2020~~2021 Annual Form 10-K during the nine months ended September 30, ~~2021 except for accounting policies related to investment securities and the ACL on investment securities held to maturity as follows:~~

~~Investment Securities~~

Investment securities for which the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Investment securities held primarily for the purpose of selling in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in income. Investment securities not classified as held to maturity or trading are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. The Bank determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. When the Company acquires another entity, all investment securities are recorded at fair value and classified as available for sale at the acquisition date.

Realized gains and losses on sales of investment securities are recorded on the trade date in gain on sale of investment securities, net on the Consolidated Statements of Income and determined using the specific identification method. Premiums and discounts on investment securities available for sale and held to maturity are amortized or accreted into income using the interest method. The objective of the interest method is to calculate periodic interest income at a constant effective

~~Table of Contents~~

yield. An investment security available for sale or held to maturity is placed on nonaccrual status at the time any principal or payments become more than 90 days delinquent and classified as past due after 30 days of nonpayment. Interest accrued, but not received for an investment security classified as nonaccrual is reversed against interest income during the period that the investment security is placed on nonaccrual status.

~~ACL on Investment Securities Held to Maturity~~

The Company measures expected credit losses on investment securities held to maturity on a pooled, collective basis by major investment security type with similar risk characteristics. A historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the investment securities on those historical credit losses. Expected credit losses on investment securities in the held to maturity portfolio that do not share similar risk characteristics with any of the pools are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the investment securities.

Accrued interest receivable on investment securities held to maturity is excluded from the estimate of expected credit losses. Changes in the ACL on investment securities held to maturity are recorded as provision for credit losses expense. Losses are charged against the ACL when management believes the uncollectability of an investment security held to maturity is confirmed.

2022.

(d) Recently Issued or Adopted Accounting Pronouncements

~~FASB ASU 2016-13~~, ~~Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~, as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, and ASU 2020-02, was originally issued in June 2016. This ASU replaced the incurred loss methodology with an expected loss methodology, which is commonly referred to as the "CECL" methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, CECL Adoption made changes to the accounting for credit losses on investment securities available for sale. This ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for fiscal years after December 15, 2018 and can be delayed under a provision of the CARES Act until the end of the official health emergency declaration. The Bank adopted ASU 2016-13 on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and unfunded commitments. At adoption, the Bank elected not to measure an ACL on accrued interest receivable on loans receivable or accrued interest receivable on investment securities available for sale as Bank policy is to reverse interest income for uncollectible accrued interest receivable balances in a timely manner.

The adoption of ASU 2016-13 included an increase to the ACL on loans of $3.4 million and an increase to the ACL on unfunded commitments of $3.7 million, resulting in a pretax cumulative-effect adjustment of $7.1 million. The impact of this adjustment to beginning retained earnings on January 1, 2020 was $5.6 million, net of tax.

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 ~~Condensed~~ 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

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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.

During the three months ended September 30, 2021, the Company reassessed and transferred, at fair value, $244.8 million of U.S. government and agency securities from the available for sale classification to the held to maturity classification. The net unrealized after tax gain of $1.3 million remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer.

There were no investment securities classified as trading at September 30, ~~2021~~2022 or December 31, ~~2020. There were no investment securities classified as held to maturity at December 31, 2020.~~

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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 ~~accumulated other comprehensive income:~~AOCI:


		September 30, 2021									September 30, 2022
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(In thousands)									(In thousands)
Investment securities available for sale:	Investment securities available for sale:									Investment securities available for sale:
U.S. government and agency securities	U.S. government and agency securities	$	26,000	$	146	$	(40)	$	26,106	U.S. government and agency securities	$	68,912	$	—	$	(5,163)	$	63,749
Municipal securities	Municipal securities	219,737		9,385		(956)		228,166		Municipal securities	206,767		51		(21,105)		185,713

Residential CMO and MBS	Residential CMO and MBS	240,018		3,065		(390)		242,693		Residential CMO and MBS	494,330		6		(55,966)		438,370
Commercial CMO and MBS	Commercial CMO and MBS	229,518		5,861		(361)		235,018		Commercial CMO and MBS	691,836		29		(52,424)		639,441
Corporate obligations	Corporate obligations	2,009		14		—		2,023		Corporate obligations	6,001		—		(167)		5,834
Other asset-backed securities	Other asset-backed securities	27,054		475		(9)		27,520		Other asset-backed securities	23,594		19		(578)		23,035
Total	Total	$	744,336	$	18,946	$	(1,756)	$	761,526	Total	$	1,491,440	$	105	$	(135,403)	$	1,356,142

Investment securities held to maturity:	Investment securities held to maturity:									Investment securities held to maturity:
U.S. government and agency securities	U.S. government and agency securities	$	82,577	$	46	$	(563)	$	82,060	U.S. government and agency securities	$	150,948	$	—	$	(32,916)	$	118,032

Residential CMO and MBS	Residential CMO and MBS	10,000		—		—		10,000		Residential CMO and MBS	296,432		—		(19,168)		277,264
Commercial CMO and MBS	Commercial CMO and MBS	218,497		—		(3,227)		215,270		Commercial CMO and MBS	325,939		—		(43,900)		282,039

Total	Total	$	311,074	$	46	$	(3,790)	$	307,330	Total	$	773,319	$	—	$	(95,984)	$	677,335


		December 31, 2020						December 31, 2021
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(In thousands)						(In thousands)
Investment securities available for sale:	Investment securities available for sale:										Investment securities available for sale:
U.S. government and agency securities	U.S. government and agency securities	$	44,713	$	947	$	—		$	45,660	U.S. government and agency securities	$	21,494	$	55	$	(176)	$	21,373
Municipal securities	Municipal securities	197,634		12,561		(227)			209,968		Municipal securities	213,158		8,908		(854)		221,212

Residential CMO and MBS	Residential CMO and MBS	196,956		5,125		(209)			201,872		Residential CMO and MBS	307,366		2,111		(2,593)		306,884
Commercial CMO and MBS	Commercial CMO and MBS	290,638		13,198		(90)			303,746		Commercial CMO and MBS	313,169		3,891		(1,199)		315,861
Corporate obligations	Corporate obligations	10,971		125		—			11,096		Corporate obligations	2,007		7		—		2,014
Other asset-backed securities	Other asset-backed securities	29,283		565		(27)			29,821		Other asset-backed securities	26,638		369		(16)		26,991
Total	Total	$	770,195	$	32,521	$	(553)		$	802,163	Total	$	883,832	$	15,341	$	(4,838)	$	894,335

Investment securities held to maturity:											Investment securities held to maturity:
U.S. government and agency securities											U.S. government and agency securities	$	141,011	$	120	$	(1,768)	$	139,363

Residential CMO and MBS											Residential CMO and MBS	24,529		—		(153)		24,376
Commercial CMO and MBS											Commercial CMO and MBS	217,853		—		(5,261)		212,592

Total											Total	$	383,393	$	120	$	(7,182)	$	376,331

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The amortized cost and fair value of investment securities at September 30, ~~2021,~~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 Sale Securities Held to Maturity
Amortized Cost Fair
Value Amortized Cost Fair
Value
(In thousands)
Due in one year or less $ 36,745 $ 37,158 $ — $ —
Due after one year through five years 122,029 126,853 — —
Due after five years through ten years 174,729 179,546 205,748 203,119
Due after ten years 410,833 417,969 105,326 104,211
Total $ 744,336 $ 761,526 $ 311,074 $ 307,330


	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	26,280	$	25,952	$	—	$	—
Due after one year through five years	63,151		60,858		—		—
Due after five years through ten years	67,834		63,738		83,219		68,150
Due after ten years	124,415		104,748		67,729		49,882
Total investment securities due at a single maturity date	281,680		255,296		150,948		118,032
Mortgage-backed securities (1)	1,209,760		1,100,846		622,371		559,303
Total investment securities	$	1,491,440	$	1,356,142	$	773,319	$	677,335

~~Table of Contents~~(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 September 30, ~~2021~~2022 and December 31, ~~2020.~~

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 ~~allowance~~ACL on investment securities available for ~~credit losses~~sale has not been recorded, aggregated by investment category and length of time ~~that~~the individual securities have been in a continuous unrealized loss position ~~as of September 30, 2021 and December 31, 2020:~~at the dates indicated:


		September 30, 2021
		Less than 12 Months					12 Months or Longer				Total					September 30, 2022
		Fair Value			Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Less than 12 Months				12 Months or Longer				Total
		(In thousands)														Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
				(In thousands)
U.S. government and agency securities	U.S. government and agency securities	$	1,695		$	(40)	$	—	$	—	$	1,695	$	(40)	U.S. government and agency securities	$	58,025	$	(4,176)	$	5,724	$	(987)	$	63,749	$	(5,163)
Municipal securities	Municipal securities	42,397			(675)		6,427		(281)		48,824		(956)		Municipal securities	148,054		(12,031)		27,731		(9,074)		175,785		(21,105)
Residential CMO and MBS	Residential CMO and MBS	74,409			(267)		21,480		(123)		95,889		(390)		Residential CMO and MBS	308,142		(28,668)		128,304		(27,298)		436,446		(55,966)
Commercial CMO and MBS	Commercial CMO and MBS	30,070			(354)		2,583		(7)		32,653		(361)		Commercial CMO and MBS	611,399		(49,077)		18,636		(3,347)		630,035		(52,424)

Corporate obligations															Corporate obligations	5,834		(167)		—		—		5,834		(167)
Other asset-backed securities	Other asset-backed securities	—			—		1,209		(9)		1,209		(9)		Other asset-backed securities	17,410		(563)		834		(15)		18,244		(578)
Total	Total	$	148,571		$	(1,336)	$	31,699	$	(420)	$	180,270	$	(1,756)	Total	$	1,148,864	$	(94,682)	$	181,229	$	(40,721)	$	1,330,093	$	(135,403)

December 31, 2020
Less than 12 Months 12 Months or Longer Total
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
(In thousands)
Municipal securities $ 10,264 $ (227) $ — $ — $ 10,264 $ (227)
Residential CMO and MBS — — 25,293 (209) 25,293 (209)
Commercial CMO and MBS 11,404 (29) 7,499 (61) 18,903 (90)
Other asset-backed securities — — 4,570 (27) 4,570 (27)
Total $ 21,668 $ (256) $ 37,362 $ (297) $ 59,030 $ (553)


	December 31, 2021
	Less than 12 Months				12 Months or Longer				Total
	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 securities	29,774		(619)		9,351		(235)		39,125		(854)
Residential CMO and MBS	204,039		(2,470)		19,862		(123)		223,901		(2,593)
Commercial CMO and MBS	83,283		(1,161)		1,936		(38)		85,219		(1,199)

Other asset-backed securities	2,763		(9)		1,118		(7)		3,881		(16)
Total	$	334,687	$	(4,435)	$	32,267	$	(403)	$	366,954	$	(4,838)

The Company evaluated investment securities available for sale as of September 30, ~~2021~~2022 and December 31, ~~2020~~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

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rated investment securities and none of these securities had a below investment grade credit rating as of both September 30, ~~2021~~2022 and December 31, ~~2020.~~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 September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

The Company also evaluated investment securities held to maturity for current expected credit ~~losses.~~losses as of September 30, 2022 and December 31, 2021. There were no investment securities held to maturity classified as nonaccrual or past due as of September 30, 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 ~~have~~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 September 30, 2022 and December 31, 2021.

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(d) Realized Gains and Losses

~~The following table presents the gross~~No realized gains ~~and~~or losses on the sale of investment securities available for sale ~~for~~were recognized during the three months ended September 30, 2022 and 2021. No realized gains or losses and $29,000 in gross realized gains on the sale of investment securities available for sale were recognized during the nine months ended September 30, 2022 and 2021, ~~and 2020:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(In thousands)
Gross realized gains $ — $ 40 $ 29 $ 1,482
Gross realized losses — — — (19)
Net realized gains $ — $ 40 $ 29 $ 1,463

respectively.

(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 ~~September 30, 2021 and December 31, 2020:~~the dates indicated:

September 30, 2021 December 31, 2020
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
(In thousands)
Washington and Oregon state public deposits $ 127,486 $ 130,675 $ 119,652�� $ 124,228
Securities sold under agreement to repurchase 68,297 68,424 38,630 39,945
Other securities pledged 57,728 57,307 29,665 30,717
Total $ 253,511 $ 256,406 $ 187,947 $ 194,890


	September 30, 2022				December 31, 2021
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Washington and Oregon state public deposits	$	158,082	$	138,003	$	128,216	$	130,217
Federal Reserve Bank credit facility	60,763		49,037		61,057		59,674
Securities sold under agreement to repurchase	64,087		55,825		59,887		59,655
Other securities pledged	55,600		48,785		56,419		55,633
Total	$	338,532	$	291,650	$	305,579	$	305,179

(f) Accrued Interest Receivable

Accrued interest receivable excluded from the amortized cost onof investment securities available for sale totaled ~~$3.0~~$4.7 million and ~~$3.6~~$3.5 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled ~~$0.6~~$2.3 million and $1.1 million at September 30, ~~2021.~~2022 and December 31, 2021, respectively.

No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities during the three ~~and~~or nine months ended September 30, ~~2021~~2022 and ~~September 30, 2020.~~2021.

(3)Loans Receivable

~~(a) Loan Origination/Risk Management~~

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 4four 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 ~~2020~~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.

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The amortized cost of loans receivable, net of ACL on loans, ~~at September 30, 2021 and December 31, 2020~~ consisted of the following portfolio segments and ~~classes:~~classes at the dates indicated:

September 30,
2021 December 31,
2020
(In thousands)
Commercial business:
Commercial and industrial $ 652,776 $ 733,098
SBA PPP 266,896 715,121
Owner-occupied CRE 907,568 856,684

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September 30,
2021 December 31,
2020
(In thousands)
Non-owner occupied CRE 1,459,795 1,410,303
Total commercial business 3,287,035 3,715,206
Residential real estate 125,697 122,756
Real estate construction and land development:
Residential 90,081 78,259
Commercial and multifamily 205,516 227,454
Total real estate construction and land development 295,597 305,713
Consumer 245,555 324,972
Loans receivable 3,953,884 4,468,647
Allowance for credit losses on loans (48,317) (70,185)
Loans receivable, net $ 3,905,567 $ 4,398,462
Balances included in the amortized cost of Loans receivable:
Unamortized net discount on acquired loans $ (4,325) $ (6,575)
Unamortized net deferred fee $ (11,497) $ (15,458)


	September 30, 2022		December 31, 2021
	(In thousands)
Commercial business:
Commercial and industrial	$	735,028	$	621,567
SBA PPP	3,593		145,840
Owner-occupied CRE	959,486		931,150
Non-owner occupied CRE	1,547,114		1,493,099
Total commercial business	3,245,221		3,191,656
Residential real estate	296,019		164,582
Real estate construction and land development:
Residential	92,297		85,547
Commercial and multifamily	160,723		141,336
Total real estate construction and land development	253,020		226,883
Consumer	207,035		232,541
Loans receivable	4,001,295		3,815,662
Allowance for credit losses on loans	(42,089)		(42,361)
Loans receivable, net	$	3,959,206	$	3,773,301

Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans	$	2,686	$	3,938
Unamortized net deferred fee	$	5,479	$	7,954

(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, ~~our~~the Bank's loan portfolio is concentrated in ~~commercial-type~~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.

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 ~~2020~~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 ~~the~~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 ~~with higher~~at risk of ~~loss if the deficiencies are not corrected.~~being classified as nonaccrual loans and includes all of

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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.

~~Regulatory agencies provided guidance regarding credit~~The following table presents the amortized cost of loans receivable by risk ~~ratings, delinquency reporting and nonaccrual status for loans adversely impacted by~~grade at the COVID-19 pandemic. The Bank has and will continue to exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely classify credits that are affected by the COVID-19 pandemic. The Bank also will not designate loans with payment deferrals granted due to the COVID-19 pandemic as past due because of the deferral. Due to the short-term nature of the forbearance and other relief programs the Bank is offering as a resultdates indicated:


	September 30, 2022
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
	2022		2021		2020		2019		2018		Prior
	(In thousands)
Commercial business:
Commercial and industrial
Pass	$	133,352	$	97,240	$	89,078	$	68,237	$	36,505	$	83,371	$	193,558	$	108	$	701,449
SM	223		—		715		4,759		1,898		5,311		6,678		—		19,584
SS	764		275		1,057		3,141		687		5,381		2,322		368		13,995

Total	134,339		97,515		90,850		76,137		39,090		94,063		202,558		476		735,028
SBA PPP
Pass	—		3,455		138		—		—		—		—		—		3,593




Owner-occupied CRE
Pass	111,751		168,437		93,272		172,494		71,795		302,107		—		—		919,856
SM	—		1,009		—		1,237		2,558		16,313		—		—		21,117
SS	—		259		675		—		3,739		13,840		—		—		18,513

Total	111,751		169,705		93,947		173,731		78,092		332,260		—		—		959,486
Non-owner occupied CRE
Pass	182,804		189,307		162,954		240,088		133,478		571,457		—		—		1,480,088
SM	—		8,392		—		3,619		—		24,127		—		—		36,138
SS	—		—		—		—		3,627		27,261		—		—		30,888

Total	182,804		197,699		162,954		243,707		137,105		622,845		—		—		1,547,114
Total commercial business
Pass	427,907		458,439		345,442		480,819		241,778		956,935		193,558		108		3,104,986
SM	223		9,401		715		9,615		4,456		45,751		6,678		—		76,839
SS	764		534		1,732		3,141		8,053		46,482		2,322		368		63,396

Total	428,894		468,374		347,889		493,575		254,287		1,049,168		202,558		476		3,245,221
Residential real estate
Pass(1)	94,144		140,093		24,191		17,030		4,501		15,885		—		—		295,844

SS	—		—		—		—		—		175		—		—		175

Total	94,144		140,093		24,191		17,030		4,501		16,060		—		—		296,019
Real estate construction and land development:
Residential
Pass	33,244		37,666		7,617		11,810		885		1,075		—		—		92,297




Commercial and multifamily
Pass	36,362		103,541		7,601		1,096		2,565		1,513		—		—		152,678
SM	—		—		1,913		5,687		—		—		—		—		7,600
SS	—		—		—		45		—		400		—		—		445

Total	36,362		103,541		9,514		6,828		2,565		1,913		—		—		160,723
Total real estate construction and land development
Pass	69,606		141,207		15,218		12,906		3,450		2,588		—		—		244,975
SM	—		—		1,913		5,687		—		—		—		—		7,600
SS	—		—		—		45		—		400		—		—		445

Total	69,606		141,207		17,131		18,638		3,450		2,988		—		—		253,020
Consumer
Pass	3,266		616		11,078		31,077		18,201		22,828		117,070		539		204,675

Table of Contents

~~of the COVID-19 pandemic, management expects that borrowers granted relief under these programs will generally not be reported as nonaccrual during the deferral period.~~

~~The following table presents the amortized cost of loans receivable by risk grade as of September 30, 2021 and December 31, 2020:~~

September 30, 2021
Term Loans
Amortized Cost Basis by Origination Year Revolving Loans
Revolving Loans Converted to Term Loans (1)
Loans Receivable
2021 2020 2019 2018 2017 Prior
(In thousands)
Commercial business:
Commercial and industrial
Pass $ 74,653 $ 107,406 $ 103,431 $ 55,513 $ 34,254 $ 102,143 $ 120,622 $ 877 $ 598,899
SM 532 700 6,192 6,682 1,252 5,716 2,693 242 24,009
SS 1,057 1,369 5,533 1,219 3,034 6,276 10,772 608 29,868
Total 76,242 109,475 115,156 63,414 38,540 114,135 134,087 1,727 652,776
SBA PPP
Pass 247,213 19,683 — — — — — — 266,896
Owner-occupied CRE
Pass 114,176 86,004 183,540 92,201 70,672 277,948 — 73 824,614
SM — 5,102 3,086 12,366 4,504 24,793 — — 49,851
SS — 691 — 3,803 6,995 21,614 — — 33,103
Total 114,176 91,797 186,626 108,370 82,171 324,355 — 73 907,568
Non-owner occupied CRE
Pass 132,922 182,994 218,203 155,131 164,632 530,818 — — 1,384,700
SM — 5,034 5,715 352 2,215 2,713 — — 16,029
SS — — — 3,460 — 55,606 — — 59,066
Total 132,922 188,028 223,918 158,943 166,847 589,137 — — 1,459,795
Total commercial business
Pass 568,964 396,087 505,174 302,845 269,558 910,909 120,622 950 3,075,109
SM 532 10,836 14,993 19,400 7,971 33,222 2,693 242 89,889
SS 1,057 2,060 5,533 8,482 10,029 83,496 10,772 608 122,037
Total 570,553 408,983 525,700 330,727 287,558 1,027,627 134,087 1,800 3,287,035
Residential real estate
Pass 43,126 24,715 25,443 6,619 7,275 17,821 — — 124,999
SS — — — — — 698 — — 698
Total 43,126 24,715 25,443 6,619 7,275 18,519 — — 125,697
Real estate construction and land development:
Residential
Pass 35,506 30,987 19,044 2,781 394 1,369 — — 90,081
Commercial and multifamily
Pass 38,144 50,546 106,428 5,587 1,606 1,542 — — 203,853
SM — — 450 — — 215 — — 665
SS — 571 — — — 427 — — 998
Total 38,144 51,117 106,878 5,587 1,606 2,184 — — 205,516
Total real estate construction and land development
Pass 73,650 81,533 125,472 8,368 2,000 2,911 — — 293,934
SM — — 450 — — 215 — — 665
SS — 571 — — — 427 — — 998
Total 73,650 82,104 125,922 8,368 2,000 3,553 — — 295,597

~~Table of Contents~~


		September 30, 2021																						September 30, 2022
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted to Term Loans (1)			Loans Receivable				Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
		2021		2020		2019		2018		2017		Prior
Consumer
Pass		20,185		18,083		52,803		34,571		18,109		15,863				82,780			200			242,594
																								2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
SS	SS	—		186		685		549		564		939		38			—			2,961			SS	—		—		164		582		361		1,241

Total	Total	20,185		18,269		53,488		35,120		18,673		16,802		82,818			200			245,555			Total	3,266		616		11,242		31,659		18,562		24,069		117,081		540		207,035
Loans receivable	Loans receivable																						Loans receivable
Pass	Pass	705,925		520,418		708,892		352,403		296,942		947,504		203,402			1,150			3,736,636			Pass	594,923		740,355		395,929		541,832		267,930		998,236		310,628		647		3,850,480
SM	SM	532		10,836		15,443		19,400		7,971		33,437		2,693			242			90,554			SM	223		9,401		2,628		15,302		4,456		45,751		6,678		—		84,439
SS	SS	1,057		2,817		6,218		9,031		10,593		85,560		10,810			608			126,694			SS	764		534		1,896		3,768		8,414		48,298		2,333		369		66,376

Total	Total	$	707,514	$	534,071	$	730,553	$	380,834	$	315,506	$	1,066,501	$	216,905		$	2,000		$	3,953,884		Total	$	595,910	$	750,290	$	400,453	$	560,902	$	280,800	$	1,092,285	$	319,639	$	1,016	$	4,001,295

(1) Represents the loans receivable balance at September 30, ~~2021~~2022 which was converted from a revolving loan to an amortizing loan during the nine months ended September 30, ~~2021.~~2022.


		December 31, 2020																							December 31, 2021
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted to Term Loans (1)			Loans Receivable					Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
		2020		2019		2018		2017		2016		Prior									2021				2020		2019		2018		2017		Prior
		(In thousands)																			(In thousands)
Commercial business:	Commercial business:																							Commercial business:
Commercial and industrial	Commercial and industrial																							Commercial and industrial
Pass	Pass	$	118,971	$	127,919	$	70,766	$	44,231	$	37,658	$	95,958		$	121,440		$	819			$	617,762			Pass	$	95,960	$	100,193	$	94,657	$	54,707	$	28,558	$	77,294	$	127,651	$	1,035	$	580,055
SM	SM	14,430		9,162		10,878		4,171		5,700		3,579		11,790			814			60,524				SM	326		884		5,998		1,425		2,223		2,401		2,048		353		15,658
SS	SS	2,199		11,835		3,416		9,348		1,052		7,651		15,484			3,827			54,812				SS	1,443		1,287		5,912		2,809		2,526		6,907		4,402		568		25,854

Total	Total	135,600		148,916		85,060		57,750		44,410		107,188		148,714			5,460			733,098				Total	97,729		102,364		106,567		58,941		33,307		86,602		134,101		1,956		621,567
SBA PPP	SBA PPP																							SBA PPP
Pass	Pass	715,121		—		—		—		—		—		—			—			715,121				Pass	139,253		6,587		—		—		—		—		—		—		145,840

Owner-occupied CRE	Owner-occupied CRE																							Owner-occupied CRE
Pass	Pass	89,224		167,095		94,830		80,138		74,902		254,864		—			—			761,053				Pass	182,742		90,609		188,380		73,714		66,039		273,518		—		72		875,074
SM	SM	6,146		4,540		16,386		11,231		5,464		12,105		—			—			55,872				SM	264		—		3,079		7,521		3,937		16,724		—		—		31,525
SS	SS	—		—		114		7,320		3,313		29,012		—			—			39,759				SS	—		1,332		—		3,787		3,014		16,418		—		—		24,551

Total	Total	95,370		171,635		111,330		98,689		83,679		295,981		—			—			856,684				Total	183,006		91,941		191,459		85,022		72,990		306,660		—		72		931,150
Non-owner-occupied CRE	Non-owner-occupied CRE																							Non-owner-occupied CRE
Pass	Pass	197,548		173,153		148,830		172,438		240,614		406,817		—			—			1,339,400				Pass	187,860		185,650		244,863		149,090		144,896		499,486		—		—		1,411,845
SM	SM	—		1,979		357		2,448		6,210		3,539		—			—			14,533				SM	—		—		5,674		—		15,482		2,400		—		—		23,556
SS	SS	—		—		3,623		—		35,455		17,292		—			—			56,370				SS	—		—		—		3,379		—		54,319		—		—		57,698

Total	Total	197,548		175,132		152,810		174,886		282,279		427,648		—			—			1,410,303				Total	187,860		185,650		250,537		152,469		160,378		556,205		—		—		1,493,099
Total commercial business	Total commercial business																							Total commercial business
Pass	Pass	1,120,864		468,167		314,426		296,807		353,174		757,639		121,440			819			3,433,336				Pass	605,815		383,039		527,900		277,511		239,493		850,298		127,651		1,107		3,012,814
SM	SM	20,576		15,681		27,621		17,850		17,374		19,223		11,790			814			130,929				SM	590		884		14,751		8,946		21,642		21,525		2,048		353		70,739
SS	SS	2,199		11,835		7,153		16,668		39,820		53,955		15,484			3,827			150,941				SS	1,443		2,619		5,912		9,975		5,540		77,644		4,402		568		108,103

Total	Total	1,143,639		495,683		349,200		331,325		410,368		830,817		148,714			5,460			3,715,206				Total	607,848		386,542		548,563		296,432		266,675		949,467		134,101		2,028		3,191,656
Residential real estate	Residential real estate																							Residential real estate
Pass	Pass	30,141		41,829		15,730		10,362		7,322		16,825		—			—			122,209				Pass	85,089		27,090		23,295		5,672		6,141		16,891		—		—		164,178

SS	SS	—		—		—		59		—		488		—			—			547				SS	—		—		—		—		—		404		—		—		404

Total	Total	30,141		41,829		15,730		10,421		7,322		17,313		—			—			122,756				Total	85,089		27,090		23,295		5,672		6,141		17,295		—		—		164,582
Real estate construction and land development:																								Real estate construction and land development:
Residential																								Residential
Pass																								Pass	44,892		23,728		12,266		2,921		389		1,351		—		—		85,547

1918

Table of Contents


Real estate construction and land development:
Residential
Pass		33,801		36,697		2,725		1,097		971		1,042		—		—		76,333
																						December 31, 2021
SS		—		—		—		1,926		—		—		—		—		1,926
																						Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (1)			Loans Receivable
Total		33,801		36,697		2,725		3,023		971		1,042		—		—		78,259
																						2021		2020		2019		2018		2017		Prior				Revolving Loans			Revolving Loans Converted (1)			Loans Receivable
																						(In thousands)
Commercial and multifamily	Commercial and multifamily																				Commercial and multifamily
Pass	Pass	27,423		151,020		38,682		5,660		689		1,407		—		—		224,881			Pass	56,448		41,616		34,117		5,794		710		1,379		—					—			140,064
SM	SM	67		1,011		—		—		—		29		—		—		1,107			SM	—		—		68		—		—		213		—			—			281
SS	SS	572		450		—		—		—		444		—		—		1,466			SS	—		571		—		—		—		420		—			—			991

Total	Total	28,062		152,481		38,682		5,660		689		1,880		—		—		227,454			Total	56,448		42,187		34,185		5,794		710		2,012		—			—			141,336
Total real estate construction and land development	Total real estate construction and land development																			Total real estate construction and land development
Pass	Pass	61,224		187,717		41,407		6,757		1,660		2,449		—		—		301,214			Pass	101,340		65,344		46,383		8,715		1,099		2,730		—			—			225,611
SM	SM	67		1,011		—		—		—		29		—		—		1,107			SM	—		—		68		—		—		213		—			—			281
SS	SS	572		450		—		1,926		—		444		—		—		3,392			SS	—		571		—		—		—		420		—			—			991

Total	Total	61,863		189,178		41,407		8,683		1,660		2,922		—		—		305,713			Total	101,340		65,915		46,451		8,715		1,099		3,363		—			—			226,883
Consumer	Consumer																				Consumer
Pass	Pass	43,742		77,083		53,195		30,559		13,443		15,453		87,547		315		321,337			Pass	1,286		15,737		46,041		29,819		15,068		13,026		108,492			120			229,589

SS	SS	34		404		684		648		420		1,319		78		48		3,635			SS	—		181		657		476		542		1,043		36			17			2,952

Total	Total	43,776		77,487		53,879		31,207		13,863		16,772		87,625		363		324,972			Total	1,286		15,918		46,698		30,295		15,610		14,069		108,528			137			232,541
Loans receivable	Loans receivable																				Loans receivable
Pass	Pass	1,255,971		774,796		424,758		344,485		375,599		792,366		208,987		1,134		4,178,096			Pass	793,530		491,210		643,619		321,717		261,801		882,945		236,143			1,227			3,632,192
SM	SM	20,643		16,692		27,621		17,850		17,374		19,252		11,790		814		132,036			SM	590		884		14,819		8,946		21,642		21,738		2,048			353			71,020
SS	SS	2,805		12,689		7,837		19,301		40,240		56,206		15,562		3,875		158,515			SS	1,443		3,371		6,569		10,451		6,082		79,511		4,438			585			112,450

Total	Total	$	1,279,419	$	804,177	$	460,216	$	381,636	$	433,213	$	867,824	$	236,339	$	5,823	$	4,468,647		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, ~~2020~~2021 which was converted from a revolving loan to an amortizing loan during the year ended December 31, ~~2020.~~

2021.

(d) Nonaccrual Loans

The following ~~table presents~~tables present the amortized cost of nonaccrual loans for the dates indicated:

September 30, 2021
Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial $ 6,952 $ 4,013 $ 10,965
Owner-occupied CRE 3,714 5,786 9,500
Non-owner occupied CRE 1,318 3,460 4,778
Total commercial business 11,984 13,259 25,243
Residential real estate — 51 51
Real estate construction and land development:
Commercial and multifamily — 571 571
Consumer — 29 29
Total $ 11,984 $ 13,910 $ 25,894


	September 30, 2022
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(In thousands)
Commercial business:
Commercial and industrial	$	5,060	$	299	$	5,359
Owner-occupied CRE	—		875		875








Total	$	5,060	$	1,174	$	6,234


	December 31, 2021
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(In thousands)
Commercial business:
Commercial and industrial	$	6,454	$	3,827	$	10,281
Owner-occupied CRE	3,036		5,138		8,174
Non-owner occupied CRE	1,273		3,379		4,652
Total commercial business	10,763		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

2019

Table of Contents

December 31, 2020
Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial $ 22,039 $ 9,208 $ 31,247
Owner-occupied CRE 4,693 13,700 18,393
Non-owner occupied CRE 3,424 3,722 7,146
Total commercial business 30,156 26,630 56,786
Residential real estate 67 117 184
Real estate construction and land development:
Commercial and multifamily 572 450 1,022
Consumer 31 69 100
Total $ 30,826 $ 27,266 $ 58,092

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
September 30, 2021 Three Months Ended
September 30, 2020
Interest Income Reversed Interest Income Recognized Interest Income Reversed Interest Income Recognized
(In thousands)
Commercial business:
Commercial and industrial $ (1) $ 184 $ (59) $ 111
Owner-occupied CRE — — (219) 29
Non-owner occupied CRE — — (102) —
Total commercial business (1) 184 (380) 140
Residential real estate — — (1) 2
Real estate construction and land development:
Commercial and multifamily — — (11) —
Consumer — 32 — —
Total $ (1) $ 216 $ (392) $ 142


	Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(In thousands)
Commercial business:
Commercial and industrial	$	—	$	31	$	(1)	$	184








Consumer	—		—		—		32
Total	$	—	$	31	$	(1)	$	216

Nine Months Ended
September 30, 2021 Nine months ended
September 30, 2020
Interest Income Reversed Interest Income Recognized Interest Income Reversed Interest Income Recognized
(in thousands)
Commercial business:
Commercial and industrial $ (11) $ 2,228 $ (75) $ 419
Owner-occupied CRE — 117 (219) 89
Non-owner occupied CRE — 313 (102) 67
Total commercial business (11) 2,658 (396) 575
One-to-four family residential 0 0 (1) 2
Real estate construction and land development:
Residential — 73 — —
Commercial and multifamily — — (11) —
Consumer — 32 — 47
Total $ (11) $ 2,763 $ (408) $ 624

~~Table of Contents~~


	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(in thousands)
Commercial business:
Commercial and industrial	$	(14)	$	260	$	(11)	$	2,228
Owner-occupied CRE	—		53		—		117
Non-owner occupied CRE	—		774		—		313
Total commercial business	(14)		1,087		(11)		2,658
Residential real estate	—		19		—		—
Real estate construction and land development:
Residential	—		—		—		73


Consumer	—		68		—		32
Total	$	(14)	$	1,174	$	(11)	$	2,763

For the three and nine months ended September 30, ~~2021~~2022 and ~~2020,~~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.~~

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 September 30, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:
September 30, 2021
30-89 Days 90 Days or
Greater Total Past
Due Current Loans Receivable
(In thousands)
Commercial business:
Commercial and industrial $ 440 $ 6,219 $ 6,659 $ 646,117 $ 652,776
SBA PPP — — — 266,896 266,896
Owner-occupied CRE 283 — 283 907,285 907,568
Non-owner occupied CRE 6,165 — 6,165 1,453,630 1,459,795
Total commercial business 6,888 6,219 13,107 3,273,928 3,287,035
Residential real estate 25 — 25 125,672 125,697
Real estate construction and land development:
Residential — — — 90,081 90,081
Commercial and multifamily — 571 571 204,945 205,516
Total real estate construction and land development — 571 571 295,026 295,597
Consumer 643 — 643 244,912 245,555
Total $ 7,556 $ 6,790 $ 14,346 $ 3,939,538 $ 3,953,884


		December 31, 2020											September 30, 2022
		30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable			30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
		(In thousands)											(In thousands)
Commercial business:	Commercial business:											Commercial business:
Commercial and industrial	Commercial and industrial	$	4,621	$	8,082	$	12,703	$	720,395	$	733,098	Commercial and industrial	$	1,774	$	4,130	$	5,904	$	729,124	$	735,028
SBA PPP	SBA PPP	—		—		—		715,121		715,121		SBA PPP	167		—		167		3,426		3,593
Owner-occupied CRE	Owner-occupied CRE	991		403		1,394		855,290		856,684		Owner-occupied CRE	30		189		219		959,267		959,486
Non-owner occupied CRE	Non-owner occupied CRE	412		1,970		2,382		1,407,921		1,410,303		Non-owner occupied CRE	296		—		296		1,546,818		1,547,114
Total commercial business	Total commercial business	6,024		10,455		16,479		3,698,727		3,715,206		Total commercial business	2,267		4,319		6,586		3,238,635		3,245,221
Residential real estate	Residential real estate	765		16		781		121,975		122,756		Residential real estate	—		—		—		296,019		296,019
Real estate construction and land development:	Real estate construction and land development:											Real estate construction and land development:
Residential	Residential	—		—		—		78,259		78,259		Residential	—		—		—		92,297		92,297
Commercial and multifamily	Commercial and multifamily	2,225		—		2,225		225,229		227,454		Commercial and multifamily	—		—		—		160,723		160,723
Total real estate construction and land development	Total real estate construction and land development	2,225		—		2,225		303,488		305,713		Total real estate construction and land development	—		—		—		253,020		253,020
Consumer		1,407		30		1,437		323,535		324,972
Total		$	10,421	$	10,501	$	20,922	$	4,447,725	$	4,468,647

~~There were no loans~~Table of Contents


	September 30, 2022
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(In thousands)
Consumer	736		20		756		206,279		207,035
Total	$	3,003	$	4,339	$	7,342	$	3,993,953	$	4,001,295


	December 31, 2021
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(In thousands)
Commercial business:
Commercial and industrial	$	1,858	$	6,821	$	8,679	$	612,888	$	621,567
SBA PPP	223		293		516		145,324		145,840
Owner-occupied CRE	2,397		112		2,509		928,641		931,150
Non-owner occupied CRE	—		—		—		1,493,099		1,493,099
Total commercial business	4,478		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 development	4,266		571		4,837		222,046		226,883
Consumer	1,026		—		1,026		231,515		232,541
Total	$	10,190	$	7,807	$	17,997	$	3,797,665	$	3,815,662

Loans 90 days or more past due ~~that were~~and still accruing interest were $20,000 and $293,000 as of September 30, ~~2021~~2022 and December 31, ~~2020.~~

2021, 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 September 30, ~~2021~~2022 and December 31, ~~2020~~

~~Table of Contents~~

~~were~~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:


		September 30, 2021								September 30, 2022
		CRE		Farmland		Residential Real Estate		Other			Total			CRE		Farmland		Residential Real Estate		Total
		(In thousands)								(In thousands)
Commercial business:	Commercial business:												Commercial business:
Commercial and industrial	Commercial and industrial	$	1,504	$	4,384	$	727	$	595		$	7,210	Commercial and industrial	$	1,239	$	2,082	$	1,271	$	4,592
Owner-occupied CRE	Owner-occupied CRE	4,261		—		—		—			4,261		Owner-occupied CRE	189		—		—		189
Non-owner occupied CRE		1,318		—		—		—			1,318
Total commercial business		7,083		4,384		727		595			12,789

Real estate construction and land development:

Commercial and multifamily		571		—		—		—			571

Total	Total	$	7,654	$	4,384	$	727	$	595		$	13,360	Total	$	1,428	$	2,082	$	1,271	$	4,781


		December 31, 2020								December 31, 2021
		CRE		Farmland		Residential Real Estate		Other			Total			CRE		Farmland		Residential Real Estate		Other		Total
		(In thousands)								(In thousands)
Commercial business:	Commercial business:												Commercial business:
Commercial and industrial	Commercial and industrial	$	1,893	$	18,738	$	584	$	1,405		$	22,620	Commercial and industrial	$	1,499	$	4,362	$	1,036	$	245	$	7,142
Owner-occupied CRE	Owner-occupied CRE	4,693		—		—		—			4,693		Owner-occupied CRE	3,035		—		—		—		3,035
Non-owner occupied CRE	Non-owner occupied CRE	3,424		—		—		—			3,424		Non-owner occupied CRE	1,273		—		—		—		1,273
Total commercial business	Total commercial business	10,010		18,738		584		1,405			30,737		Total commercial business	5,807		4,362		1,036		245		11,450
Residential real estate		—		—		67		—			67

Real estate construction and land development:	Real estate construction and land development:												Real estate construction and land development:

Commercial and multifamily		572		—		—		—			572

Consumer		—		—		30		—			30
Total		$	10,582	$	18,738	$	681	$	1,405		$	31,406

Table of Contents


	December 31, 2021
	CRE		Farmland		Residential Real Estate		Other		Total
	(In thousands)
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 nine months ended September 30, ~~2021,~~2022, except changes due to additions or removals of loans infrom this classification.

(g) Troubled Debt Restructured Loans

A TDR is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider. The TDR modifications or concessions are made to increase the likelihood that these borrowers with financial difficulties will be able to satisfy their debt obligations as amended.

The concessions granted in the restructurings largely consisted of maturity extensions. The Bank typically grants shorter extension periods to continually monitor these TDR loans despite the fact that the extended date might not be the date the Bank expects the scheduled cash flow from these borrowers. The Bank does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted.

The CARES Act, CA Act and regulatory agencies provided guidance around the modification of loans as a result of the COVID-19 pandemic, and outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined by the guidance are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers were considered current if they were less than 30 days past due on the contractual payments as of December 31, 2019 under the CARES Act and at the time a modification program is implemented under related regulatory guidance. The CA Act extended relief offered under the CARES Act through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier. The Bank elected to apply the temporary relief under the applicable guidance to certain eligible short-term modifications and did not classify the modifications as TDRs for accounting or disclosure purposes. However, COVID Modifications whose payment deferral exceeded 180 days following the loans' initial modification were classified as TDRs based on the Bank's internal policy.

~~Table of Contents~~

Loans that were modified as TDR loans are set forth in the following ~~tables~~table for the periods indicated:


		Three Months Ended September 30,							Three Months Ended September 30,
		2021			2020				2022			2021
		Number of Contracts	Amortized Cost (1) (2)		Number of Contracts	Amortized Cost (1) (2)			Number of Contracts	Amortized Cost (1) (2)		Number of Contracts	Amortized Cost (1) (2)
		(Dollars in thousands)							(Dollars in thousands)
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	5	$	1,861	12	$	7,217	Commercial and industrial	4	$	2,150	5	$	1,861
Owner-occupied CRE	Owner-occupied CRE	2	7,124		5	2,312		Owner-occupied CRE	—	—		2	7,124
Non-owner occupied CRE	Non-owner occupied CRE	—	—		2	438		Non-owner occupied CRE	—	—		—	—
Total commercial business	Total commercial business	7	8,985		19	9,967		Total commercial business	4	2,150		7	8,985
Residential real estate		—	—		1	22

Real estate construction and land development:	Real estate construction and land development:							Real estate construction and land development:
Residential		—	—		4	1,812

Commercial and multifamily	Commercial and multifamily	1	450		—	—		Commercial and multifamily	1	5,687		1	450
Total real estate construction and land development		1	450		4	1,812

Consumer	Consumer	5	94		9	127		Consumer	2	238		5	94
Total	Total	13	$	9,529	33	$	11,928	Total	7	$	8,075	13	$	9,529


		Nine Months Ended September 30,							Nine Months Ended September 30,
		2021			2020				2022			2021
		Number of Contracts	Amortized Cost (1) (2)		Number of Contracts	Amortized Cost (1) (2)			Number of Contracts	Amortized Cost (1) (2)		Number of Contracts	Amortized Cost (1) (2)
		(Dollars in thousands)							(Dollars in thousands)
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	32	$	10,380	37	$	17,694	Commercial and industrial	8	$	3,119	32	$	10,380
Owner-occupied CRE	Owner-occupied CRE	6	16,710		7	3,227		Owner-occupied CRE	—	—		6	16,710
Non-owner occupied CRE	Non-owner occupied CRE	3	5,673		4	2,417		Non-owner occupied CRE	—	—		3	5,673
Total commercial business	Total commercial business	41	32,763		48	23,338		Total commercial business	8	3,119		41	32,763
Residential real estate	Residential real estate	1	180		1	22		Residential real estate	—	—		1	180
Real estate construction and land development:	Real estate construction and land development:							Real estate construction and land development:
Residential		—	—		4	1,812

Commercial and multifamily	Commercial and multifamily	1	450		—	—		Commercial and multifamily	1	5,687		1	450
Total real estate construction and land development		1	450		4	1,812

Consumer	Consumer	22	487		20	251		Consumer	9	307		22	487
Total	Total	65	$	33,880	73	$	25,423	Total	18	$	9,113	65	$	33,880

(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 or~~ nine months ended September 30, ~~2021~~2022 and ~~September 30, 2020.~~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 $~~3.4 million~~30,000 and ~~$1.6~~$3.4 million at September 30, ~~2021~~2022 and September 30, ~~2020,~~2021, respectively, related to these TDR loans which were restructured during the nine months ended September 30, ~~2021~~2022 and September 30, ~~2020,~~2021, respectively.

The unfunded commitment to borrowers related to TDR loans was ~~$4.3~~$5.9 million and ~~$2.6~~$5.7 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

2422

Table of Contents

The following ~~tables present~~table presents loans that were modified in a ~~troubled debt restructure~~TDR and subsequently defaulted within twelve months from the modification date during the periods indicated:


		Three Months Ended September 30,							Three Months Ended September 30,
		2021			2020				2022			2021
		Number of Contracts (1)	Amortized Cost (1)		Number of Contracts (1)	Amortized Cost (1)			Number of Contracts (1)	Amortized Cost (1)		Number of Contracts (1)	Amortized Cost (1)
		(Dollars in thousands)							(Dollars in thousands)
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	1	$	336	1	$	229	Commercial and industrial	—	$	—	1	$	336

Total		1	$	336	1	$	229


		Nine Months Ended September 30,							Nine Months Ended September 30,
		2021			2020				2022			2021
		Number of Contracts (1)	Amortized Cost (1)		Number of Contracts (1)	Amortized Cost (1)			Number of Contracts (1)	Amortized Cost (1)		Number of Contracts (1)	Amortized Cost (1)
		(Dollars in thousands)							(Dollars in thousands)
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	3	$	976	4	$	2,152	Commercial and industrial	—	$	—	3	$	976
Owner-occupied CRE	Owner-occupied CRE	—	—		1	431		Owner-occupied CRE	1	189		—	—
Non-owner occupied CRE		—	—		2	376

Total		3	$	976	7	$	2,959

(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 nine months ended September 30, ~~2021~~2022 and ~~September 30, 2020.~~2021.

During the three and nine months ended September 30, 2021 and 2020 all of the TDR loans in the tables above defaulted because each was past its modified maturity date and the borrower had not subsequently repaid the credits. The Bank chose not to extend further the maturity date on these TDR loans. The Bank had an$4,000 ACL on lo~~ans of~~ ~~$13,000~~loans at September 30, 2022 and ~~$512,000~~$13,000 at September 30, 2021 ~~and September 30, 2020, respectively,~~ related to these TDR loans which defaulted during the nine months ended September 30, ~~2021~~2022 and ~~2020.~~

2021.

(h) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled ~~$11.2~~$10.5 million and ~~$15.8~~$10.1 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~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 September 30, ~~2021,~~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

~~Effective January 1, 2020, the Bank adopted ASU 2016-13. Risk characteristics by segment considered in the CECL model are the same as those disclosed in the 2020 Annual Form 10-K.~~

The baseline loss rates used to calculate the ACL on loans at September 30, ~~2021~~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 nine months ended September 30, ~~2021.~~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 September 30, ~~2021~~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 nine months ended September 30, ~~2021.~~2022.

The reasonable and supportable period and subsequent reversion period used in the CECL model ~~as of September 30, 2021~~ was five ~~quarters.~~quarters and two quarters, respectively, at December 31, 2021. There were no changes to ~~this assumption~~these assumptions during the nine months ended September 30, ~~2021.~~2022. Management believes ~~that~~ forecasts beyond this ~~five~~seven quarter time period tend to diverge in economic assumptions and may be less comparable to actual future

~~Table of Contents~~

events. As the length of the reasonable and supportable period increases, the degree of judgment involved in estimating the allowance ~~will likely increase.~~

The Bank used a two-quarter reversion period in calculating the ACL on loans as of September 30, 2021 as it believes the historical loss information is relevant to the expected credit losses and recognizes the declining precision and increasing uncertainty of estimating credit losses in those periods beyond which it can make reasonable and supportable forecasts. There were no changes to this assumption during the nine months ended September 30, 2021.increases.

During the nine months ended September 30, ~~2021~~,2022, the ACL on loans decreased~~decrease~~d $~~21.9 million~~,272,000, or ~~31.2%~~0.6%, due primarily to a reversal of provision for credit losses on loans of $1.3 million driven by a $3.4 million reduction in the ACL on loans individually evaluated for losses and their related ACL offset partially by an increase related to the growth in loans receivable. The ACL on loans at September 30, 2022 and December 31, 2021 did not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.

~~$21.8~~During the nine months ended September 30, 2021, the ACL on loans decreased $21.9 million or 31.2%, due primarily to a reversal of provision for credit losses on loans of $21.8 million. The reversal of provision for credit losses was primarily driven by improvements in the economic forecast at September 30, 2021 as compared to the forecast at December 31, 2020.

Table of Contents

A summary of the changes in the ACL on loans during the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 is as follows:

Nine Months Ended
September 30,
2021 2020
(In thousands)
Balance at the beginning of the year $ 70,185 $ 36,171
Impact of CECL Adoption — 1,822
Balance at the beginning of the year, as adjusted 70,185 37,993
Charge-offs (1,267) (4,694)
Recoveries of loans previously charged-off 1,207 1,816
(Reversal of) provision for credit losses on loans (21,808) 38,225
Balance at the end of the year $ 48,317 $ 73,340


	Nine Months Ended September 30,
	2022		2021
	(In thousands)
Beginning balance	$	42,361	$	70,185
Charge-offs	(742)		(1,267)
Recoveries of loans previously charged-off	1,722		1,207
Reversal of provision for credit losses on loans	(1,252)		(21,808)
Ending balance	$	42,089	$	48,317

The following tables detail the activity in the ACL on loans ~~disaggregated~~ by segment and class for the ~~three and nine months ended September 30, 2021 and 2020:~~periods indicated:


		Three Months Ended September 30, 2021											Three Months Ended September 30, 2022
		Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance			Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
		(In thousands)											(In thousands)
Commercial business:	Commercial business:											Commercial business:
Commercial and industrial	Commercial and industrial	$	17,485	$	(743)	$	373	$	1,531	$	18,646	Commercial and industrial	$	14,033	$	—	$	455	$	180	$	14,668
SBA PPP		—		—		—		—		—
Owner-occupied CRE	Owner-occupied CRE	8,562		—		12		(1,644)		6,930		Owner-occupied CRE	8,162		—		—		(443)		7,719
Non-owner occupied CRE	Non-owner occupied CRE	10,630		—		—		(1,133)		9,497		Non-owner occupied CRE	9,512		—		—		41		9,553
Total commercial business	Total commercial business	36,677		(743)		385		(1,246)		35,073		Total commercial business	31,707		—		455		(222)		31,940
Residential real estate	Residential real estate	1,153		—		—		(67)		1,086		Residential real estate	2,137		—		—		408		2,545
Real estate construction and land development:	Real estate construction and land development:											Real estate construction and land development:
Residential	Residential	1,636		—		8		136		1,780		Residential	1,081		—		5		208		1,294
Commercial and multifamily	Commercial and multifamily	8,835		—		—		(1,530)		7,305		Commercial and multifamily	2,203		—		102		1,505		3,810
Total real estate construction and land development	Total real estate construction and land development	10,471		—		8		(1,394)		9,085		Total real estate construction and land development	3,284		—		107		1,713		5,104
Consumer	Consumer	3,261		(204)		161		(145)		3,073		Consumer	2,568		(138)		50		20		2,500
Total	Total	$	51,562	$	(947)	$	554	$	(2,852)	$	48,317	Total	$	39,696	$	(138)	$	612	$	1,919	$	42,089


		Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2022
		Beginning Balance		Charge-offs		Recoveries			Reversal of Provision for Credit Losses		Ending Balance			Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
		(In thousands)						(In thousands)
Commercial business:	Commercial business:												Commercial business:
Commercial and industrial	Commercial and industrial	$	30,010	$	(757)	$	710		$	(11,317)	$	18,646	Commercial and industrial	$	17,777	$	(280)	$	876	$	(3,705)	$	14,668
SBA PPP		—		—		—			—		—
Owner-occupied CRE													Owner-occupied CRE	6,411		(36)		—		1,344		7,719
Non-owner occupied CRE													Non-owner occupied CRE	8,861		—		—		692		9,553
Total commercial business													Total commercial business	33,049		(316)		876		(1,669)		31,940
Residential real estate													Residential real estate	1,409		(30)		3		1,163		2,545
Real estate construction and land development:													Real estate construction and land development:
Residential													Residential	1,304		—		19		(29)		1,294
Commercial and multifamily													Commercial and multifamily	3,972		—		155		(317)		3,810
Total real estate construction and land development													Total real estate construction and land development	5,276		—		174		(346)		5,104
Consumer													Consumer	2,627		(396)		669		(400)		2,500
Total													Total	$	42,361	$	(742)	$	1,722	$	(1,252)	$	42,089

2624

Table of Contents


		Nine Months Ended September 30, 2021							Three Months Ended September 30, 2021
		Beginning Balance		Charge-offs		Recoveries				Reversal of Provision for Credit Losses		Ending Balance			Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
		(In thousands)							(In thousands)
Commercial business:														Commercial business:
Commercial and industrial														Commercial and industrial	$	17,485	$	(743)	$	373	$	1,531	$	18,646
Owner-occupied CRE	Owner-occupied CRE	9,486		—		25				(2,581)		6,930		Owner-occupied CRE	8,562		—		12		(1,644)		6,930
Non-owner occupied CRE	Non-owner occupied CRE	10,112		—		—				(615)		9,497		Non-owner occupied CRE	10,630		—		—		(1,133)		9,497
Total commercial business	Total commercial business	49,608		(757)		735				(14,513)		35,073		Total commercial business	36,677		(743)		385		(1,246)		35,073
Residential real estate	Residential real estate	1,591		—		—				(505)		1,086		Residential real estate	1,153		—		—		(67)		1,086
Real estate construction and land development:	Real estate construction and land development:							Real estate construction and land development:
Residential	Residential	1,951		—		28				(199)		1,780		Residential	1,636		—		8		136		1,780
Commercial and multifamily	Commercial and multifamily	11,141		(1)		—				(3,835)		7,305		Commercial and multifamily	8,835		—		—		(1,530)		7,305
Total real estate construction and land development	Total real estate construction and land development	13,092		(1)		28				(4,034)		9,085		Total real estate construction and land development	10,471		—		8		(1,394)		9,085
Consumer	Consumer	5,894		(509)		444				(2,756)		3,073		Consumer	3,261		(204)		161		(145)		3,073
Total	Total	$	70,185	$	(1,267)	$	1,207			$	(21,808)	$	48,317	Total	$	51,562	$	(947)	$	554	$	(2,852)	$	48,317

Three Months Ended September 30, 2020
Beginning Balance Charge-offs Recoveries Provision for (Reversal of Provision for) Credit Losses Ending Balance
(In thousands)
Commercial business:
Commercial and industrial $ 29,773 $ (507) $ 78 $ 1,815�� $ 31,159
SBA PPP — — — — —
Owner-occupied CRE 10,003 — 2 3,027 13,032
Non-owner occupied CRE 10,666 — — (124) 10,542
Total commercial business 50,442 (507) 80 4,718 54,733
Residential real estate 2,223 — — (398) 1,825
Real estate construction and land development:
Residential 567 — 139 (42) 664
Commercial and multifamily 8,557 — — 70 8,627
Total real estate construction and land development 9,124 — 139 28 9,291
Consumer 9,712 (335) 142 (2,028) 7,491
Total $ 71,501 $ (842) $ 361 $ 2,320 $ 73,340

Nine Months Ended September 30, 2020
Beginning Balance Impact of CECL Adoption Beginning Balance,
as Adjusted Charge-offs Recoveries Provision for (Reversal of Provision for) Credit Losses Ending Balance
(In thousands)
Commercial business:
Commercial and industrial $ 11,739 $ (1,348) $ 10,391 $ (3,418) $ 1,204 $ 22,982 $ 31,159
SBA PPP — — — — — — —
Owner-occupied CRE 4,512 452 4,964 (135) 16 8,187 13,032
Non-owner occupied CRE 7,682 (2,039) 5,643 — — 4,899 10,542
Total commercial business 23,933 (2,935) 20,998 (3,553) 1,220 36,068 54,733
Residential real estate 1,458 1,471 2,929 — 3 (1,107) 1,825

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		Nine Months Ended September 30, 2020															Nine Months Ended September 30, 2021
		Beginning Balance		Impact of CECL Adoption		Beginning Balance, as Adjusted		Charge-offs		Recoveries		Provision for (Reversal of Provision for) Credit Losses		Ending Balance			Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
		(In thousands)															(In thousands)
Commercial business:																Commercial business:
Commercial and industrial																Commercial and industrial	$	30,010	$	(757)	$	710	$	(11,317)	$	18,646
Owner-occupied CRE																Owner-occupied CRE	9,486		—		25		(2,581)		6,930
Non-owner occupied CRE																Non-owner occupied CRE	10,112		—		—		(615)		9,497
Total commercial business																Total commercial business	49,608		(757)		735		(14,513)		35,073
Residential real estate																Residential real estate	1,591		—		—		(505)		1,086
Real estate construction and land development:	Real estate construction and land development:															Real estate construction and land development:
Residential	Residential	1,455		(571)		884		—		160		(380)		664		Residential	1,951		—		28		(199)		1,780
Commercial and multifamily	Commercial and multifamily	1,605		7,240		8,845		—		—		(218)		8,627		Commercial and multifamily	11,141		(1)		—		(3,835)		7,305
Total real estate construction and land development	Total real estate construction and land development	3,060		6,669		9,729		—		160		(598)		9,291		Total real estate construction and land development	13,092		(1)		28		(4,034)		9,085
Consumer	Consumer	6,821		(2,484)		4,337		(1,141)		433		3,862		7,491		Consumer	5,894		(509)		444		(2,756)		3,073
Unallocated		899		(899)		—		—		—		—		—
Total	Total	$	36,171	$	1,822	$	37,993	$	(4,694)	$	1,816	$	38,225	$	73,340	Total	$	70,185	$	(1,267)	$	1,207	$	(21,808)	$	48,317

(5)Goodwill and Other Intangible Assets

(a) Goodwill

The Company’s goodwill represents the excess of the purchase price over the fair value of net assets acquired in the following mergers: Premier Commercial Bancorp and Puget Sound Bancorp in 2018; Washington Banking Company in 2014; Valley Community Bancshares in 2013; Western Washington Bancorp in 2006 and North Pacific Bank in 1998. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit).

There were no additions to goodwill during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~

~~Management~~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 ~~that~~ the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, ~~2020~~2021 and concluded that there was no impairment.

(b) Other Intangible Assets

Other intangible assets represent core deposit ~~intangibles~~intangible acquired in business ~~combinations. The~~combinations with estimated useful ~~life~~lives of ~~the core deposit intangibles was estimated~~ten years. There were no additions to ~~be ten years for the acquisitions of Premier Commercial Bancorp, Puget Sound Bancorp, Washington Banking Company, and Valley Community Bancshares.~~

~~The following table presents the change in~~ other intangible assets ~~for~~during the ~~periods indicated:~~three and nine months ended September 30, 2022 and 2021.

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(In thousands)
Balance at the beginning of the period $ 11,494 $ 14,807 $ 13,088 $ 16,613
Amortization (758) (860) (2,352) (2,666)
Balance at the end of the period $ 10,736 $ 13,947 $ 10,736 $ 13,947

(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

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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

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assets and Accrued expenses and other liabilities in the unaudited Condensed Consolidated Statements of Financial Condition. The gains and losses due to changes in fair value and all cash flows are included in Other income in the unaudited Condensed Consolidated Statements of Income, but typically net to zero based on the identical back-to-back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at ~~September 30, 2021 and December 31, 2020:~~the dates indicated:


		September 30, 2021				December 31, 2020					September 30, 2022			December 31, 2021
		Notional Amounts		Estimated Fair Value		Notional Amounts		Estimated Fair Value			Notional Amounts		Estimated Fair Value	Notional Amounts		Estimated Fair Value
		(In thousands)									(In thousands)
Non-hedging interest rate derivatives	Non-hedging interest rate derivatives									Non-hedging interest rate derivatives
Interest rate swap asset (1)	Interest rate swap asset (1)	$	323,706	$	17,843	$	308,126	$	25,740	Interest rate swap asset (1)	$	298,601	32,523	$	322,726	$	15,219
Interest rate swap liability (1)	Interest rate swap liability (1)	323,706		(17,970)		308,126		(26,162)		Interest rate swap liability (1)	298,601		(32,523)	322,726		(15,286)

(1) The estimated fair value of derivatives with customers was ~~$13.0~~$(32.5) million and ~~$25.4~~$9.8 million as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The estimated fair value of derivatives with ~~third parties~~third-parties was ~~$(13.2)~~$32.5 million and ~~$(25.9)~~$(9.8) million as of September 30, ~~2021~~2022 and December 31, ~~2020,~~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 ~~at September 30, 2021 and September 30, 2020:~~for the periods indicated:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands, except shares)									(In thousands, except shares)
Net income:

Net income	Net income	$	20,592	$	16,636	$	78,638	$	22,688	Net income	$	20,990	$	20,592	$	59,331	$	78,638
Dividends and undistributed earnings allocated to participating securities (1)		—		—		—		(5)
Net income allocated to common shareholders		$	20,592	$	16,636	$	78,638	$	22,683

Basic:	Basic:									Basic:
Weighted average common shares outstanding	Weighted average common shares outstanding	35,644,192		35,909,148		35,854,258		36,054,906		Weighted average common shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258
Restricted stock awards		—		(303)		—		(5,537)
Total basic weighted average common shares outstanding		35,644,192		35,908,845		35,854,258		36,049,369

Diluted:	Diluted:									Diluted:
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	35,644,192		35,908,845		35,854,258		36,049,369		Basic weighted average common shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258
Effect of potentially dilutive common shares ~~(2)~~(1)	Effect of potentially dilutive common shares ~~(2)~~(1)	285,326		79,889		297,794		144,246		Effect of potentially dilutive common shares ~~(2)~~(1)	364,906		285,326		335,624		297,794
Total diluted weighted average common shares outstanding	Total diluted weighted average common shares outstanding	35,929,518		35,988,734		36,152,052		36,193,615		Total diluted weighted average common shares outstanding	35,468,890		35,929,518		35,438,672		36,152,052
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive ~~(3)~~(2)	Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive ~~(3)~~(2)	16,002		222,818		7,083		140,217		Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive ~~(3)~~(2)	3,026		16,002		13,662		7,083

(1)~~Represents dividends paid and undistributed earnings allocated to unvested restricted stock awards.~~

~~(2)~~Represents the effect of the ~~assumed exercise of stock options and~~ vesting of restricted stock ~~awards and~~ units.

~~(3)~~(2) Anti-dilution occurs when ~~the exercise price of a stock option or~~ the unrecognized compensation cost per share of a restricted stock ~~award~~unit exceeds the market price of the Company’s stock.

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(b) Dividends

The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings,

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capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.

The following table summarizes the dividend activity during the nine months ended September 30, ~~2021~~ 2022and the calendar year ~~2020:~~2021:

Declared

Cash Dividend per Share

Record Date

Paid Date

~~January 22, 2020~~

~~$0.20~~

~~February 6, 2020~~

~~February 20, 2020~~

~~April 29, 2020~~

~~$0.20~~

~~May 13, 2020~~

~~May 27, 2020~~

~~July 22, 2020~~

~~$0.20~~

~~August 5, 2020~~

~~August 19, 2020~~

~~October 21, 2020~~

~~$0.20~~

~~November 4, 2020~~

~~November 18, 2020~~

January 27, 2021

$0.20

February 10, 2021

February 24, 2021

April 21, 2021

$0.20

May 5, 2021

May 19, 2021

July 21, 2021

$0.20

August 4, 2021

August 18, 2021

October 20, 2021

$0.21

November 3, 2021

November 17, 2021

January 26, 2022

$0.21

February 9, 2022

February 23, 2022

April 20, 2022

$0.21

May 4, 2022

May 18, 2022

July 20, 2022

$0.21

August 3, 2022

August 17, 2022

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.

The Company has had various stock repurchase programs since March 1999. ~~On October 23, 2014, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,512,600 shares, under the eleventh stock repurchase plan.~~ 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 after all shares under the eleventh stock repurchase plan had been repurchased.~~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~~repurchase plan for the periods indicated:


		Three Months Ended September 30,				Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020		Plan Total(1)			2022		2021		2022		2021		Plan Total(1)
Eleventh Stock Repurchase Plan

Repurchased shares	Repurchased shares	—		—		—		639,922		1,512,600		Repurchased shares	—		841,088		100,090		841,088		1,160,840
Stock repurchase average share price	Stock repurchase average share price	$	—	$	—	$	—	$	23.95	$	21.69	Stock repurchase average share price	$	—	$	24.54	$	25.07	$	24.54	$	23.94

Twelfth Stock Repurchase Plan
Repurchased shares		841,088		—		841,088		155,778		996,866
Stock repurchase average share price		$	24.54	$	—	$	24.54	$	20.34	$	23.88

(1)Represents shares repurchased and average price per share paid during the duration of ~~each~~the repurchase 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 September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Repurchased shares to pay withholding taxes	Repurchased shares to pay withholding taxes	220		378		26,023		28,306		Repurchased shares to pay withholding taxes	100		220		26,280		26,023
Stock repurchase to pay withholding taxes average share price	Stock repurchase to pay withholding taxes average share price	$	23.91	$	19.84	$	29.29	$	21.54	Stock repurchase to pay withholding taxes average share price	$	26.94	$	23.91	$	25.40	$	29.29

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(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.

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(a) Recurring and Nonrecurring Basis

The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:

Investment Securities:

The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third-party pricing services.

Collateral-Dependent Loans:

Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The 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~~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 September 30, ~~2021~~2022 and December 31, ~~2020,~~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 ~~that~~ 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~~premises and equipment, net to ~~Prepaid~~prepaid expenses and other assets on the unaudited Condensed Consolidated Statements of Financial Condition with any valuation adjustment recorded within ~~Other~~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

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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:

September 30, 2021
Total Level 1 Level 2 Level 3
(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities $ 26,106 $ — $ 26,106 $ —
Municipal securities 228,166 — 228,166 —
Residential CMO and MBS 242,693 — 242,693 —
Commercial CMO and MBS 235,018 — 235,018 —
Corporate obligations 2,023 — 2,023 —
Other asset-backed securities 27,520 — 27,520 —
Total investment securities available for sale 761,526 — 761,526 —
Equity security 210 210 — —
Derivative assets - interest rate swaps 17,843 — 17,843 —
Liabilities
Derivative liabilities - interest rate swaps $ 17,970 $ — 17,970 $ —


	September 30, 2022
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities	$	63,749	$	19,770	$	43,979	$	—
Municipal securities	185,713		—		185,713		—
Residential CMO and MBS	438,370		—		438,370		—

December 31, 2020
Total Level 1 Level 2 Level 3
(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities $ 45,660 $ — $ 45,660 $ —
Municipal securities 209,968 — 209,968 —
Residential CMO and MBS 201,872 — 201,872 —
Commercial CMO and MBS 303,746 — 303,746 —
Corporate obligations 11,096 — 11,096 —
Other asset-backed securities 29,821 — 29,821 —
Total investment securities available for sale 802,163 — 802,163 —
Equity security 131 131 — —
Derivative assets - interest rate swaps 25,740 — 25,740 —
Liabilities
Derivative liabilities - interest rate swaps $ 26,162 $ — $ 26,162 $ —

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	September 30, 2022
	Total		Level 1		Level 2		Level 3
	(In thousands)
Commercial CMO and MBS	639,441		—		639,441		—
Corporate obligations	5,834		—		5,834		—
Other asset-backed securities	23,035		—		23,035		—
Total investment securities available for sale	1,356,142		19,770		1,336,372		—
Equity security	192		192		—		—
Derivative assets - interest rate swaps	32,523		—		32,523		—
Liabilities
Derivative liabilities - interest rate swaps	$	32,523	$	—	$	32,523	$	—


	December 31, 2021
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities	$	21,373	$	—	$	21,373	$	—
Municipal securities	221,212		—		221,212		—
Residential CMO and MBS	306,884		—		306,884		—
Commercial CMO and MBS	315,861		—		315,861		—
Corporate obligations	2,014		—		2,014		—
Other asset-backed securities	26,991		—		26,991		—
Total investment securities available for sale	894,335		—		894,335		—
Equity security	240		240		—		—
Derivative assets - interest rate swaps	15,219		—		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 ~~below~~ represent assets measured at fair value on a nonrecurring basis at the dates indicated:


				Fair Value at September 30, 2021											Fair Value at September 30, 2022
		Basis(1)		Total		Level 1		Level 2		Level 3			Basis(1)		Total		Level 1		Level 2		Level 3
		(In thousands)											(In thousands)
Collateral-dependent loans:	Collateral-dependent loans:											Collateral-dependent loans:
Commercial business:	Commercial business:											Commercial business:
Commercial and industrial		$	2,058	$	1,222	$	—	$	—	$	1,222

Owner-occupied CRE												Owner-occupied CRE	613		186		—		—		186

Total assets measured at fair value on a nonrecurring basis												Total assets measured at fair value on a nonrecurring basis	$	613	$	186	$	—	$	—	$	186

(1) Basis represents the outstanding principal balance of collateral-dependent loans.


			Fair Value at December 31, 2021
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	1,911	$	1,049	$	—	$	—	$	1,049
Owner-occupied CRE	613		189		—		—		189

Total commercial business	2,524		1,238		—		—		1,238

Real estate construction and land development:

3229

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				Fair Value at September 30, 2021											Fair Value at December 31, 2021
		Basis(1)		Total		Level 1		Level 2		Level 3			Basis(1)		Total		Level 1		Level 2		Level 3
		(In thousands)
Owner-occupied CRE		613		486		—		—		486

Total commercial business		2,671		1,708		—		—		1,708

Real estate construction and land development:
													(In thousands)
Commercial and multifamily	Commercial and multifamily	991		534		—		—		534		Commercial and multifamily	991		$	534	—		—		534

Total	Total	$	3,662	$	2,242	$	—	$	—	$	2,242	Total	3,515		1,772		—		—		1,772
Prepaid expenses and other assets:	Prepaid expenses and other assets:											Prepaid expenses and other assets:
Branch held for sale (2)	Branch held for sale (2)	805		805		—		—		805		Branch held for sale (2)	698		698		—		—		698
Total assets measured at fair value on a nonrecurring basis	Total assets measured at fair value on a nonrecurring basis	$	4,467	$	3,047	$	—	$	—	$	3,047	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 ~~July~~December 2021, ~~three branches were reclassified as held for sale in accordance with ASC 360-10. As part of the transfer,~~ one branch was written down to its net realizable value ~~at that time.~~

Fair Value at December 31, 2020
Basis(1)
Total Level 1 Level 2 Level 3
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial $ 1,305 $ 1,289 $ — $ — $ 1,289
Prepaid expenses and other assets:
Branch held for sale (2)
1,330 1,330 — — 1,330
Total assets measured at fair value on a nonrecurring basis $ 2,635 $ 2,619 $ — $ — $ 2,619

~~(1)~~ ~~Basis represents~~concurrent with the ~~outstanding principal balance~~signing of ~~collateral-dependent loans and the carrying value of the branch held for sale.~~

~~(2)~~ ~~In October 2020, one branch was reclassified as held~~an agreement for sale ~~in accordance with ASC 360-10. As part of~~and was sold during the ~~transfer, the branch was written down to its net realizable value at that time.~~

three months ended March 31, 2022.

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
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial $ (54) $ — $ (563) $ (10)
Owner-occupied CRE 15 — (61) —
Total commercial business (39) — (624) (10)
Real estate construction and land development:
Commercial and multifamily — — (38) —
Total (39) — (662) (10)
Prepaid expenses and other assets:
Branch held for sale (38) — (38) —
Net loss from nonrecurring fair value adjustments $ (77) $ — $ (700) $ (10)

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	—	$	(54)	$	24	$	(563)
Owner-occupied CRE	—		15		(4)		(61)

Total commercial business	—		(39)		20		(624)

Real estate construction and land development:

Commercial and multifamily	—		—		—		(38)
Total	—		(39)		20		(662)
Prepaid expenses and other assets:
Branch held for sale	—		(38)		—		(38)
Net (loss) gain from nonrecurring fair value adjustments	$	—	$	(77)	$	20	$	(700)

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:

September 30, 2022

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs; Weighted
Average

(Dollars in thousands)

Collateral-dependent loans

186

Market approach

Adjustment for differences between the comparable sales

N/A(1)

(1)Quantitative disclosures are not provided for collateral-dependent loans because there were no adjustments made to the appraisal or stated values during the current period.

December 31, 2021

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs; Weighted
Average

(Dollars in thousands)

Collateral-dependent loans

~~2,242~~1,772

Market approach

Adjustment for differences between the comparable sales

~~55.0%~~35.0% - ~~(20.0)%~~(11.0%); ~~9.6%~~13.8%

Branch held for sale

~~805~~698

Market approach

~~Adjustment for differences between the comparable sales~~

~~51.8% - (26.0)%; 6.4%~~

~~December 31, 2020~~

Fair
ValueSale agreement

Valuation
Technique(s)N/A

~~Unobservable Input(s)~~

Range of Inputs; Weighted
Average

~~(Dollars in thousands)~~

~~Collateral-dependent loans~~

~~1,289~~

~~Market approach~~

~~Adjustment for differences between the comparable sales~~

~~0.6% - (40.1%); (24.1%)~~

~~Branch held for sale~~

~~1,330~~

~~Market approach~~

~~Adjustment for differences between the comparable sales~~

~~140.7% - (40.3%); 33.2%~~

(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

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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:


		September 30, 2021															September 30, 2022
		Carrying Value			Fair Value			Fair Value Measurements Using:									Carrying Value			Fair Value			Fair Value Measurements Using:
							Level 1			Level 2			Level 3									Level 1			Level 2			Level 3
				(In thousands)															(In thousands)
Financial Assets:	Financial Assets:															Financial Assets:
Cash and cash equivalents	Cash and cash equivalents	$	1,634,739		$	1,634,739		$	1,634,739		$	—		$	—	Cash and cash equivalents	$	407,324		$	407,324		$	407,324		$	—		$	—
Investment securities available for sale	Investment securities available for sale	761,526			761,526			—			761,526			—		Investment securities available for sale	1,356,142			1,356,142			19,770			1,336,372			—
Investment securities held to maturity	Investment securities held to maturity	311,074			307,330			—			307,330			—		Investment securities held to maturity	773,319			677,335			—			677,335			—
Loans held for sale	Loans held for sale	2,636			2,726			—			—			2,726		Loans held for sale	—			—			—			—			—
Loans receivable, net	Loans receivable, net	3,905,567			4,014,701			—			—			4,014,701		Loans receivable, net	3,959,206			3,848,546			—			—			3,848,546
Accrued interest receivable	Accrued interest receivable	14,802			14,802			51			3,578			11,173		Accrued interest receivable	17,812			17,812			351			6,962			10,499
Bank owned life insurance		109,634			109,634			109,634			—			—
Derivative assets - interest rate swaps	Derivative assets - interest rate swaps	17,843			17,843			—			17,843			—		Derivative assets - interest rate swaps	32,523			32,523			—			32,523			—
Equity security	Equity security	210			210			210			—			—		Equity security	192			192			192			—			—
Financial Liabilities:	Financial Liabilities:															Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts		$	5,859,762		$	5,859,762		$	5,859,762		$	—		$	—
Non-maturity deposits																Non-maturity deposits	$	5,950,312		$	5,950,312		$	5,950,312		$	—		$	—
Certificates of deposit	Certificates of deposit	355,796			357,266			—			357,266			—		Certificates of deposit	287,423			287,837			—			287,837			—

Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	44,096			44,096			44,096			—			—		Securities sold under agreement to repurchase	40,449			40,449			40,449			—			—
Junior subordinated debentures	Junior subordinated debentures	21,107			18,250			—			—			18,250		Junior subordinated debentures	21,399			20,250			—			—			20,250
Accrued interest payable	Accrued interest payable	74			74			31			25			18		Accrued interest payable	101			101			36			13			52
Derivative liabilities - interest rate swaps	Derivative liabilities - interest rate swaps	17,970			17,970			—			17,970			—		Derivative liabilities - interest rate swaps	32,523			32,523			—			32,523			—


	December 31, 2021
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	1,723,292	$	1,723,292	$	1,723,292	$	—	$	—
Investment securities available for sale	894,335		894,335		—		894,335		—
Investment securities held to maturity	383,393		376,331		—		376,331		—
Loans held for sale	1,476		1,527		—		1,527		—
Loans receivable, net	3,773,301		3,849,602		—		—		3,849,602
Accrued interest receivable	14,657		14,657		14		4,582		10,061
Derivative assets - interest rate swaps	15,219		15,219		—		15,219		—
Equity security	240		240		240		—		—
Financial Liabilities:
Non-maturity deposits	$	6,051,451	$	6,051,451	$	6,051,451	$	—	$	—
Certificates of deposit	342,839		344,025		—		344,025		—

Securities sold under agreement to repurchase	50,839		50,839		50,839		—		—
Junior subordinated debentures	21,180		18,750		—		—		18,750
Accrued interest payable	73		73		33		19		21
Derivative liabilities - interest rate swaps	15,286		15,286		—		15,286		—

3431

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December 31, 2020
Carrying
Value Fair
Value Fair Value Measurements Using:
Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents $ 743,322 $ 743,322 $ 743,322 $ — $ —
Investment securities available for sale 802,163 802,163 — 802,163 —
Loans held for sale 4,932 5,156 — — 5,156
Loans receivable, net 4,398,462 4,556,862 — — 4,556,862
Accrued interest receivable 19,418 19,418 2 3,648 15,768
Bank owned life insurance 107,580 107,580 107,580 — —
Derivative assets - interest rate swaps 25,740 25,740 — 25,740 —
Equity security 131 131 131 — —
Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts $ 5,198,456 $ 5,198,456 $ 5,198,456 $ — $ —
Certificates of deposit 399,534 402,701 — 402,701 —
Securities sold under agreement to repurchase 35,683 35,683 35,683 — —
Junior subordinated debentures 20,887 18,500 — — 18,500
Accrued interest payable 94 94 42 33 19
Derivative liabilities - interest rate swaps 26,162 26,162 — 26,162 —

(9)Cash Restriction

The Bank had no cash restrictions at September 30, 2022 and had restricted cash included in interest earning deposits ~~on the Condensed Consolidated Statements~~ of ~~Financial Condition of $13.2~~$9.8 million ~~and $25.9 million as of September 30, 2021 and~~at December 31, ~~2020, respectively,~~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.

The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:

September 30,
2021 December 31, 2020
(In thousands)
Commercial business:
Commercial and industrial $ 577,284 $ 640,018
Owner-occupied CRE 1,533 3,488
Non-owner occupied CRE 8,311 18,396
Total commercial business 587,128 661,902
Real estate construction and land development:
Residential 46,911 52,453
Commercial and multifamily 137,161 127,821
Total real estate construction and land development 184,072 180,274
Consumer 282,850 263,249
Total outstanding commitments $ 1,054,050 $ 1,105,425

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Upon CECL adoption, as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements, the Bank recorded an increase in the beginning ACL on unfunded commitments of $3.7 million as of January 1, 2020, representing the change in methodology from an estimate of incurred losses at the balance sheet date, with an estimated probability of funding, to an estimate of credit losses on future utilization over the entire contractual period.


	September 30, 2022		December 31, 2021
	(In thousands)
Commercial business:
Commercial and industrial	$	528,690	$	570,156
Owner-occupied CRE	4,260		2,252
Non-owner occupied CRE	12,334		7,487
Total commercial business	545,284		579,895

Real estate construction and land development:
Residential	52,098		51,838
Commercial and multifamily	237,204		209,217
Total real estate construction and land development	289,302		261,055
Consumer	314,216		285,010
Total outstanding commitments	$	1,148,802	$	1,125,960

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

Three Months Ended Nine Months Ended
September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
(In thousands)
Balance, beginning of period $ 2,451 $ 4,612 $ 4,681 $ 306
Impact of CECL Adoption — — — 3,702
Adjusted balance, beginning of period 2,451 4,612 4,681 4,008
(Reversal of) provision for credit losses on unfunded commitments (297) 410 (2,527) 1,014
Balance, end of period $ 2,154 $ 5,022 $ 2,154 $ 5,022


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands)
Balance, beginning of period	$	997	$	2,451	$	2,607	$	4,681
Provision for (reversal of) credit losses on unfunded commitments	26		(297)		(1,584)		(2,527)
Balance, end of period	$	1,023	$	2,154	$	1,023	$	2,154

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three and nine months ended September 30, ~~2021.~~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~~Forward-Looking Statements included herein and the December 31, ~~2020~~2021 audited Consolidated Financial Statements and the accompanying Notes included in our ~~2020~~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

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land development loans and consumer loans. ~~During the three months ended March 31, 2020, we ceased indirect auto loan originations, included in our consumer portfolio.~~ We additionally originate for sale or for investment purposes residential real estate loans on single family properties located primarily in our markets.

Our core profitability depends primarily on our net interest income. 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 including most recently significant changes as a result of inflation, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.

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

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of products and services, ~~and~~ internet and mobile banking channels ~~as well as~~and software-as-a-service providers. Professional services consists primarily of ~~third party~~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, ~~especially~~including changes resulting from the COVID-19 ~~pandemic~~Pandemic and inflation and the governmental actions taken to address ~~it.~~these issues. 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~~Pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As of September 30, 2021, all Bank branches are open with normal hours, remote employees commenced a phased-in return to the office and substantially all employees are expected to return to their go-forward working environments by the end of 2021. 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 62 branches at September 30, 2020, including the consolidation~~Results of one branch during the three months ended December 31, 2020, eight branches during the three months ended March 31, 2021, and four branches in October 2021. 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. All significant expenses related to the Branch Consolidation Plan for the four branches closed during October 2021 have been included in results of operations for the three months ended September 30, 2021.

~~Earnings Summary~~Operations

Comparison of quarter ended September 30, ~~2021~~2022 to the comparable quarter in the prior year

Net ~~income~~income was ~~$20.6~~$21.0 million,, or ~~$0.58~~$0.59 per diluted common share, for the three months ended September 30, ~~2021~~2022 compared to ~~$16.6~~$20.6 million, or ~~$0.46~~$0.58 per diluted common share, for the ~~three months ended September 30, 2020.~~same period in 2021. Net income increased ~~$4.0 million,~~$398,000, or ~~23.8%~~1.9%, due primarily to an increase in interest earned on interest earning assets following increases in market interest rates partially offset by a ~~reversal~~$1.9 million provision for credit losses, compared to a $3.1 million reversal of provision for credit losses of ~~$3.1 million~~ ~~during~~for the three months ended September 30, 2021 ~~compared to a provision for credit losses of $2.7 million for the same period in 2020.~~

~~The efficiency ratio consists of~~and increased noninterest ~~expense divided by the sum of net interest income plus noninterest income.~~ expense. The Company’s efficiency ratio was 58.66% for the three months ended September 30, 2022 compared to 62.35% for the ~~three months ended September 30, 2021 compared~~ ~~to 62.27% for the three months ended September 30, 2020.~~same period in 2021.

Comparison of nine months endedSeptember 30, ~~2021~~2022 to the comparable period in the prior year.

Net income was $~~78.6~~59.3 million, or $1.67 per diluted common share, for the nine months ended September 30, 2022 compared to $78.6 million, or $2.18 per diluted common share, for the nine months endedSeptember 30, 2021 ~~compared to $22.7~~. Net income decreased $19.3 million, or ~~$0.63~~ ~~per diluted common share, for the nine months ended September 30, 2020. Net income~~ ~~increased $56.0 million, or 246.6%~~24.6%, due primarily to a lower reversal of provision for credit ~~losses of~~losses. The Company’s efficiency ratio was 61.67% for the ~~$24.3 million~~ ~~during the~~ nine months endedSeptember 30, ~~2021~~2022 compared to ~~a provision for credit losses of $39.2 million~~60.66% for the same period in ~~2020.~~2021.

Average Balances, Yields and Rates Paid

The ~~Company’s efficiency ratio was~~ ~~60.66%~~following table provides relevant net interest income information for the ~~nine~~periods indicated:

Three Months Ended September 30,

2022

2021

Change

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:

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	Three Months Ended September 30,
	2022						2021						Change
	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)
Loans receivable, net (2)(3)	$	3,859,839	$	43,847	4.51	%	$	4,005,585	$	46,863	4.64	%	$	(145,746)	$	(3,016)	(0.13)	%
Taxable securities	1,868,900		12,362		2.62		893,374		4,711		2.09		975,526		7,651		0.53
Nontaxable securities (3)	133,022		892		2.66		157,907		931		2.34		(24,885)		(39)		0.32
Interest earning deposits	730,600		4,009		2.18		1,417,661		537		0.15		(687,061)		3,472		2.03
Total interest earning assets	6,592,361		61,110		3.68	%	6,474,527		53,042		3.25	%	117,834		8,068		0.43	%
Noninterest earning assets	775,375						740,433						34,942
Total assets	$	7,367,736					$	7,214,960					$	152,776
Interest Bearing Liabilities:
Certificates of Deposit	$	297,786	$	290	0.39	%	$	365,278	$	407	0.44	%	$	(67,492)	$	(117)	(0.05)	%
Savings accounts	654,697		99		0.06		609,818		90		0.06		44,879		9		—
Interest bearing demand and money market accounts	3,065,007		1,089		0.14		2,881,567		947		0.13		183,440		142		0.01
Total interest bearing deposits	4,017,490		1,478		0.15		3,856,663		1,444		0.15		160,827		34		—
Junior subordinated debentures	21,356		312		5.80		21,060		184		3.47		296		128		2.33
Securities sold under agreement to repurchase	42,959		34		0.31		52,197		36		0.27		(9,238)		(2)		0.04

Total interest bearing liabilities	4,081,805		1,824		0.18	%	3,929,920		1,664		0.17	%	151,885		160		0.01	%
Noninterest bearing demand deposits	2,356,688						2,313,145						43,543
Other noninterest bearing liabilities	118,191						116,187						2,004
Stockholders’ equity	811,052						855,708						(44,656)
Total liabilities and stock-holders’ equity	$	7,367,736					$	7,214,960					$	152,776
Net interest income and spread			$	59,286	3.50	%			$	51,378	3.08	%			$	7,908	0.42	%
Net interest margin					3.57	%					3.15	%					0.42	%

(1) Average balances are calculated using daily balances.

(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $857,000 and $7.8 million for the three months ended September 30, 2022 and 2021, ~~compared to 63.26% for the nine months ended September 30, 2020.~~respectively.

(3) ~~The improvement in the efficiency ratio was attributable primarily to the increase in net interest income.~~Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.

Net Interest Income and ~~Net Interest~~ 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' eq~~uity;~~equity; market interest rate fluctuations; and asset quality.

The following table provides the changes in net interest income for the three months ended September 30, 2022 compared to the three months ended September 30, 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:
	Volume		Yield/Rate		Total		% Change
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net	$	(1,678)	$	(1,338)	$	(3,016)	(6.4)	%
Taxable securities	6,206		1,445		7,651		162.4
Nontaxable securities	(158)		119		(39)		(4.2)
Interest earning deposits	(382)		3,854		3,472		646.6
Total interest income	$	3,988	$	4,080	$	8,068	15.2	%

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	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total		% Change
	(Dollars in thousands)
Interest Bearing Liabilities:
Certificates of deposit	$	(70)	$	(47)	$	(117)	(28.7)	%
Savings accounts	7		2		9		10.0
Interest bearing demand and money market accounts	62		80		142		15.0
Total interest bearing deposits	(1)		35		34		2.4
Junior subordinated debentures	3		125		128		69.6
Securities sold under agreement to repurchase	(7)		5		(2)		(5.6)

Total interest expense	$	(5)	$	165	$	160	9.6	%
Net interest income	$	3,993	$	3,915	$	7,908	15.4	%

Comparison of quarter ended September 30, ~~2021~~2022 to the comparable quarter in the prior year

Net interest income increased ~~$1.7 million, or 3.4%, to $51.4 million for the three months ended September 30, 2021 compared to $49.7 million for the same period in 2020 due~~ primarily to the Bank decreasing deposit rates following decreases in short-term market interest rates. Additionally, net interest income benefited from the recognition of a $412,000 prepayment penalty on an investment security.

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

Three Months Ended September 30,
2021 2020 Change
Average
Balance Interest
Earned/
Paid
Average
Yield/
Rate (1)
Average
Balance Interest
Earned/
Paid
Average
Yield/
Rate (1)
Average
Balance Interest
Earned/
Paid Average
Yield/
Rate
(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2) (3)
$ 4,005,585 $ 46,863 4.64 % $ 4,605,389 $ 47,647 4.12 % $ (599,804) $ (784) 0.52 %
Taxable securities 893,374 4,711 2.09 697,128 3,865 2.21 196,246 846 (0.12)
Nontaxable securities (3)
157,907 931 2.34 163,070 953 2.32 (5,163) (22) 0.02
Interest earning deposits 1,417,661 537 0.15 389,653 98 0.10 1,028,008 439 0.05
Total interest earning assets 6,474,527 53,042 3.25 % 5,855,240 52,563 3.57 % 619,287 479 (0.32) %
Noninterest earning assets 740,433 765,740 (25,307)
Total assets $ 7,214,960 $ 6,620,980 $ 593,980
Interest Bearing Liabilities:
Certificates of Deposit $ 365,278 $ 407 0.44 % $ 466,920 $ 1,133 0.97 % $ (101,642) $ (726) (0.53) %
Savings accounts 609,818 90 0.06 514,072 117 0.09 95,746 (27) (0.03)
Interest bearing demand and money market accounts 2,881,567 947 0.13 2,639,511 1,389 0.21 242,056 (442) (0.08)
Total interest bearing deposits 3,856,663 1,444 0.15 3,620,503 2,639 0.29 236,160 (1,195) (0.14)
Junior subordinated debentures 21,060 184 3.47 20,766 196 3.75 294 (12) (0.28)
Securities sold under agreement to repurchase 52,197 36 0.27 32,856 50 0.61 19,341 (14) (0.34)
Total interest bearing liabilities 3,929,920 1,664 0.17 % 3,674,125 2,885 0.31 % 255,795 (1,221) (0.14) %
Noninterest bearing demand deposits 2,300,795 1,998,772 302,023
Other noninterest bearing liabilities 128,537 148,345 (19,808)
Stockholders’ equity 855,708 799,738 55,970
Total liabilities and stock-holders’ equity $ 7,214,960 $ 6,620,980 $ 593,980
Net interest income $ 51,378 $ 49,678 $ 1,700
Net interest spread 3.08 % 3.26 % (0.18) %
Net interest margin 3.15 % 3.38 % (0.23) %
Average interest earning assets to average interest bearing liabilities 164.75 % 159.36 % 5.39 %
Cost of total deposits 0.09 % 0.19 % (0.10) %

~~(1)~~ ~~Annualized~~

~~(2)~~ ~~Average loan balances are net of ACL on loans. Nonaccrual loans have been included as loans carrying a zero yield.~~

~~(3)~~ ~~Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.~~

~~Net interest income~~ as a ~~percentage~~result of ~~average interest earning assets, or net interest margin, decreased due primarily to the decrease in the average yield~~higher yields earned on interest earning assets ~~primarily reflecting a significant increase~~following increases in market interest rates as well as an increased average ~~interest earning deposits to 21.9%~~balance of ~~total earning assets at September 30, 2021 compared to 6.7% at September 30, 2020,~~taxable investment securities, offset partially by a decrease ~~in the cost of total interest bearing liabilities. The decrease in net interest margin was also offset partially by an increase~~ in deferred SBA PPP loan fees recognized due to ~~an increase~~a decline in the volume of forgiven SBA PPP ~~loans during~~loans. SBA PPP interest and fee income decreased $7.8 million compared to the three months ended September 30, ~~2021 which benefited net~~2021.

Net interest margin ~~compared~~increased due to a ~~reduction in net interest margin from the Company's participation~~shift in the mix of interest-earning assets towards higher yielding loans and taxable investment securities as well as increased average yields on all interest earning assets, excluding the impact from SBA PPP ~~loans during the same period in 2020.~~

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loans.

The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on ~~purchased~~acquired loans on this financial measure for the periods presented below:

Three Months Ended
September 30,
2021 September 30,
2020
Non-GAAP reconciliation of loan yield: (1)
Loan yield (GAAP) 4.64 % 4.12 %
Exclude impact from SBA PPP loans (0.38) 0.33
Exclude impact from incremental accretion on purchased loans (2)
(0.07) (0.10)
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) 4.19 % 4.35 %


	Three Months Ended
	September 30, 2022		September 30, 2021

Loan yield (GAAP)	4.51	%	4.64	%
Exclude impact from SBA PPP loans	(0.02)		(0.38)
Exclude impact from incremental accretion on acquired loans	(0.05)		(0.07)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1)	4.44	%	4.19	%

(1) For additional information, see the "Reconciliations of Non-GAAP ~~Measures."~~Measures" section below.

~~(2)~~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 CECL Adoption. 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.

~~The~~There was no impact to loan yield from ~~net~~ recoveries of interest and fees on loans classified as nonaccrual ~~was an increase of two basis points~~ during the three months ended September 30, ~~2021. The impact~~2022 compared to ~~loan yield from net charge-offs of interest and fees on loans classified as nonaccrual was a decrease of~~ two basis points during the ~~three months ended September 30, 2020.~~same period in 2021.

Comparison of nine months ended September 30, ~~2021~~2022 to the comparable period in the prior year

~~Net interest income~~ ~~increased $9.3 million, or 6.3%, to $157.9 million for the nine months ended September 30, 2021 compared to $148.5 million for the same period in 2020 due primarily to~~ the Bank decreasing deposit rates following decreases in short-term market interest rates and secondarily due to an increase in the yield of loans receivable, net, predominately from higher deferred SBA PPP loan fees recognized from forgiven SBA PPP loans and higher recoveries of interest and fees on loans classified as nonaccrual. The increase in net interest income was offset partially by decreases in the yield for all interest earning assets, excluding the impact of SBA PPP loans and recoveries of interest and fees on loans classified as nonaccrual.

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


		Nine Months Ended September 30,																			Nine Months Ended September 30,
		2021						2020						Change							2022						2021						Change
		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate			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)																			(Dollars in thousands)
Interest Earning Assets:	Interest Earning Assets:																			Interest Earning Assets:
Loans receivable, net (2) (3)		$	4,297,875	$	147,137	4.58	%	$	4,266,598	$	142,328	4.46	%	$	31,277	$	4,809	0.12	%
Loans receivable, net (2)(3)																				Loans receivable, net (2)(3)	$	3,815,387	$	125,762	4.41	%	$	4,297,875	$	147,137	4.58	%	$	(482,488)	$	(21,375)	(0.17)	%
Taxable securities	Taxable securities	789,691		12,295		2.08		758,941		14,068		2.48		30,750		(1,773)		(0.40)		Taxable securities	1,532,450		25,972		2.27		789,691		12,295		2.08		742,759		13,677		0.19
Nontaxable securities (3)	Nontaxable securities (3)	160,748		2,836		2.36		148,560		2,686		2.42		12,188		150		(0.06)		Nontaxable securities (3)	138,904		2,645		2.55		160,748		2,836		2.36		(21,844)		(191)		0.19
Interest earning deposits	Interest earning deposits	1,034,690		975		0.13		234,040		561		0.32		800,650		414		(0.19)		Interest earning deposits	1,146,183		7,057		0.82		1,034,690		975		0.13		111,493		6,082		0.69
Total interest earning assets	Total interest earning assets	6,283,004		163,243		3.47	%	5,408,139		159,643		3.94	%	874,865		3,600		(0.47)	%	Total interest earning assets	6,632,924		161,436		3.25	%	6,283,004		163,243		3.47	%	349,920		(1,807)		(0.22)	%
Noninterest earning assets	Noninterest earning assets	749,781						757,269						(7,488)						Noninterest earning assets	762,877						749,781						13,096
Total assets	Total assets	$	7,032,785					$	6,165,408					$	867,377					Total assets	$	7,395,801					$	7,032,785					$	363,016

Interest Bearing Liabilities:
Certificates of deposit		$	379,885	$	1,447	0.51	%	$	502,691	$	4,955	1.32	%	$	(122,806)	$	(3,508)	(0.81)	%
Savings accounts		587,358		274		0.06		475,091		420		0.12		112,267		(146)		(0.06)
Interest bearing demand and money market accounts		2,817,353		2,975		0.14		2,428,148		4,897		0.27		389,205		(1,922)		(0.13)
Total interest bearing deposits		3,784,596		4,696		0.17		3,405,930		10,272		0.40		378,666		(5,576)		(0.23)

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		Nine Months Ended September 30,																			Nine Months Ended September 30,
		2021						2020						Change							2022						2021						Change
		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate			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)																			(Dollars in thousands)
Interest Bearing Liabilities:																				Interest Bearing Liabilities:
Certificates of Deposit																				Certificates of Deposit	$	318,547	$	952	0.40	%	$	379,885	$	1,447	0.51	%	$	(61,338)	$	(495)	(0.11)	%
Savings accounts																				Savings accounts	651,292		274		0.06		587,358		274		0.06		63,934		—		—
Interest bearing demand and money market accounts																				Interest bearing demand and money market accounts	3,066,229		3,089		0.13		2,817,353		2,975		0.14		248,876		114		(0.01)
Total interest bearing deposits																				Total interest bearing deposits	4,036,068		4,315		0.14		3,784,596		4,696		0.17		251,472		(381)		(0.03)
Junior subordinated debentures	Junior subordinated debentures	20,987		557		3.55		20,693		699		4.51		294		(142)		(0.96)		Junior subordinated debentures	21,286		745		4.68		20,987		557		3.55		299		188		1.13
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	45,221		109		0.32		25,296		122		0.64		19,925		(13)		(0.32)		Securities sold under agreement to repurchase	47,057		98		0.28		45,221		109		0.32		1,836		(11)		(0.04)
FHLB advances and other borrowings		—		—		—		1,959		8		0.55		(1,959)		(8)		(0.55)

Total interest bearing liabilities	Total interest bearing liabilities	3,850,804		5,362		0.19	%	3,453,878		11,101		0.43	%	396,926		(5,739)		(0.24)	%	Total interest bearing liabilities	4,104,411		5,158		0.17	%	3,850,804		5,362		0.19	%	253,607		(204)		(0.02)	%
Noninterest bearing demand deposits	Noninterest bearing demand deposits	2,213,795						1,768,260						445,535						Noninterest bearing demand deposits	2,355,285						2,227,281						128,004
Other noninterest bearing liabilities	Other noninterest bearing liabilities	128,584						138,837						(10,253)						Other noninterest bearing liabilities	113,534						115,098						(1,564)
Stockholders’ equity	Stockholders’ equity	839,602						804,433						35,169						Stockholders’ equity	822,571						839,602						(17,031)
Total liabilities and stockholders’ equity		$	7,032,785					$	6,165,408					$	867,377
Net interest income				$	157,881					$	148,542					$	9,339
Net interest spread						3.28	%					3.51	%					(0.23)	%
Total liabilities and stock-holders’ equity																				Total liabilities and stock-holders’ equity	$	7,395,801					$	7,032,785					$	363,016
Net interest income and spread																				Net interest income and spread			$	156,278	3.08	%			$	157,881	3.28	%			$	(1,603)	(0.20)	%
Net interest margin	Net interest margin					3.36	%					3.67	%					(0.31)	%	Net interest margin					3.15	%					3.36	%					(0.21)	%
Average interest earning assets to average interest bearing liabilities						163.16	%					156.58	%					6.58	%
Cost of total deposits						0.10	%					0.27	%					(0.17)	%

(1)~~Annualized~~ Average balances are calculated using daily balances.

(2)Average ~~loan balances are~~loans receivable, net ~~of ACL on loans. Nonaccrual~~includes loans ~~have been included~~held for sale and loans classified as ~~loans carrying~~nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $6.7 million and $23.2 million for the nine months ended September 30, 2022 and 2021, respectively.

(3)Yields on tax-exempt ~~securities~~loans and ~~loans~~securities have not been stated on a tax-equivalent basis.

~~Net~~The following table provides the changes in net interest ~~margin~~ ~~decreased~~ ~~due primarily t~~oincome for the ~~significant increase in average interest earning deposits~~nine months ended September 30, 2022 compared to ~~16.5% of total earning assets during~~ the nine months ended September 30, 2021 ~~compared~~due to ~~4.3% for~~changes in average asset and liability balances (volume), changes in average rates (rate) and changes attributable to the ~~same~~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:
	Volume		Yield/Rate		Total		% Change
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net	$	(16,057)	$	(5,318)	$	(21,375)	(14.5)	%
Taxable securities	12,500		1,177		13,677		111.2
Nontaxable securities	(405)		214		(191)		(6.7)
Interest earning deposits	116		5,966		6,082		623.8
Total interest income	$	(3,846)	$	2,039	$	(1,807)	(1.1)	%
Interest Bearing Liabilities:
Certificates of deposit	$	(212)	$	(283)	$	(495)	(34.2)	%
Savings accounts	28		(28)		—		—
Interest bearing demand and money market accounts	255		(141)		114		3.8
Total interest bearing deposits	71		(452)		(381)		(8.1)
Junior subordinated debentures	8		180		188		33.8
Securities sold under agreement to repurchase	4		(15)		(11)		(10.1)

Total interest expense	$	83	$	(287)	$	(204)	(3.8)	%
Net interest income	$	(3,929)	$	2,326	$	(1,603)	(1.0)	%

Comparison of nine months ended September 30, 2022 to the comparable period in the prior ~~year.~~year

Net interest income decreased due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decline in the volume of forgiven SBA PPP loans, offset partially by a higher average balance of taxable investment securities and higher

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yield earned on taxable securities and interest earning deposits following increases in market interest rates. SBA PPP interest and fee income decreased $22.0 million compared to the nine months ended September 30, 2021.

Net interest margin decreased due primarily to the change in the mix of total interest earning assets into a higher proportion of lower yielding investment securities and interest earning deposits.

The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on ~~purchased~~acquired loans on this financial measure for the periods presented below:

Nine Months Ended
September 30,
2021 2020
Non-GAAP reconciliation of loan yield: (1)
Loan yield (GAAP) 4.58 % 4.46 %
Exclude Impact on loan yield from SBA PPP loans (0.17) 0.22
Exclude impact on loan yield from incremental accretion on purchased loans (2)
(0.08) (0.09)
Loan yield excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) 4.33 % 4.59 %


	Nine Months Ended September 30,
	2022		2021
Loan yield (GAAP)	4.41	%	4.58	%
Exclude impact from SBA PPP loans	(0.13)		(0.17)
Exclude impact from incremental accretion on acquired loans	(0.04)		(0.08)
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1)	4.24	%	4.33	%

(1) For additional information, see "Reconciliations of Non-GAAP Measures."

~~(2)~~ 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 CECL Adoption. 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.

The impact to loan yield from ~~net~~ recoveries of interest and fees on loans classified as nonaccrual was ~~nine~~four basis points ~~and one basis point,~~ during the nine months ended September 30, ~~2021 and 2020, respectively.~~2022 compared to nine basis points during the same period 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 (reversal of) credit losses. The ACL on unfunded commitments is included on the unaudited Condensed Consolidated Statements of Financial Condition within ~~Accrued~~accrued expenses and other liabilities. The methodology for determining the ACL on loans is disclosed in the Analysis of Allowance for Credit Losses on Loans section below. The methodology for determining the ACL on unfunded commitments uses loss rates calculated in the ACL

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~~on loans by segment and an estimate of the likelihood of utilization of the unfunded commitment, both applied to the outstanding balance of unfunded commitments by segment.~~

Comparison of quarter ended September 30, ~~2021~~2022 to the comparable quarter in the prior year

The following table presents the provision for (reversal of) credit losses for the periods indicated:

Three Months Ended
September 30,
2021 2020 Change Percentage Change
(Dollars in thousands)
(Reversal of) provision for credit losses on loans $ (2,852) $ 2,320 $ (5,172) (222.9) %
(Reversal of) provision for credit losses on unfunded commitments (297) 410 (707) (172.4)
(Reversal of) provision for credit losses $ (3,149) $ 2,730 $ (5,879) (215.3) %


	Three Months Ended September 30,
	2022		2021		Change		% Change
	(Dollars in thousands)
Provision for (reversal of) credit losses on loans	$	1,919	$	(2,852)	$	4,771	(167.3)	%
Provision for (reversal of) credit losses on unfunded commitments	26		(297)		323		(108.8)
Provision for (reversal of) credit losses	$	1,945	$	(3,149)	$	5,094	(161.8)	%

The provision for credit losses on loans recognized during the three months ended September 30, 2022 was due primarily to an increase related to the growth in loans receivable offset partially by a reduction to the ACL on loans individually evaluated for losses.

The reversal of provision for credit losses on loans and unfunded commitments recognized during the three months ended September 30, 2021 was due primarily to ~~the reduction of the ACL on nonaccrual loans of $2.0 million following a decrease~~continued improvements in ~~nonaccrual loan balances of $9.4 million as well as changes in the loan mix.~~ ~~The provision for credit losses on loans of~~ ~~$2.3 million~~ ~~for the three months ended~~ ~~September 30, 2020~~ ~~was due primarily to~~ the economic forecast at ~~that time reflecting~~September 30, 2021 as compared to the ~~uncertain economic conditions stemming from the continued impacts from the COVID-19 pandemic.~~forecast at June 30, 2021.

Comparison of nine months ended September 30, ~~2021~~2022 to the comparable period in the prior year

The following table presents the provision for credit losses for the periods indicated:

Nine Months Ended
September 30,
2021 2020 Change Percentage Change
(Dollars in thousands)
(Reversal of) provision for credit losses on loans $ (21,808) $ 38,225 $ (60,033) (157.1) %
(Reversal of) provision for credit losses on unfunded commitments (2,527) 1,014 (3,541) (349.2)
(Reversal of) provision for credit losses $ (24,335) $ 39,239 $ (63,574) (162.0) %


	Nine Months Ended September 30,
	2022		2021		Change		Percentage Change
	(Dollars in thousands)
Reversal of provision for credit losses on loans	$	(1,252)	$	(21,808)	$	20,556	(94.3)	%
Reversal of provision for credit losses on unfunded commitments	(1,584)		(2,527)		943		(37.3)
Reversal of provision for credit losses	$	(2,836)	$	(24,335)	$	21,499	(88.3)	%

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The reversal of provision for credit losses recognized during the nine months endedSeptember 30, 2022was due primarily to a reduction of loans individually evaluated for losses and their related ACL.

The reversal of provision for credit losses recognized during the nine months ended September 30, 2021 was ~~primarily~~ due substantially to continued improvements in the economic forecast ~~during the nine months ended~~ at September 30, 2021 as compared to the ~~worsening of economic conditions during the~~ ~~nine months ended September 30, 2020 stemming from~~ ~~the onset of the COVID-19 pandemic.~~forecast at December 31, 2020.

Noninterest Income Overview

Comparison of quarter ended September 30, ~~2021~~2022 to the comparable quarter in the prior year

The following table presents the change in the key components of noninterest income ~~and the change~~ for the periods indicated:


		Three Months Ended September 30,									Three Months Ended September 30,
		2021		2020		Change		Percentage Change			2022		2021		Change		% Change
		(Dollars in thousands)									(Dollars in thousands)
Service charges and other fees	Service charges and other fees	$	4,566	$	4,039	$	527	13.0	%	Service charges and other fees	$	2,688	$	2,400	$	288	12.0	%
Gain on sale of investment securities, net		—		40		(40)		(100.0)
Card revenue										Card revenue	2,365		2,150		215		10.0

Gain on sale of loans, net	Gain on sale of loans, net	765		1,443		(678)		(47.0)		Gain on sale of loans, net	133		765		(632)		(82.6)
Interest rate swap fees	Interest rate swap fees	126		396		(270)		(68.2)		Interest rate swap fees	78		126		(48)		(38.1)
Bank owned life insurance income	Bank owned life insurance income	647		909		(262)		(28.8)		Bank owned life insurance income	723		647		76		11.7
Gain on sale of other assets, net										Gain on sale of other assets, net	265		942		(677)		(71.9)
Other income	Other income	2,124		1,383		741		53.6		Other income	1,201		1,198		3		0.3
Total noninterest income	Total noninterest income	$	8,228	$	8,210	$	18	0.2	%	Total noninterest income	$	7,453	$	8,228	$	(775)	(9.4)	%

Noninterest income ~~slightly increased~~decreased due primarily to ~~an increase in~~reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined and secondarily due to lower gain on sale of other ~~income as~~assets, net due to a ~~result of~~higher gain on sale of branches held for sale and an increase in service charges and other fees due mostly to higher interchange income and increased deposit fee income, offset partially by a decrease in gain on sale of loans due primarily to lower sales volume of secondary market mortgage loans. Included in other income was gain on sale of $0.9 millionrecognized during the three months ended September 30, ~~2021 from branches classified as held for sale as part of the Branch Consolidation Plan.~~2021.

~~Table of Contents~~

Comparison of nine months ended September 30, ~~2021~~2022 to the comparable period in the prior year

The following table presents the change in the key components of noninterest income for the periods indicated:


		Nine Months Ended September 30,									Nine Months Ended September 30,
		2021		2020		Change		Percentage Change			2022		2021		Change		% Change
		(Dollars in thousands)									(Dollars in thousands)
Service charges and other fees	Service charges and other fees	$	12,988	$	12,015	$	973	8.1	%	Service charges and other fees	$	7,739	$	6,728	$	1,011	15.0	%
Card revenue										Card revenue	6,774		6,216		558		9.0
Gain on sale of investment securities, net	Gain on sale of investment securities, net	29		1,463		(1,434)		(98.0)		Gain on sale of investment securities, net	—		29		(29)		(100.0)
Gain on sale of loans, net	Gain on sale of loans, net	3,138		3,125		13		0.4		Gain on sale of loans, net	593		3,138		(2,545)		(81.1)
Interest rate swap fees	Interest rate swap fees	487		1,461		(974)		(66.7)		Interest rate swap fees	383		487		(104)		(21.4)
Bank owned life insurance income	Bank owned life insurance income	2,020		2,439		(419)		(17.2)		Bank owned life insurance income	3,182		2,020		1,162		57.5
Gain on sale of other assets, net										Gain on sale of other assets, net	469		1,688		(1,219)		(72.2)
Other income	Other income	6,114		5,441		673		12.4		Other income	3,867		4,470		(603)		(13.5)
Total noninterest income	Total noninterest income	$	24,776	$	25,944	$	(1,168)	(4.5)	%	Total noninterest income	$	23,007	$	24,776	$	(1,769)	(7.1)	%

Noninterest income decreased due primarily to reduced gain on sale of ~~investment securities~~loans, net as sales volume of secondary market mortgage loans declined and secondarily due to ~~fewer sales and a decline in interest rate swap fees~~lower gain on sale of other assets, net due to ~~fewer executions~~a higher gain on sale of ~~interest rate swap contracts. Partially offsetting these decreases~~branches held for sale recognized during the nine months ended September 30, 2021. The decrease was offset partially by an increase in bank owned life insurance income due to the recognition of a death benefit of $1.0 million during the nine months ended September 30, 2022 as well as increases in service charges and other fees ~~due primarily to higher interchange income~~ and ~~an increase~~card revenue reflecting increased customer transactions as businesses reopened in ~~other income as a result of gains on sale of branches of $1.6 million related to the Branch Consolidation Plan, previously discussed.~~our market areas.

Table of Contents

Noninterest Expense Overview

Comparison of quarter ended September 30, ~~2021~~2022 to the comparable quarter ~~in the prior year~~

~~The following table presents the key components of noninterest expense and the change for the periods indicated:~~

Three Months Ended
September 30,
2021 2020 Change Percentage Change
(Dollars in thousands)
Compensation and employee benefits $ 22,176 $ 21,416 $ 760 3.5 %
Occupancy and equipment 4,373 4,348 25 0.6
Data processing 4,029 3,691 338 9.2
Marketing 775 755 20 2.6
Professional services 816 1,086 (270) (24.9)
State/municipal business and use tax 1,071 964 107 11.1
Federal deposit insurance premium 550 848 (298) (35.1)
Amortization of intangible assets 758 860 (102) (11.9)
Other expense 2,618 2,077 541 26.0
Total noninterest expense $ 37,166 $ 36,045 $ 1,121 3.1 %

Noninterest expense increased due primarily to an increase in compensation and employee benefits from upward market pressure on salaries and wages and an increase in other expenses related to the Branch Consolidation Plan.

~~Comparison of nine months ended September 30, 2021 to the comparable period~~ in the prior year

The following table presents changes in the key components of noninterest expense for the periods indicated:


		Nine Months Ended September 30,									Three Months Ended September 30,
		2021		2020		Change		Percentage Change			2022		2021		Change		% Change
		(Dollars in thousands)									(Dollars in thousands)
Compensation and employee benefits	Compensation and employee benefits	$	66,725	$	65,849	$	876	1.3	%	Compensation and employee benefits	$	24,206	$	21,963	$	2,243	10.2	%
Occupancy and equipment	Occupancy and equipment	12,918		13,247		(329)		(2.5)		Occupancy and equipment	4,422		4,373		49		1.1
Data processing	Data processing	11,839		10,735		1,104		10.3		Data processing	4,185		4,029		156		3.9
Marketing	Marketing	2,336		2,317		19		0.8		Marketing	358		486		(128)		(26.3)
Professional services	Professional services	3,249		4,632		(1,383)		(29.9)		Professional services	639		776		(137)		(17.7)
State/municipal business and use tax										State/municipal business and use tax	963		1,071		(108)		(10.1)
Federal deposit insurance premium										Federal deposit insurance premium	500		550		(50)		(9.1)

Amortization of intangible assets										Amortization of intangible assets	671		758		(87)		(11.5)
Other expense										Other expense	3,203		3,160		43		1.4
Total noninterest expense										Total noninterest expense	$	39,147	$	37,166	$	1,981	5.3	%

Noninterest expense increased due primarily to an increase in salaries and wages effective July 1, 2022 due to upward market pressure and an increase in accrual for incentive compensation.

Comparison of nine months endedSeptember 30, 2022 to the comparable period in the prior year

The following table presents changes in the key components of noninterest expense for the periods indicated:


	Nine Months Ended September 30,
	2022		2021		Change		% Change
	(Dollars in thousands)
Compensation and employee benefits	$	67,236	$	65,967	$	1,269	1.9	%
Occupancy and equipment	12,924		12,918		6		—
Data processing	12,431		11,839		592		5.0
Marketing	968		1,566		(598)		(38.2)
Professional services	1,867		3,083		(1,216)		(39.4)
State/municipal business and use tax	2,626		3,034		(408)		(13.4)
Federal deposit insurance premium	1,525		1,478		47		3.2

Amortization of intangible assets	2,079		2,352		(273)		(11.6)
Other expense	8,918		8,567		351		4.1
Total noninterest expense	$	110,574	$	110,804	$	(230)	(0.2)	%

Noninterest expense decreased due primarily to a decrease in professional services, which was elevated during the nine months ended September 30, 2021 due to costs associated with our participation in the SBA PPP, as well as a decrease in marketing expenses due to less activity. This decrease was offset partially by an increase in compensation and employee benefits due to increases in both salaries and wages and in accrual for incentive compensation as noted above, as well as an increase in data processing as the Bank continues to invest in its technology platforms.

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Nine Months Ended
September 30,
2021 2020 Change Percentage Change
(Dollars in thousands)
State/municipal business and use tax 3,034 2,626 408 15.5
Federal deposit insurance premium 1,478 1,086 392 36.1
Other real estate owned, net — (145) 145 (100.0)
Amortization of intangible assets 2,352 2,666 (314) (11.8)
Other expense 6,873 7,365 (492) (6.7)
Total noninterest expense $ 110,804 $ 110,378 $ 426 0.4 %

~~Noninterest~~ ~~expense~~ ~~increased due primarily to an increase in data processing expense as the Bank continues to invest in technology and an increase in compensation and employee benefits from upward market pressure on salaries and wages. The increase in noninterest expense was offset partially by~~ ~~lower~~ professional services expense due to costs incurred during the nine months ended September 30, 2020 related to the launch of the new mobile and online commercial banking platform, "Heritage Direct" last year and secondarily due to t~~he decrease in other expense driven primarily by a reduction of discretionary expenses, including employee business travel as a result of the Company's suspension of non-essential travel due to the COVID-19 pandemic.~~

Income Tax Expense Overview

Comparison of quarter ended September 30, ~~2021~~2022 to the comparable quarter in the prior year

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


		Three Months Ended September 30,												Three Months Ended September 30,
		2021			2020			Change			Percentage Change			2022			2021			Change			% Change
		(Dollars in thousands)												(Dollars in thousands)
Income before income taxes	Income before income taxes	$	25,589		$	19,113		$	6,476		33.9	%	Income before income taxes	$	25,647		$	25,589		$	58		0.2	%
Income tax expense	Income tax expense	$	4,997		$	2,477		$	2,520		101.7	%	Income tax expense	$	4,657		$	4,997		$	(340)		(6.8)	%
Effective income tax rate	Effective income tax rate	19.5		%	13.0		%	6.5		%	50.0	%	Effective income tax rate	18.2		%	19.5		%	(1.3)		%	(6.7)	%

Income tax expense ~~increased~~decreased due primarily to a ~~higher~~lower effective ~~income~~ tax rate ~~and secondarily due to higher income before income taxes. The effective income tax rate increased due primarily to an increase in the~~as a result of lower estimated annual pre-tax income for the year ended December 31, 2022 as compared to year ended December 31, 2021, which ~~decreased~~increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance, and low-income housing tax credits. Additionally, there remain no gross tax credits related to the Company's New Market Tax Credit as these credits were fully utilized during the seven year period ending December 31, 2020.LIHTC.

Comparison of nine months ended September 30, ~~2021~~2022 to the comparable period in the prior year.

The following table presents the income tax expense and related metrics and the change for the periods indicated:


		Nine Months Ended September 30,												Nine Months Ended September 30,
		2021			2020			Change			Percentage Change			2022			2021			Change			% Change
		(Dollars in thousands)												(Dollars in thousands)
Income before income taxes	Income before income taxes	$	96,188		$	24,869		$	71,319		286.8	%	Income before income taxes	$	71,547		$	96,188		$	(24,641)		(25.6)	%
Income tax expense	Income tax expense	$	17,550		$	2,181		$	15,369		704.7	%	Income tax expense	$	12,216		$	17,550		$	(5,334)		(30.4)	%
Effective income tax rate	Effective income tax rate	18.2		%	8.8		%	9.4		%	106.8	%	Effective income tax rate	17.1		%	18.2		%	(1.1)		%	(6.0)	%

~~Inco~~meIncome tax expense ~~and the effective income tax rate both~~ ~~increased~~decreased also due primarily to ~~higher~~the change in income before income taxes earned between the periods and lower estimated annual pre-tax income~~, which decreased~~ for the ~~impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits,~~ ~~and secondarily due to a provision in the CARES Act, which permitted the Company to recognize a $1.0 million benefit from net operating losses related to prior acquisitions during the nine months~~year ended ~~September 30, 2020. Additionally, there remain no gross tax credits related to the Company's New Market Tax Credit as these credits were fully utilized during the seven year period ending~~ December 31, ~~2020.~~2022.

~~Table of Contents~~

~~Consolidated~~ Financial Condition Overview

The table below provides a comparison of the changes in the Company's financial condition ~~from December 31, 2020 to September 30, 2021:~~at the periods indicated:


		September 30, 2021		December 31, 2020		Change		Percentage Change			September 30, 2022		December 31, 2021		Change		% Change
		(Dollars in thousands)									(Dollars in thousands)
Assets	Assets									Assets
Cash and cash equivalents	Cash and cash equivalents	$	1,634,739	$	743,322	$	891,417	119.9	%	Cash and cash equivalents	$	407,324	$	1,723,292	$	(1,315,968)	(76.4)	%
Investment securities available for sale, at fair value, net	Investment securities available for sale, at fair value, net	761,526		802,163		(40,637)		(5.1)		Investment securities available for sale, at fair value, net	1,356,142		894,335		461,807		51.6	%
Investment securities held to maturity, at amortized cost, net	Investment securities held to maturity, at amortized cost, net	311,074		—		311,074		100.0		Investment securities held to maturity, at amortized cost, net	773,319		383,393		389,926		101.7	%
Loans held for sale	Loans held for sale	2,636		4,932		(2,296)		(46.6)		Loans held for sale	—		1,476		(1,476)		(100.0)	%
Loans receivable, net	Loans receivable, net	3,905,567		4,398,462		(492,895)		(11.2)		Loans receivable, net	3,959,206		3,773,301		185,905		4.9	%
Other real estate owned		—		—		—		—

Premises and equipment, net	Premises and equipment, net	79,958		85,452		(5,494)		(6.4)		Premises and equipment, net	76,683		79,370		(2,687)		(3.4)	%
Federal Home Loan Bank stock, at cost	Federal Home Loan Bank stock, at cost	7,933		6,661		1,272		19.1		Federal Home Loan Bank stock, at cost	8,916		7,933		983		12.4	%
Bank owned life insurance	Bank owned life insurance	109,634		107,580		2,054		1.9		Bank owned life insurance	121,369		120,196		1,173		1.0	%
Accrued interest receivable	Accrued interest receivable	14,802		19,418		(4,616)		(23.8)		Accrued interest receivable	17,812		14,657		3,155		21.5	%
Prepaid expenses and other assets	Prepaid expenses and other assets	179,494		193,301		(13,807)		(7.1)		Prepaid expenses and other assets	230,704		183,543		47,161		25.7	%
Other intangible assets, net	Other intangible assets, net	10,736		13,088		(2,352)		(18.0)		Other intangible assets, net	7,898		9,977		(2,079)		(20.8)	%
Goodwill	Goodwill	240,939		240,939		—		—		Goodwill	240,939		240,939		—		—
Total assets	Total assets	$	7,259,038	$	6,615,318	$	643,720	9.7	%	Total assets	$	7,200,312	$	7,432,412	$	(232,100)	(3.1)	%

Liabilities
Deposits		$	6,215,558	$	5,597,990	$	617,568	11.0	%

Junior subordinated debentures		21,107		20,887		220		1.1
Securities sold under agreement to repurchase		44,096		35,683		8,413		23.6
Accrued expenses and other liabilities		129,873		140,319		(10,446)		(7.4)
Total liabilities		6,410,634		5,794,879		615,755		10.6

Stockholders' equity
Common stock		552,385		571,021		(18,636)		(3.3)
Retained earnings		281,285		224,400		56,885		25.3
Accumulated other comprehensive income, net		14,734		25,018		(10,284)		(41.1)
Total stockholders' equity		848,404		820,439		27,965		3.4
Total liabilities and stockholders' equity		$	7,259,038	$	6,615,318	$	643,720	9.7	%

Table of Contents


	September 30, 2022		December 31, 2021		Change		% Change
	(Dollars in thousands)
Liabilities and Stockholders' Equity
Deposits	$	6,214,964	$	6,394,290	$	(179,326)	(2.8)	%

Deposits held for sale	22,771		—		$	22,771	100.0	%
Total deposits	6,237,735		6,394,290		(156,555)		(2.4)
Junior subordinated debentures	21,399		21,180		219		1.0
Securities sold under agreement to repurchase	40,449		50,839		(10,390)		(20.4)
Accrued expenses and other liabilities	124,027		111,671		12,356		11.1
Total liabilities	6,423,610		6,577,980		(154,370)		(2.3)
Common stock	551,419		551,798		(379)		(0.1)
Retained earnings	330,284		293,238		37,046		12.6
Accumulated other comprehensive (loss) income, net	(105,001)		9,396		(114,397)		(1,217.5)
Total stockholders' equity	776,702		854,432		(77,730)		(9.1)
Total liabilities and stockholders' equity	$	7,200,312	$	7,432,412	$	(232,100)	(3.1)	%

Total assets ~~increased~~decreased due primarily to ~~increases~~a decrease in cash and cash equivalents ~~and total investment securities. The change in total~~reflecting deployment of excess liquidity into purchases of higher yielding investment securities ~~included~~and loans. Total liabilities and stockholders' equity decreased due primarily to a decrease in deposits as well as an increased loss in AOCI following an increase in market interest rates during the ~~transfer~~nine months ended September 30, 2022, which negatively impacted the fair value of ~~$244.8 million~~our investment securities available for sale portfolio at September 30, 2022.

Investment Activities Overview

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


	September 30, 2022				December 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	$	63,749	3.0	%	$	21,373	1.7	%	$	42,376	198.3	%
Municipal securities	185,713		8.7		221,212		17.3	%	(35,499)		(16.0)
Residential CMO and MBS	438,370		20.6		306,884		24.0	%	131,486		42.8
Commercial CMO and MBS	639,441		30.0		315,861		24.7	%	323,580		102.4
Corporate obligations	5,834		0.3		2,014		0.2	%	3,820		189.7
Other asset-backed securities	23,035		1.1		26,991		2.1	%	(3,956)		(14.7)
Total	$	1,356,142	63.7	%	$	894,335	70.0	%	$	461,807	51.6	%

Investment securities held to maturity, at amortized cost:
U.S. government and agency securities	$	150,948	7.1	%	$	141,011	11.0	%	$	9,937	7.0	%

Residential CMO and MBS	296,432		13.9		24,529		1.9		271,903		1,108.5
Commercial CMO and MBS	325,939		15.3		217,853		17.1		108,086		49.6


Total	$	773,319	36.3	%	$	383,393	30.0	%	$	389,926	101.7	%

Total investment securities	$	2,129,461	100.0	%	$	1,277,728	100.0	%	$	851,733	66.7	%

Total investment securities increased due primarily to purchases to deploy excess liquidity into higher yielding, longer duration assets. Purchases of investment securities available for sale ~~to investment securities held to maturity in order to mitigate market price volatility and its impact to accumulated comprehensive income within stockholders' equity. These increases~~ were ~~primarily the result of the significant increase in total deposits, which is discussed in more detail in the "Deposit Activities Overview" section below. The increase in total assets was~~ offset partially by a $145.8 million decrease in ~~loan receivable, net, which is discussed~~the fair value of these investment securities as a result of an increase in ~~more detail~~market interest rates resulting in ~~the "Lending Activities Overview" section below.~~an unrealized loss at September 30, 2022 compared to an unrealized gain at December 31, 2021.

~~Lending Activities~~

Table of Contents

Loan Portfolio Overview

Changes by loan type

The Bank ~~is a~~ ~~full-service commercial bank which~~ 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:


	September 30, 2022				December 31, 2021
	Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		Change		% Change
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	735,028	18.4	%	$	621,567	16.3	%	$	113,461	18.3	%
SBA PPP	3,593		0.1		145,840		3.8		(142,247)		(97.5)
Owner-occupied CRE	959,486		24.0		931,150		24.4		28,336		3.0
Non-owner occupied CRE	1,547,114		38.6		1,493,099		39.2		54,015		3.6
Total commercial business	3,245,221		81.1		3,191,656		83.7		53,565		1.7
Residential real estate	296,019		7.4		164,582		4.3		131,437		79.9
Real estate construction and land development:
Residential	92,297		2.3		85,547		2.2		6,750		7.9
Commercial and multifamily	160,723		4.0		141,336		3.7		19,387		13.7
Total real estate construction and land development	253,020		6.3		226,883		5.9		26,137		11.5
Consumer	207,035		5.2		232,541		6.1		(25,506)		(11.0)
Total	$	4,001,295	100.0	%	$	3,815,662	100.0	%	$	185,633	4.9	%

Loans receivable ~~decrease~~d ~~$514.8 million~~ ~~compared~~increased due primarily to ~~December 31, 2020 due primarily~~ ~~to a decrease in SBA PPP loans as a result of forgiveness payments received from the SBA in excess of originations, a decrease in demand for~~higher commercial and industrial loan demand including an increased usage of lines of credit and an increase in residential real estate loans, including $98.5 million of purchased residential real estate loans as well as lower prepayments. This increase was offset partially by repayments of SBA PPP loans and a decrease in consumer loans due primarily ~~from continued runoff of~~to a $42.2 million decline in indirect loans outstanding as the Bank ceased indirect auto loan ~~portfolio~~originations in 2020.

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 cessation of this business line during the three months ended March 31, 2020. Offsetting these decreases was an increase in CRE loans which includes the transfer of completed projects from real estate construction and land development loans.dates indicated:


	September 30, 2022			December 31, 2021			Change			% Change
	(Dollars in thousands)
Nonaccrual loans: (1)
Commercial business	$	6,234		$	23,107		$	(16,873)		(73.0)	%
Residential real estate	—			47			(47)			(100.0)
Real estate construction and land development	—			571			(571)			(100.0)
Consumer	—			29			(29)			(100.0)
Total nonaccrual loans	6,234			23,754			(17,520)			(73.8)
Other real estate owned	—			—			—			n/a
Total nonperforming assets	$	6,234		$	23,754		$	(17,520)		(73.8)	%

Accruing loans past due 90 days or more	$	20		$	293		$	(273)		(93.2)	%

Credit quality ratios:
Nonaccrual loans to loans receivable	0.16		%	0.62		%	(0.46)		%	(74.2)	%
Nonaccrual loans to total assets	0.09			0.32			(0.23)			(71.9)
Performing TDR loans: (1)
Commercial business	$	64,739		$	57,142		$	7,597		13.3	%
Residential real estate	175			358			(183)			(51.1)
Real estate construction and land development	6,137			450			5,687			1,263.8

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~~The following table provides a comparison of the changes in the Company's loan portfolio by type of loan at the dates indicated:~~

September 30, 2021 December 31, 2020
Balance (1)
% of Total (2)
Balance (1)
% of Total (2)
Change Percentage Change
(Dollars in thousands)
Commercial business:
Commercial and industrial $ 652,776 16.5 % $ 733,098 16.4 % $ (80,322) (11.0) %
SBA PPP 266,896 6.8 715,121 16.0 (448,225) (62.7)
Owner-occupied CRE 907,568 23.0 856,684 19.2 50,884 5.9
Non-owner occupied CRE 1,459,795 36.8 1,410,303 31.5 49,492 3.5
Total commercial business 3,287,035 83.1 3,715,206 83.1 (428,171) (11.5)
Residential real estate (3)
125,697 3.2 122,756 2.7 2,941 2.4
Real estate construction and land development:
Residential 90,081 2.3 78,259 1.8 11,822 15.1
Commercial and multifamily 205,516 5.2 227,454 5.1 (21,938) (9.6)
Total real estate construction and land development 295,597 7.5 305,713 6.9 (10,116) (3.3)
Consumer 245,555 6.2 324,972 7.3 (79,417) (24.4)
Total $ 3,953,884 100.0 % $ 4,468,647 100.0 % $ (514,763) (11.5) %


	September 30, 2022		December 31, 2021		Change		% Change
	(Dollars in thousands)
Consumer	812		1,160		(348)		(30.0)
Total performing TDR loans	$	71,863	$	59,110	$	12,753	21.6	%

(1) ~~Balances do not include unfunded loan commitments.~~

~~(2)~~ ~~Percent of loans receivable.~~

~~(3)~~ ~~Excludes loans held for sale o~~f ~~$2.6 millionand $4.9 million at~~At September 30, ~~2021~~2022 and December 31, ~~2020, respectively.~~

~~SBA Paycheck Protection Program~~

~~The Company has supported its community~~2021, $1.7 million and ~~customers during the COVID-19 pandemic through its participation in the SBA's PPP. The Company has identified its SBA PPP~~$1.4 million of nonaccrual loans, ~~separately in two tranches based on the date~~respectively, and $2.2 million and $1.6 million of ~~origination with the first tranche comprised of the SBA PPP~~performing TDR loans, originated in accordance with the CARES Act ("PPP1") and the second tranche comprised of SBA PPP loans originated under the SBA's PPP in accordance with the CA Act ("PPP2"). The SBA PPP ended on May 31, 2021.

The Bank earns 1% interest on these loans as well as a fee from the SBA to cover processing costs, which is amortized over the life of the loan and recognized fully at payoff or forgiveness. The Bank began processing loan forgiveness applications and receiving SBA PPP forgiveness payments during the three months ended December 31, 2020.

~~The following are key statistics of the Company's SBA PPP loan activity for both tranches since inception:~~

As of September 30, 2021
PPP1 PPP2 Total SBA PPP
(Dollars in thousands)
Total number of funded loans 4,642 2,542 7,184
Total amount funded $ 897,353 $ 380,014 $ 1,277,367
Average funded loan size $ 193 $ 149 $ 178
Total net fees deferred at funding $ 28,805 $ 16,041 $ 44,846

~~The following table summarizes key statistics of the SBA PPP loans as of and for the period indicated:~~

As of or for the Three Months Ended
September 30, 2021
PPP1 PPP2 Total SBA PPP
(In thousands)
Net deferred fees recognized during the period $ 2,276 $ 4,754 $ 7,030
Net deferred fees unrecognized as of period end 280 9,055 9,335
Principal payments received during the period, including forgiveness payments from the SBA 179,030 105,355 284,385
Amortized cost as of period end 19,683 247,213 266,896

respectively, were guaranteed by government agencies.

~~Table of Contents~~

~~Nonperforming Assets and Credit Quality Metrics~~

The following table provides ~~information about our nonaccrual loans, other real estate owned and performing TDR loans for the dates indicated:~~

September 30,
2021 December 31, 2020
(Dollars in thousands)
Nonaccrual loans:
Commercial business $ 25,243 $ 56,786
Residential real estate 51 184
Real estate construction and land development 571 1,022
Consumer 29 100
Total nonaccrual loans 25,894 58,092
Other real estate owned — —
Total nonperforming assets $ 25,894 $ 58,092
ACL on loans $ 48,317 $ 70,185
Nonperforming loans to loans receivable 0.65 % 1.30 %
ACL on loans to nonperforming loans 186.60 120.82
Nonperforming assets to total assets 0.36 0.88
Performing TDR loans:
Commercial business $ 58,633 $ 49,403
Residential real estate 361 188
Real estate construction and land development 450 1,926
Consumer 1,240 1,355
Total performing TDR loans $ 60,684 $ 52,872
Accruing loans past due 90 days or more $ — $ —

~~Nonaccrual Loans~~

N~~onaccrual loans~~ ~~decrease~~d ~~$32.2 million to 0.65% of loans receivable and 0.36%~~ ~~of total assets at September 30, 2021 from 1.30% of loans receivable and 0.88% of total assets at December 31, 2020.~~ ~~The following table reflects~~ the changes ~~in nonaccrual loans during the periods indicated:~~

Nine Months Ended
September 30,
2021 2020
(In thousands)
Nonaccrual loans
Balance, beginning of period $ 58,092 $ 44,525
Additions to nonaccrual loan classification 1,162 24,679
Net principal payments and transfers to accruing status (13,351) (4,277)
Payoffs (19,317) (10,951)
Charge-offs (692) (1,102)
Transfer to OREO — (270)
Balance, end of period $ 25,894 $ 52,604

~~The decrease~~ in nonaccrual loans during the nine months ended September 30, ~~2021 was~~2022:




	(In thousands)
Balance, beginning of period	$	23,754
Additions	720
Net principal payments, sales and transfers to accruing status	(13,784)
Payoffs	(4,285)
Charge-offs	(171)

Balance, end of period	$	6,234

Nonaccrual loans decreased $17.5 million, or 73.8%, due primarily to ~~payoffs,~~ongoing collection efforts, including athe partial payoff of ~~an agricultural business relationship of $10.7 million, which was initially classified as nonaccrual during the~~ three ~~months ended September 30, 2019,~~large commercial and ~~the return to accrual status of an owner-occupied CRE relationship of $7.0 million. The Company recovered $1.5 million of interest and fees on loans related to~~industrial loan relationships, the payoff of four commercial business loan relationships, and the ~~agricultural~~transfer of five commercial business ~~relationship.~~loan relationships totaling $10.1 million back to accruing status. The Bank also sold a pool of 14 nonaccrual loans totaling $1.0 million during the period ending March 31, 2022.

~~Table of Contents~~

~~Analysis of~~ Allowance for Credit Losses on Loans

We adopted CECL on January 1, 2020. Under this methodology, certain nonaccrual loans and certain performing TDR loans are not considered to have similar risk characteristics as other loans; therefore, they are evaluated for credit loss on an individual basis. The allowance for individually evaluated loans is calculated using either the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell if applicable, or the net present value method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt.

The remaining loans not individually evaluated are disaggregated based on similar risk characteristics into segments and collectively evaluated for ACL using baseline loss rates that are calculated using the Bank's average quarterly historical loss information for those segments. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan under the remaining life method, including prepayment estimates, to determine the baseline loss estimate for each loan. The CECL methodology also includes consideration of the forecasted direction of the economic and business environment and its likely impact to the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. The impact of those macroeconomic factors to each segment, positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss rate and are used to establish a macroeconomic allowance. After the reasonable and supportable period, the estimated credit losses revert back to historical baseline loss levels under a reversion period on a straight-lined, input reversion basis. Management can also consider other qualitative factors to adjust the ACL on loans if internal or external conditions suggest changes to the modeled ACL on loans are appropriate. Overview

The following table provides information regarding ~~changes in the~~our ACL on loans ~~at and~~ for the periods indicated:

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
ACL on loans at the beginning of the period $ 51,562 $ 71,501 $ 70,185 $ 36,171
Impact of CECL Adoption — — — 1,822
Adjusted ACL on loans, beginning of period 51,562 71,501 70,185 37,993
Charge-offs:
Commercial business (743) (507) (757) (3,553)
Real estate construction and land development — — (1) —
Consumer (204) (335) (509) (1,141)
Total charge-offs (947) (842) (1,267) (4,694)
Recoveries:
Commercial business 385 80 735 1,220
Residential real estate — — — 3
Real estate construction and land development 8 139 28 160
Consumer 161 142 444 433
Total recoveries 554 361 1,207 1,816
Net charge-offs (393) (481) (60) (2,878)
(Reversal of) provision for credit losses on loans (2,852) 2,320 (21,808) 38,225
ACL on loans at the end of period $ 48,317 $ 73,340 $ 48,317 $ 73,340
Net charge-offs on loans to average loans receivable, net (1)
(0.04) % (0.04) % — % (0.09) %
Loans receivable at the end of the period $ 3,953,884 $ 4,666,730 $ 3,953,884 $ 4,666,730
Average loans receivable, net during the period (2)
4,005,585 4,605,389 4,297,875 4,266,598


	At or For the Nine Months Ended September 30,
	2022			2021			Change			% Change
	(Dollars in thousands)
ACL on loans at the end of period	$	42,089		$	48,317		$	(6,228)		(12.9)	%

Credit quality ratios:
ACL on loans to loans receivable	1.05		%	1.22		%	(0.06)		%	(5.4)
ACL on loans to loans receivable, excluding SBA PPP loans (1)	1.05			1.31			(0.10)			(8.7)
ACL on loans to nonaccrual loans	675.15			186.60			496.82			278.60

Net (recoveries) charge-offs	$	(980)		$	60		$	(1,040)		0.02
Average loans receivable, net during the period (2)	3,815,387			4,297,875			(482,488)			(11.2)
Net recoveries on loans to average loans receivable, net(3)	(0.03)		%	—		%	(0.03)		%	—	%

(1) ~~Annualized.~~

~~(2)~~ ~~The average loan balances are net of the ACL on loans and include loans held for sale.~~

~~The~~ ~~ACL on loans~~ ~~decreased $21.9 million, or 31.2%, to $48.3 million, or 1.22% of loans receivable, at September 30, 2021 from $70.2 million, or 1.57% of loans receivable, at December 31, 2020. The~~ ~~decrease~~ ~~in the ACL on loans was due primarily to a reversal of provision for credit losses on loans of $21.8 million~~ ~~recorded during the nine months ended September 30, 2021 following~~ ~~improvements in the economic forecast used in the CECL model at September 30, 2021 as compared to the forecast at~~ ~~December 31, 2020~~. The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. ~~The ACL on loans receivable, excluding SBA PPP loans was 1.31% and 1.87% at September 30, 2021 and December 31, 2020, respectively.~~ See "Reconciliations of Non-GAAP Measures" section below.

(2) Average loan receivable, net includes loans held for ~~the calculation of the~~ sale.

(3) Annualized.

The ACL on loans decreased during the nine months endedSeptember 30, 2022due primarily to a reduction of loans ~~receivable, excluding SBA PPP.~~

individually evaluated for losses and as a result, their related ACL of $3.9 million as well as improvements in the economic forecast at September 30, 2022 as compared to the forecast at September 30, 2021 as the economic forecast as of September 30, 2021 still considered a more significant impact as as a result of COVID-19 and related variants.

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The following table presents the ACL on loans by loan portfolio segment at the indicated dates:


	September 30, 2022				December 31, 2021
	ACL on loans		% of Total (1)		ACL on loans		% of Total (1)		Change		% Change
	(Dollars in thousands)
Commercial business	$	31,940	81.1	%	$	33,049	83.7	%	$	(1,109)	(3.4)	%
Residential real estate	2,545		7.4		1,409		4.3		1,136		80.6
Real estate construction and land development	5,104		6.3		5,276		5.9		(172)		(3.3)
Consumer	2,500		5.2		2,627		6.1		(127)		(4.8)
Total ACL on loans	$	42,089	100.0	%	$	42,361	100.0	%	$	(272)	(0.6)	%

(1) Represents the percent of loans receivable by loan category to loans receivable.

Deposits ~~and Other Borrowings~~ Overview

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


		September 30, 2021				December 31, 2020									September 30, 2022				December 31, 2021
		Balance		% of Total		Balance		% of Total		Change		Percentage Change			Balance		% of Total		Balance		% of Total		Change		% Change
		(Dollars in thousands)													(Dollars in thousands)
Noninterest demand deposits	Noninterest demand deposits	$	2,299,248	37.0	%	$	1,980,531	35.4	%	$	318,717	16.1	%	Noninterest demand deposits	$	2,308,583	37.0	%	$	2,343,909	36.7	%	$	(35,326)	(1.5)	%
Interest bearing demand deposits	Interest bearing demand deposits	1,870,618		30.1		1,716,123		30.7		154,495		9.0		Interest bearing demand deposits	1,997,989		32.0	%	1,946,605		30.4		51,384		2.6
Money market accounts	Money market accounts	1,072,427		17.3		962,983		17.2		109,444		11.4		Money market accounts	996,214		16.0	%	1,120,174		17.5		(123,960)		(11.1)
Savings accounts	Savings accounts	617,469		9.9		538,819		9.6		78,650		14.6		Savings accounts	647,526		10.4	%	640,763		10.0		6,763		1.1
Total non-maturity deposits	Total non-maturity deposits	5,859,762		94.3		5,198,456		92.9		661,306		12.7		Total non-maturity deposits	5,950,312		95.4		6,051,451		94.6		(101,139)		(1.7)
Certificates of deposit	Certificates of deposit	355,796		5.7		399,534		7.1		(43,738)		(10.9)		Certificates of deposit	287,423		4.6		342,839		5.4		(55,416)		(16.2)
Total deposits	Total deposits	$	6,215,558	100.0	%	$	5,597,990	100.0	%	$	617,568	11.0	%	Total deposits	$	6,237,735	100.0	%	$	6,394,290	100.0	%	$	(156,555)	(2.4)	%

Total deposits decreased due primarily to competitive pricing pressures and customers moving excess funds to alternative higher yielding investments.

The ~~increase~~Bank entered into a purchase and sale agreement with a third party to sell and transfer assets, deposits and other liabilities of its branch in ~~deposits is primarily due to proceeds from SBA PPP loans originated~~Ellensburg during the ~~nine~~three months ended September 30, ~~2021 which~~2022. As a result of entering into this purchase and sale agreement, $22.7 million in deposits were ~~deposited directly into the customers' deposit accounts.~~

transferred to held for sale. The ~~Bank also utilizes securities sold under agreement to repurchase, which are secured by investment securities, as a supplement to its funding sources. As~~lower of ~~September 30, 2021 and December 31, 2020, three customers utilized this product with total balances of $44.1 million and $35.7 million, respectively.~~

In addition to deposits and securities sold under agreement to repurchase, borrowings may be used on a short-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets.

The Company has junior subordinated debentures with a par value of $25.0 million which pay quarterly interest based on the three-month LIBOR plus 1.56% and mature in 2037. The balance of the junior subordinated debentures was $21.1 million at September 30, 2021, which reflects theamortized cost or fair value ~~of the junior subordinated debentures established as part of the merger with Washington Banking Company on May 1, 2014, adjusted~~adjustment upon transferring these deposits to held for ~~the accretion of discount from purchase accounting fair value adjustment.~~

Additionally, the Bank maintained credit facilities with the FHLB for $992.3 million and credit facilities with the Federal Reserve Bank for $50.2 million at September 30, 2021. There were no FHLB or Federal Reserve Bank advances outstanding under either facility at September 30, 2021 and these credit facilities weresale was not ~~utilized~~material. The sale is expected to be completed during the ~~nine~~three months ended ~~September 30, 2021. The average balance~~March 31, 2023; however, the completion of ~~FHLB advances was $2.0 million during the nine months ended September 30, 2020. The credit facility with the Federal Reserve Bank was not utilized during the nine months ended September 30, 2020.~~

The Bank also maintains lines of credit with five correspondent banks to purchase federal funds totaling $215.0 million as of September 30, 2021. These lines of credit were not utilized during both the nine months ended September 30, 2021 and 2020.

~~Liquidity and Cash Flows~~

~~Our primary sources of funds are customer and local government deposits, loan principal and interest payments, loan sales and payments of interest earned~~this sale depends on and proceeds from sales, and maturities of investment securities. These funds, together with retained earnings, equity and other borrowed funds, are used to make loans, acquire investment securities and other assets, and fund continuing operations. 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.

~~Heritage Bank:~~ The principal objective of the Bank’s liquidity management program is to maintain the ability to meet day-to-day cash flow requirements of its customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayment and maturities of loans and investment securities, the Bank can utilize established credit facilities and lines of credit totaling $1.26 billion, as discussed in the Deposits and Other Borrowings Overview section above or may initiate the sale of investment securities.

~~Heritage Financial Corporation:~~ The Company is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all of the Company’s revenues are obtained from dividends declared and paid by the Bank. There are statutory andmany factors including regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. However, management believes that such restrictions will not have an adverse impact on the ability of the Company to meets its ongoing cash obligations. At September 30, 2021, the Company (on an unconsolidated basis) had cash and cash equivalents of $9.8 million.

We are required to maintain an adequate level of liquidity to ensure the availability of sufficient funds for loan originations and deposit withdrawals, satisfy other financial commitments and fund operations. We generally maintain sufficient

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cash and investments to meet short-term liquidity needs. At September 30, 2021, cash and cash equivalents totaled $1.63 billion, or 22.5% of total assets. Management considers unpledged investment securities available for sale to be another source of liquidity. The fair value of investment securities available for sale that were unpledged totaled $589.7 million, or 8.1% of total assets, at September 30, 2021. The fair value of investment securities available for sale with maturities of one year or less totaled $37.2 million, or 0.5% of total assets, at September 30, 2021.

~~Consolidated Cash Flows:~~ As disclosed in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $50.7 million for the nine months ended September 30, 2021, and primarily consisted of net income of $78.6 million, offset partially by non-cash adjustments, including reversal of provision for credit losses of $24.3 million and depreciation, amortization, and accretion of $18.4 million. During the nine months ended September 30, 2021, net cash provided by investing activities was $257.7 million, which consisted primarily of net loan repayments of $555.8 million (including SBA PPP loan principal reduction of $834.4 million compared to SBA PPP originations of $380.0 million) and net cash use in investment securities of $286.5 million (including $488.4 million of purchases). Net cash provided by financing activities was $583.0 million for the nine months ended September 30, 2021 and primarily consisted of a net increase in deposits of $617.6 million, as discussed above.approval.

Stockholders' Equity ~~and Regulatory Capital Requirements~~ Overview

The Company’s stockholders' equity to assets ratio was ~~11.7%~~10.8% and ~~12.4%~~11.5% at September 30, ~~2021~~2022 and December 31, ~~2020, respectively. The~~2021, respectively, and decreased due primarily to a decrease in AOCI of $114.4 million following ~~table reflects the changes to stockholders' equity during the periods indicated:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(In thousands)
Balance, beginning of period $ 855,984 $ 793,652 $ 820,439 $ 809,311
Cumulative effect from change in accounting policy(1)
— — — (5,615)
Net income 20,592 16,636 78,638 22,688
Dividends declared (7,170) (7,227) (21,753) (21,796)
Other comprehensive (loss) income, net of tax (1,327) (773) (10,284) 14,830
Repurchase of common stock (20,641) (7) (21,398) (19,105)
Other 966 848 2,762 2,816
Balance, end of period $ 848,404 $ 803,129 $ 848,404 $ 803,129

~~(1)~~ ~~Effective January 1, 2020, the Company adopted ASU 2016-13,~~ ~~Financial Instruments - Credit Losses~~.

~~The Company repurchased 841,088 and 797,700 shares under the Company's stock repurchase plans~~increases in market interest rates during the nine months ended September 30, ~~2021 and 2020, respectively. In addition to~~2022, which negatively impacted the ~~stock repurchases under a plan,~~fair value of our investment securities available for sale. AOCI has no effect on our regulatory capital ratios as the Company ~~repurchased shares~~opted to ~~pay withholding taxes on the vesting of restricted stock awards and units.~~exclude it from our common equity tier 1 capital calculations as set forth below.

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~~board of ~~Directors~~directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. On October ~~20, 2021,~~19, 2022, the Company’s ~~Board~~board of ~~Directors~~directors declared a regular quarterly dividend of $0.21 per common share ~~which is~~ payable on November ~~17, 2021~~16, 2022 to shareholders of record on November ~~3, 2021.~~2, 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

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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. ~~Management believes that as of September 30, 2021, the Company and the Bank met all capital adequacy requirements to which they are subject.~~

As of September 30, 2021 and December 31, 2020, 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

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notification that management believes have changed the Bank's categories. The following table represents the minimum required ratios of the Company and the Bank and the actual capital ratios at the periods indicated:

Minimum Requirements Well-Capitalized Requirements Actual
(Dollars in thousands)
As of September 30, 2021:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets $ 199,287 4.5 % N/A N/A $ 590,146 13.3 %
Tier 1 leverage capital to average assets 277,963 4.0 N/A N/A 611,253 8.8
Tier 1 capital to risk-weighted assets 265,716 6.0 N/A N/A 611,253 13.8
Total capital to risk-weighted assets 354,289 8.0 N/A N/A 654,014 14.8
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets 199,130 4.5 $ 287,632 6.5 % 598,297 13.5
Tier 1 leverage capital to average assets 277,867 4.0 347,334 5.0 598,297 8.6
Tier 1 capital to risk-weighted assets 265,507 6.0 354,009 8.0 598,297 13.5
Total capital to risk-weighted assets 354,009 8.0 442,512 10.0 641,058 14.5
As of December 31, 2020:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets $ 203,314 4.5 % N/A N/A $ 555,644 12.3 %
Tier 1 leverage capital to average assets 256,216 4.0 N/A N/A 576,531 9.0
Tier 1 capital to risk-weighted assets 271,086 6.0 N/A N/A 576,531 12.8
Total capital to risk-weighted assets 361,448 8.0 N/A N/A 633,061 14.0
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets 203,112 4.5 $ 293,383 6.5 % 563,630 12.5
Tier 1 leverage capital to average assets 256,051 4.0 320,064 5.0 563,630 8.8
Tier 1 capital to risk-weighted assets 270,815 6.0 361,087 8.0 563,630 12.5
Total capital to risk-weighted assets 361,087 8.0 451,359 10.0 620,124 13.7

As of both September 30, 2021 and December 31, 2020, 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 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.

~~Under applicable capital requirements both~~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. AtManagement believes that as of September 30, ~~2021, the capital conservation buffer was 6.8% and 6.5% for~~2022, the Company and the Bank ~~respectively.~~met all capital adequacy requirements to which they are subject.

As of September 30, 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:


	Company				Heritage Bank
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Common equity Tier 1 capital ratio	12.8	%	13.5	%	13.0	%	13.8	%
Leverage ratio	9.2		8.7		9.0		8.6
Tier 1 capital ratio	13.3		13.9		13.0		13.8
Total capital ratio	14.0		14.8		13.8		14.7
Capital conservation buffer	6.0		6.8		5.8		6.7

As of both September 30, 2022 and December 31, 2021, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allowed 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.

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 nine months ended September 30, 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 ~~that~~ they provide useful and comparative information to assess trends in the Company’s performance and asset quality ~~reflected in the current quarter~~ and ~~comparable period results 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. These non-GAAP measures may not be~~GAAP, nor are they necessarily comparable to ~~similarly titled~~non-GAAP performance measures ~~reported~~that may be presented by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.

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The Company believes presenting loan yield excluding the effect of discount accretion on ~~purchased~~acquired 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 ~~our~~its balance sheet. Incremental accretion on acquired loans represents the amount of interest income recorded on acquired 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 acquired loans decreases. Similarly, presenting loan yield excluding the effect of SBA PPP loans is

~~Table of Contents~~

useful in assessing the impact of these special program loans that ~~are anticipated to~~have substantially ~~decrease upon forgiveness by the SBA~~decreased within a short time frame.

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized:
Interest and fees on loans (GAAP) $ 46,863 $ 47,647 $ 147,137 $ 142,328
Exclude SBA PPP loan interest and fees (8,042) (5,810) (27,180) (10,733)
Exclude incremental accretion on purchased loans (681) (944) (2,250) (2,651)
Adjusted interest and fees on loans (non-GAAP) $ 38,140 $ 40,893 $ 117,707 $ 128,944
Average loans receivable, net (GAAP) $ 4,005,585 $ 4,605,389 $ 4,297,875 $ 4,266,598
Exclude average SBA PPP loans (392,570) (863,127) (665,681) (511,461)
Adjusted average loans receivable, net (non-GAAP) $ 3,613,015 $ 3,742,262 $ 3,632,194 $ 3,755,137
Loan yield, annualized (GAAP) 4.64 % 4.12 % 4.58 % 4.46 %
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) 4.19 % 4.35 % 4.33 % 4.59 %


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Loan yield, excluding SBA PPP Loans and Incremental Accretion on Acquired Loans, annualized:
Interest and fees on loans (GAAP)	$	43,847		$	46,863		$	125,762		$	147,137
Exclude interest and fees on SBA PPP loans	(275)			(8,042)			(5,138)			(27,181)
Exclude incremental accretion on acquired loans	(398)			(681)			(1,252)			(2,250)
Adjusted interest and fees on loans (non-GAAP)	$	43,174		$	38,140		$	119,372		$	117,706

Average loans receivable, net (GAAP)	$	3,859,839		$	4,005,585		$	3,815,387		$	4,297,875
Exclude average SBA PPP loans	(5,726)			(392,570)			(49,423)			(665,681)
Adjusted average loans receivable, net (non-GAAP)	$	3,854,113		$	3,613,015		$	3,765,964		$	3,632,194

Loan yield, annualized (GAAP)	4.51		%	4.64		%	4.41		%	4.58		%
Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans, annualized (non-GAAP)	4.44		%	4.19		%	4.24		%	4.33		%

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 iswas 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.

September 30,
2021 December 31,
2020
(Dollars in thousands)
ACL on loans to loans receivable, excluding SBA PPP loans:
Allowance for credit losses on loans (GAAP) $ 48,317 $ 70,185
Loans receivable (GAAP) $ 3,953,884 $ 4,468,647
Exclude SBA PPP loans 266,896 715,121
Loans receivable, excluding SBA PPP (non-GAAP) $ 3,686,988 $ 3,753,526
ACL on loans to loans receivable (GAAP) 1.22 % 1.57 %
ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 1.31 % 1.87 %


	September 30, 2022			December 31, 2021
	(Dollars in thousands)
ACL on Loans to Loans Receivable, excluding SBA PPP Loans:
Allowance for credit losses on loans (GAAP)	$	42,089		$	42,361

Loans receivable (GAAP)	$	4,001,295		$	3,815,662
Exclude SBA PPP loans	(3,593)			(145,840)
Loans receivable, excluding SBA PPP (non-GAAP)	$	3,997,702		$	3,669,822

ACL on loans to loans receivable (GAAP)	1.05		%	1.11		%
ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP)	1.05		%	1.15		%

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risk through our lending and deposit gathering activities. Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our ~~2020~~2021 Annual Form 10-K.

Neither ~~the Company~~we, nor the Bank, ~~maintains~~maintain a trading account for any class of financial instrument, nor do we, or ~~engages~~the Bank, engage in hedging activities or ~~purchases~~purchase high risk derivative instruments. Moreover, neither ~~the Company~~we, nor the Bank, isare subject to foreign currency exchange rate risk or commodity price risk.

Table of Contents

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

~~Table of Contents~~

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 September 30, ~~2021~~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 September 30, ~~2021,~~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 ~~Part I.~~ Item 1A of the Company’s ~~2020~~2021 Annual Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

The following table provides information about repurchases of common stock by the Company during the three months ended September 30, ~~2021:~~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)
July 1, 2021— July 31, 2021 95,631 $ 23.39 9,077,432 1,547,645
August 1, 2021— August 31, 2021 453,319 24.71 9,530,751 1,094,326
September 1, 2021— September 30, 2021 292,358 24.64 9,822,889 802,188
Total 841,308 $ 24.54


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)
July 1, 2022—July 31, 2022	—	$	—	9,986,863	638,214
August 1, 2022— August 31, 2022	—	—		9,986,863	638,214
September 1, 2022—September 30, 2022	100	26.94		9,986,863	638,214
Total	100	$	26.94

(1)Of the common shares repurchased by the Company between July 1, ~~2021~~2022 and September 30, ~~2021, 220 of the~~2022, all 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

5247

Table of Contents

ITEM 6. EXHIBITS

~~Incorporated by Reference~~

~~Exhibit No.~~

~~Description of Exhibit~~

~~Form~~

~~Exhibit~~

~~Filing Date/Period End Date~~

10.29*

~~Addendum to Employment Agreement - Bryan D. McDonald~~

~~8-K~~

~~10.1~~

~~07/06/2021~~

10.34*

~~Form of Split Dollar Agreement, dated May 3, 2021, by and between Heritage Bank and Tony Chalfant~~

~~10-Q~~

~~10.34~~

~~05/05/2021~~

~~31.1~~

~~Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

10.39

Transitional Retirement Agreement made and entered into on September 26, 2022, effective as of January 1, 2023 by and between Heritage Financial Corporation and Cindy M. Hirman

8-K

10.1

09/26/2022

10.40*

Deferred Compensation Plan and Participation Agreement - Addendum by and between Heritage and Jeffrey J. Deuel

10-Q

11/8/2022

10.41*

Deferred Compensation Plan and Participation Agreement - Addendum by and between Heritage and Donald J. Hinson

10-Q

11/8/2022

10.42*

Deferred Compensation Plan and Participation Agreement - Addendum by and between Heritage and Bryan McDonald

10-Q

11/8/2022

10.43*

Deferred Compensation Plan and Participation Agreement - Addendum by and between Heritage and Tony Chalfant

10-Q

11/8/2022

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

32.1

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

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)~~

~~31.2~~

~~Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)~~

~~32.1~~

~~Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)~~

~~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)~~

*Indicates management contract or compensatory plan or arrangement.

(1) Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						HERITAGE FINANCIAL CORPORATION

Date:
November 8, ~~2021~~2022						/S/ JEFFREY J. DEUEL
						Jeffrey J. Deuel
						President and Chief Executive Officer

Date:
November 8, ~~2021~~2022						/S/ DONALD J. HINSON
						Donald J. Hinson
						Executive Vice President and Chief Financial Officer

5348


	Three Months Ended September 30, 2021				Three Months Ended September 30, 2020
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(In thousands)
Commercial business:
Commercial and industrial	$	(1)	$	184	$	(59)	$	111
Owner-occupied CRE	—		—		(219)		29
Non-owner occupied CRE	—		—		(102)		—
Total commercial business	(1)		184		(380)		140
Residential real estate	—		—		(1)		2
Real estate construction and land development:

Commercial and multifamily	—		—		(11)		—

Consumer	—		32		—		—
Total	$	(1)	$	216	$	(392)	$	142


	Nine Months Ended September 30, 2021				Nine months ended September 30, 2020
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(in thousands)
Commercial business:
Commercial and industrial	$	(11)	$	2,228	$	(75)	$	419
Owner-occupied CRE	—		117		(219)		89
Non-owner occupied CRE	—		313		(102)		67
Total commercial business	(11)		2,658		(396)		575
One-to-four family residential	0		0		(1)		2
Real estate construction and land development:
Residential	—		73		—		—
Commercial and multifamily	—		—		(11)		—

Consumer	—		32		—		47
Total	$	(11)	$	2,763	$	(408)	$	624


			Fair Value at December 31, 2020
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial	$	1,305	$	1,289	$	—	$	—	$	1,289










Prepaid expenses and other assets:
Branch held for sale (2)	1,330		1,330		—		—		1,330
Total assets measured at fair value on a nonrecurring basis	$	2,635	$	2,619	$	—	$	—	$	2,619


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(In thousands)
Balance, beginning of period	$	2,451	$	4,612	$	4,681	$	306
Impact of CECL Adoption	—		—		—		3,702
Adjusted balance, beginning of period	2,451		4,612		4,681		4,008
(Reversal of) provision for credit losses on unfunded commitments	(297)		410		(2,527)		1,014
Balance, end of period	$	2,154	$	5,022	$	2,154	$	5,022


	September 30, 2021				December 31, 2020
	Balance (1)		% of Total (2)		Balance (1)		% of Total (2)		Change		Percentage Change
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	652,776	16.5	%	$	733,098	16.4	%	$	(80,322)	(11.0)	%
SBA PPP	266,896		6.8		715,121		16.0		(448,225)		(62.7)
Owner-occupied CRE	907,568		23.0		856,684		19.2		50,884		5.9
Non-owner occupied CRE	1,459,795		36.8		1,410,303		31.5		49,492		3.5
Total commercial business	3,287,035		83.1		3,715,206		83.1		(428,171)		(11.5)
Residential real estate (3)	125,697		3.2		122,756		2.7		2,941		2.4
Real estate construction and land development:
Residential	90,081		2.3		78,259		1.8		11,822		15.1
Commercial and multifamily	205,516		5.2		227,454		5.1		(21,938)		(9.6)
Total real estate construction and land development	295,597		7.5		305,713		6.9		(10,116)		(3.3)
Consumer	245,555		6.2		324,972		7.3		(79,417)		(24.4)
Total	$	3,953,884	100.0	%	$	4,468,647	100.0	%	$	(514,763)	(11.5)	%


	As of September 30, 2021
	PPP1		PPP2		Total SBA PPP
	(Dollars in thousands)
Total number of funded loans	4,642		2,542		7,184
Total amount funded	$	897,353	$	380,014	$	1,277,367
Average funded loan size	$	193	$	149	$	178
Total net fees deferred at funding	$	28,805	$	16,041	$	44,846


	As of or for the Three Months Ended
	September 30, 2021
	PPP1		PPP2		Total SBA PPP
	(In thousands)
Net deferred fees recognized during the period	$	2,276	$	4,754	$	7,030
Net deferred fees unrecognized as of period end	280		9,055		9,335
Principal payments received during the period, including forgiveness payments from the SBA	179,030		105,355		284,385

Amortized cost as of period end	19,683		247,213		266,896


	Minimum Requirements				Well-Capitalized Requirements				Actual
	(Dollars in thousands)
As of September 30, 2021:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets	$	199,287	4.5	%	N/A		N/A		$	590,146	13.3	%
Tier 1 leverage capital to average assets	277,963		4.0		N/A		N/A		611,253		8.8
Tier 1 capital to risk-weighted assets	265,716		6.0		N/A		N/A		611,253		13.8
Total capital to risk-weighted assets	354,289		8.0		N/A		N/A		654,014		14.8
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets	199,130		4.5		$	287,632	6.5	%	598,297		13.5
Tier 1 leverage capital to average assets	277,867		4.0		347,334		5.0		598,297		8.6
Tier 1 capital to risk-weighted assets	265,507		6.0		354,009		8.0		598,297		13.5
Total capital to risk-weighted assets	354,009		8.0		442,512		10.0		641,058		14.5

As of December 31, 2020:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets	$	203,314	4.5	%	N/A		N/A		$	555,644	12.3	%
Tier 1 leverage capital to average assets	256,216		4.0		N/A		N/A		576,531		9.0
Tier 1 capital to risk-weighted assets	271,086		6.0		N/A		N/A		576,531		12.8
Total capital to risk-weighted assets	361,448		8.0		N/A		N/A		633,061		14.0
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets	203,112		4.5		$	293,383	6.5	%	563,630		12.5
Tier 1 leverage capital to average assets	256,051		4.0		320,064		5.0		563,630		8.8
Tier 1 capital to risk-weighted assets	270,815		6.0		361,087		8.0		563,630		12.5
Total capital to risk-weighted assets	361,087		8.0		451,359		10.0		620,124		13.7