UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~March 31,~~September 30, 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 ~~April 25,~~October 31, 2022, there were ~~35,102,372~~35,104,248 shares of the registrant's common stock, no par value per share, outstanding.

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

~~March 31,~~September 30, 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 ~~MARCH 31,~~SEPTEMBER 30, 2022 AND DECEMBER 31, 2021		5
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2022 AND 2021		6
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2022 AND 2021		7
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2022 AND 2021		8
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE ~~THREE~~NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2022 AND 2021		910
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		1012
	NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	1012
	NOTE 2.	INVESTMENT SECURITIES	1113
	NOTE 3.	LOANS RECEIVABLE	1315
	NOTE 4.	ALLOWANCE FOR CREDIT LOSSES ON LOANS	2123

	NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	2225
	NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	2225
	NOTE 7.	STOCKHOLDERS’ EQUITY	2326
	NOTE 8.	FAIR VALUE MEASUREMENTS	2427
	NOTE 9.	CASH RESTRICTION	2832
	NOTE 10.	COMMITMENTS AND CONTINGENCIES	2832

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		2932
	OVERVIEW		2932
	RESULTS OF OPERATIONS		3033
		AVERAGE BALANCES, YIELDS AND RATES PAID	3033
		NET INTEREST INCOME AND MARGIN OVERVIEW	3134
		PROVISION FOR CREDIT LOSSES OVERVIEW	3237
		NONINTEREST INCOME OVERVIEW	3338
		NONINTEREST EXPENSE OVERVIEW	3339
		INCOME TAX EXPENSE OVERVIEW	3440
	FINANCIAL CONDITION OVERVIEW		3440
		INVESTMENT ACTIVITIES OVERVIEW	3541
		LOAN PORTFOLIO OVERVIEW	3542
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	3743
		DEPOSITS OVERVIEW	3744
		STOCKHOLDERS' EQUITY OVERVIEW	3844
	REGULATORY REQUIREMENTS OVERVIEW		3844
	LIQUIDITY AND CAPITAL RESOURCES		3845
	CRITICAL ACCOUNTING POLICIES		3945
	RECONCILIATIONS OF NON-GAAP MEASURES		3945
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		4046
ITEM 4.	CONTROLS AND PROCEDURES		47

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~~ITEM 4.~~	~~CONTROLS AND PROCEDURES~~	40
PART II.	OTHER INFORMATION	4047
ITEM 1.	LEGAL PROCEEDINGS	4047
ITEM 1A.	RISK FACTORS	4047
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4047
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4147
ITEM 4.	MINE SAFETY DISCLOSURES	4147
ITEM 5.	OTHER INFORMATION	4147
ITEM 6.	EXHIBITS	4148
	SIGNATURES	4148

GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms “we”, “our”, or “us” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.


2021 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, 2021
ACL			Allowance for credit losses
AOCI			Accumulated other comprehensive income (loss), net

ASU			Accounting Standards Update
Bank			Heritage Bank
CECL			Current Expected Credit Loss
CMO			Collateralized Mortgage Obligation
Company			Heritage Financial Corporation
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

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 STATEMENTS

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

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

•potential adverse impacts to economic conditions in our local market areas, other markets where the ~~effect~~Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or 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, including on the ~~Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the~~possibility of new COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;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, including as a result of the COVID-19 Pandemic;

•implementing regulations, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

•our ability to control operating costs and expenses;

•~~increases in premiums for deposit insurance;~~

•the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•difficulties in reducing risk associated with ~~the loans on~~ our ~~unaudited Condensed Consolidated Statements of Financial Condition;~~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;

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

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, and the other risks detailed from time to time in our filings with the SEC including our 2021 Annual Form 10-K.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(In thousands, except shares)


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Cash on hand and in banks	Cash on hand and in banks	$	87,907	$	61,377	Cash on hand and in banks	$	100,428	$	61,377
Interest earning deposits	Interest earning deposits	1,488,815		1,661,915		Interest earning deposits	306,896		1,661,915
Cash and cash equivalents	Cash and cash equivalents	1,576,722		1,723,292		Cash and cash equivalents	407,324		1,723,292
Investment securities available for sale, at fair value, net (amortized cost of $1,085,016 and $883,832, respectively)		1,039,924		894,335
Investment securities held to maturity, at amortized cost, net (fair value of $384,822 and $376,331, respectively)		422,213		383,393
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	1,462,137		1,277,728		Total investment securities	2,129,461		1,277,728
Loans held for sale	Loans held for sale	1,142		1,476		Loans held for sale	—		1,476
Loans receivable	Loans receivable	3,821,178		3,815,662		Loans receivable	4,001,295		3,815,662
Allowance for credit losses on loans	Allowance for credit losses on loans	(40,333)		(42,361)		Allowance for credit losses on loans	(42,089)		(42,361)
Loans receivable, net	Loans receivable, net	3,780,845		3,773,301		Loans receivable, net	3,959,206		3,773,301
Other real estate owned		—		—

Premises and equipment, net	Premises and equipment, net	78,737		79,370		Premises and equipment, net	76,683		79,370
Federal Home Loan Bank stock, at cost	Federal Home Loan Bank stock, at cost	8,916		7,933		Federal Home Loan Bank stock, at cost	8,916		7,933
Bank owned life insurance	Bank owned life insurance	119,929		120,196		Bank owned life insurance	121,369		120,196
Accrued interest receivable	Accrued interest receivable	14,582		14,657		Accrued interest receivable	17,812		14,657
Prepaid expenses and other assets	Prepaid expenses and other assets	190,592		183,543		Prepaid expenses and other assets	230,704		183,543
Other intangible assets, net	Other intangible assets, net	9,273		9,977		Other intangible assets, net	7,898		9,977
Goodwill	Goodwill	240,939		240,939		Goodwill	240,939		240,939
Total assets	Total assets	$	7,483,814	$	7,432,412	Total assets	$	7,200,312	$	7,432,412
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	Deposits	$	6,491,500	$	6,394,290	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	21,253		21,180		Junior subordinated debentures	21,399		21,180
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	49,069		50,839		Securities sold under agreement to repurchase	40,449		50,839
Accrued expenses and other liabilities	Accrued expenses and other liabilities	100,543		111,671		Accrued expenses and other liabilities	124,027		111,671
Total liabilities	Total liabilities	6,662,365		6,577,980		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; 35,102,372 and 35,105,779 shares issued and outstanding, respectively		550,096		551,798
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	305,581		293,238		Retained earnings	330,284		293,238
Accumulated other comprehensive (loss) income, net	Accumulated other comprehensive (loss) income, net	(34,228)		9,396		Accumulated other comprehensive (loss) income, net	(105,001)		9,396
Total stockholders’ equity	Total stockholders’ equity	821,449		854,432		Total stockholders’ equity	776,702		854,432
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	7,483,814	$	7,432,412	Total liabilities and stockholders’ equity	$	7,200,312	$	7,432,412

See accompanying Notes to Condensed Consolidated Financial 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 March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021				2022		2021		2022		2021
INTEREST INCOME:	INTEREST INCOME:						INTEREST INCOME:
Interest and fees on loans	Interest and fees on loans	$	41,025	$	49,524		Interest and fees on loans	$	43,847	$	46,863	$	125,762	$	147,137
Taxable interest on investment securities	Taxable interest on investment securities	6,003		3,534			Taxable interest on investment securities	12,362		4,711		25,972		12,295
Nontaxable interest on investment securities	Nontaxable interest on investment securities	860		958			Nontaxable interest on investment securities	892		931		2,645		2,836
Interest on interest earning deposits	Interest on interest earning deposits	706		175			Interest on interest earning deposits	4,009		537		7,057		975
Total interest income	Total interest income	48,594		54,191			Total interest income	61,110		53,042		161,436		163,243
INTEREST EXPENSE:	INTEREST EXPENSE:						INTEREST EXPENSE:
Deposits	Deposits	1,424		1,728			Deposits	1,478		1,444		4,315		4,696
Junior subordinated debentures	Junior subordinated debentures	194		187			Junior subordinated debentures	312		184		745		557
Other borrowings	Other borrowings	32		38			Other borrowings	34		36		98		109
Total interest expense	Total interest expense	1,650		1,953			Total interest expense	1,824		1,664		5,158		5,362
Net interest income	Net interest income	46,944		52,238			Net interest income	59,286		51,378		156,278		157,881
Reversal of provision for credit losses		(3,577)		(7,199)
Net interest income after reversal of provision for credit losses		50,521		59,437
Provision for (reversal of) credit losses							Provision for (reversal of) credit losses	1,945		(3,149)		(2,836)		(24,335)
Net interest income after provision for (reversal of) credit losses							Net interest income after provision for (reversal of) credit losses	57,341		54,527		159,114		182,216
NONINTEREST INCOME:	NONINTEREST INCOME:						NONINTEREST INCOME:
Service charges and other fees	Service charges and other fees	2,296		1,892			Service charges and other fees	2,688		2,400		7,739		6,728
Card revenue	Card revenue	2,441		2,097			Card revenue	2,365		2,150		6,774		6,216
Gain on sale of investment securities, net	Gain on sale of investment securities, net	—		29			Gain on sale of investment securities, net	—		—		—		29
Gain on sale of loans, net	Gain on sale of loans, net	241		1,370			Gain on sale of loans, net	133		765		593		3,138
Interest rate swap fees	Interest rate swap fees	279		152			Interest rate swap fees	78		126		383		487
Bank owned life insurance income	Bank owned life insurance income	1,695		656			Bank owned life insurance income	723		647		3,182		2,020
Gain on sale of other assets, net	Gain on sale of other assets, net	204		22			Gain on sale of other assets, net	265		942		469		1,688
Other income	Other income	1,382		2,033			Other income	1,201		1,198		3,867		4,470
Total noninterest income	Total noninterest income	8,538		8,251			Total noninterest income	7,453		8,228		23,007		24,776
NONINTEREST EXPENSE:	NONINTEREST EXPENSE:						NONINTEREST EXPENSE:
Compensation and employee benefits	Compensation and employee benefits	21,252		22,201			Compensation and employee benefits	24,206		21,963		67,236		65,967
Occupancy and equipment	Occupancy and equipment	4,331		4,454			Occupancy and equipment	4,422		4,373		12,924		12,918
Data processing	Data processing	4,061		3,812			Data processing	4,185		4,029		12,431		11,839
Marketing	Marketing	266		513			Marketing	358		486		968		1,566
Professional services	Professional services	699		1,270			Professional services	639		776		1,867		3,083
State/municipal business and use taxes	State/municipal business and use taxes	796		972			State/municipal business and use taxes	963		1,071		2,626		3,034
Federal deposit insurance premium	Federal deposit insurance premium	600		589			Federal deposit insurance premium	500		550		1,525		1,478

Amortization of intangible assets	Amortization of intangible assets	704		797			Amortization of intangible assets	671		758		2,079		2,352
Other expense	Other expense	3,011		2,634			Other expense	3,203		3,160		8,918		8,567
Total noninterest expense	Total noninterest expense	35,720		37,242			Total noninterest expense	39,147		37,166		110,574		110,804
Income before income taxes	Income before income taxes	23,339		30,446			Income before income taxes	25,647		25,589		71,547		96,188
Income tax expense	Income tax expense	3,582		5,102			Income tax expense	4,657		4,997		12,216		17,550
Net income	Net income	$	19,757	$	25,344		Net income	$	20,990	$	20,592	$	59,331	$	78,638
Basic earnings per share	Basic earnings per share	$	0.56	$	0.70		Basic earnings per share	$	0.60	$	0.58	$	1.69	$	2.19
Diluted earnings per share	Diluted earnings per share	$	0.56	$	0.70		Diluted earnings per share	$	0.59	$	0.58	$	1.67	$	2.18
Dividends declared per share	Dividends declared per share	$	0.21	$	0.20		Dividends declared per share	$	0.21	$	0.20	$	0.63	$	0.60
Average number of basic shares outstanding	Average number of basic shares outstanding	35,094,725		35,926,950			Average number of basic shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258
Average number of diluted shares outstanding	Average number of diluted shares outstanding	35,412,098		36,232,204			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 (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

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

(In thousands)

Three Months Ended
March 31,
2022 2021
Net income $ 19,757 $ 25,344
Change in fair value of investment securities available for sale, net of tax of $(12,113) and $(3,204), respectively (43,482) (11,534)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(39) and $0, respectively (142) —
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $0 and $(6), respectively — (23)
Other comprehensive loss (43,624) (11,557)
Comprehensive (loss) income $ (23,867) $ 13,787


	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 (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(In thousands, except shares and per share amounts)


		Three Months Ended March 31, 2022										Three Months Ended September 30, 2022
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2021		35,105,779	$	551,798	$	293,238	$	9,396	$	854,432
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	101,683	—		—		—		—		Restricted stock units vested	419	—		—		—		—
Stock-based compensation expense	Stock-based compensation expense	—	950		—		—		950		Stock-based compensation expense	—	1,004		—		—		1,004
Common stock repurchased	Common stock repurchased	(105,090)	(2,652)		—		—		(2,652)		Common stock repurchased	(100)	(2)		—		—		(2)
Net income	Net income	—	—		19,757		—		19,757		Net income	—	—		20,990		—		20,990
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(43,624)		(43,624)		Other comprehensive loss, net of tax	—	—		—		(43,218)		(43,218)

Cash dividends declared on common stock ($0.21 per share)	Cash dividends declared on common stock ($0.21 per share)	—	—		(7,414)		—		(7,414)		Cash dividends declared on common stock ($0.21 per share)	—	—		(7,438)		—		(7,438)
Balance at March 31, 2022		35,102,372	$	550,096	$	305,581	$	(34,228)	$	821,449
Balance at September 30, 2022											Balance at September 30, 2022	35,104,248	$	551,419	$	330,284	$	(105,001)	$	776,702


		Three Months Ended March 31, 2021										Nine Months Ended September 30, 2022
		Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity			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
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	92,320	—		—		—		—		Restricted stock units vested	124,839	—		—		—		—
Stock-based compensation expense	Stock-based compensation expense	—	870		—		—		870		Stock-based compensation expense	—	2,797		—		—		2,797
Common stock repurchased	Common stock repurchased	(23,246)	(687)		—		—		(687)		Common stock repurchased	(126,370)	(3,176)		—		—		(3,176)
Net income	Net income	—	—		25,344		—		25,344		Net income	—	—		59,331		—		59,331
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		(11,557)		(11,557)		Other comprehensive loss, net of tax	—	—		—		(114,397)		(114,397)

Cash dividends declared on common stock ($0.20 per share)		—	—		(7,258)		—		(7,258)
Balance at March 31, 2021		35,981,317	$	571,204	$	242,486	$	13,461	$	827,151
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

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	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 (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


		Three Months Ended March 31,					Nine Months Ended September 30,
		2022		2021			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	19,757	$	25,344	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	(1,572)		(6,796)		Depreciation, amortization and accretion	(620)		(18,356)
Reversal of provision for credit losses	Reversal of provision for credit losses	(3,577)		(7,199)		Reversal of provision for credit losses	(2,836)		(24,335)

Stock-based compensation expense	Stock-based compensation expense	950		870		Stock-based compensation expense	2,797		2,762
Amortization of intangible assets	Amortization of intangible assets	704		797		Amortization of intangible assets	2,079		2,352
Origination of mortgage loans held for sale	Origination of mortgage loans held for sale	(5,833)		(32,254)		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	6,408		31,755		Proceeds from sale of mortgage loans held for sale	17,259		79,759
Bank owned life insurance income	Bank owned life insurance income	(1,695)		(656)		Bank owned life insurance income	(3,182)		(2,020)

Valuation adjustment on interest rate swaps	Valuation adjustment on interest rate swaps	(53)		(244)		Valuation adjustment on interest rate swaps	(67)		(296)

Gain on sale of mortgage loans held for sale, net	Gain on sale of mortgage loans held for sale, net	(241)		(1,370)		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)		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	(204)		(22)		Gain on sale of assets held for sale	(403)		(1,691)

Other	Other	(3,716)		(1,115)		Other	3,865		11,332
Net cash provided by operating activities	Net cash provided by operating activities	10,928		9,081		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 originations and purchases, net of payments	Loan originations and purchases, net of payments	(988)		(117,892)		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	42,327		62,675		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	6,644		—		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	(244,409)		(166,038)		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	(45,849)		—		Purchase of investment securities held to maturity	(412,835)		(66,821)
Proceeds from sales of investment securities available for sale		—		1,248
Purchase of premises and equipment	Purchase of premises and equipment	(724)		(475)		Purchase of premises and equipment	(2,295)		(2,148)
Purchases of bank owned life insurance						Purchases of bank owned life insurance	(105)		(104)
Proceeds from bank owned life insurance death benefit						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	1,173		1,731		Proceeds from sales of assets held for sale	2,102		5,642

Purchases of Federal Home Loan Bank stock		(983)		(1,272)

Purchases of bank owned life insurance		(105)		(105)
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

Capital contributions to low-income housing tax credit partnerships		—		(12,617)

Net cash used by investing activities		(242,914)		(232,745)
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		97,210		421,708

Net (decrease) increase in deposits						Net (decrease) increase in deposits	(156,555)		617,568
Federal Home Loan Bank advances						Federal Home Loan Bank advances	50		10
Repayment of Federal Home Loan Bank advances						Repayment of Federal Home Loan Bank advances	(50)		(10)
Common stock cash dividends paid	Common stock cash dividends paid	(7,372)		(7,183)		Common stock cash dividends paid	(22,119)		(21,552)
Net (decrease) increase in securities sold under agreement to repurchase	Net (decrease) increase in securities sold under agreement to repurchase	(1,770)		820		Net (decrease) increase in securities sold under agreement to repurchase	(10,390)		8,413
Repurchase of common stock	Repurchase of common stock	(2,652)		(687)		Repurchase of common stock	(3,176)		(21,398)
Net cash provided by financing activities		85,416		414,658
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	(146,570)		190,994		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 beginning of period	1,723,292		743,322
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	1,576,722	$	934,316	Cash and cash equivalents at end of period	$	407,324	$	1,634,739

Supplemental disclosures of cash flow information:
Cash paid for interest		$	1,555	$	1,889
Cash paid for income taxes, net of refunds		—		64

Investment in LIHTC partnership and related funding commitment		670		—
Right of use assets obtained in exchange for new operating lease liabilities		55		7,381
Purchase of investment securities available for sale not settled		—		5,000

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	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 (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements

(a) Description of Business

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 4950 branch offices 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.

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2021 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes the judgments, estimates and assumptions used in the preparation of the unaudited Condensed Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of the ACL on investment securities, management's estimate of the ACL on loans, management's estimate of the ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.

There have been reclassifications in certain prior year amounts in the unaudited Condensed Consolidated Statements of Financial Condition, the unaudited Condensed Consolidated Statements of Income and the unaudited Condensed Consolidated Statements of Cash Flows. Reclassifications had no effect on the prior year's net income or stockholders’ equity.

The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the 2021 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the 2021 Annual Form 10-K during the ~~three~~nine months ended ~~March 31,~~September 30, 2022.

(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Bank’s interest rate swap-related transactions are the majority of the Company's LIBOR exposure. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. Additionally, effective January 1, 2022, the ~~bank~~Bank is no longer initiating or renewing loans using LIBOR as an index. The Company does not expect this ASU to have a material impact on its business operations and the Consolidated Financial Statements.

FASB ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, was issued in March 2022. The ASU eliminates the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. These amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, since Heritage previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020. Early adoption is permitted and should be applied prospectively; however, the transition method related to the recognition and

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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.

There were no investment securities classified as trading at ~~March 31,~~September 30, 2022 or December 31, 2021.

(a) Investment Securities by Classification, Type and Maturity

The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI:


		March 31, 2022									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	$	41,489	$	—	$	(1,934)	$	39,555	U.S. government and agency securities	$	68,912	$	—	$	(5,163)	$	63,749
Municipal securities	Municipal securities	215,488		1,964		(7,213)		210,239		Municipal securities	206,767		51		(21,105)		185,713
Residential CMO and MBS	Residential CMO and MBS	378,934		219		(20,744)		358,409		Residential CMO and MBS	494,330		6		(55,966)		438,370
Commercial CMO and MBS	Commercial CMO and MBS	421,696		615		(17,806)		404,505		Commercial CMO and MBS	691,836		29		(52,424)		639,441
Corporate obligations	Corporate obligations	2,005		4		—		2,009		Corporate obligations	6,001		—		(167)		5,834
Other asset-backed securities	Other asset-backed securities	25,404		88		(285)		25,207		Other asset-backed securities	23,594		19		(578)		23,035
Total	Total	$	1,085,016	$	2,890	$	(47,982)	$	1,039,924	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	$	150,973	$	—	$	(14,344)	$	136,629	U.S. government and agency securities	$	150,948	$	—	$	(32,916)	$	118,032

Residential CMO and MBS	Residential CMO and MBS	54,486		—		(2,936)		51,550		Residential CMO and MBS	296,432		—		(19,168)		277,264
Commercial CMO and MBS	Commercial CMO and MBS	216,754		—		(20,111)		196,643		Commercial CMO and MBS	325,939		—		(43,900)		282,039

Total	Total	$	422,213	$	—	$	(37,391)	$	384,822	Total	$	773,319	$	—	$	(95,984)	$	677,335


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Investment securities available for sale:
U.S. government and agency securities	$	21,494	$	55	$	(176)	$	21,373
Municipal securities	213,158		8,908		(854)		221,212
Residential CMO and MBS	307,366		2,111		(2,593)		306,884
Commercial CMO and MBS	313,169		3,891		(1,199)		315,861
Corporate obligations	2,007		7		—		2,014
Other asset-backed securities	26,638		369		(16)		26,991
Total	$	883,832	$	15,341	$	(4,838)	$	894,335

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

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


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

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The amortized cost and fair value of investment securities at ~~March 31,~~September 30, 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					Securities Available for Sale				Securities Held to Maturity
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(In thousands)									(In thousands)
Due in one year or less	Due in one year or less	$	8,733	$	8,777	$	—	$	—	Due in one year or less	$	26,280	$	25,952	$	—	$	—
Due after one year through five years	Due after one year through five years	55,551		55,075		—		—		Due after one year through five years	63,151		60,858		—		—
Due after five years through ten years	Due after five years through ten years	63,330		62,935		83,202		76,884		Due after five years through ten years	67,834		63,738		83,219		68,150
Due after ten years	Due after ten years	131,368		125,016		67,771		59,745		Due after ten years	124,415		104,748		67,729		49,882
Total investment securities due at a single maturity date	Total investment securities due at a single maturity date	258,982		251,803		150,973		136,629		Total investment securities due at a single maturity date	281,680		255,296		150,948		118,032
Mortgage-backed securities (1)	Mortgage-backed securities (1)	826,034		788,121		271,240		248,193		Mortgage-backed securities (1)	1,209,760		1,100,846		622,371		559,303
Total investment securities	Total investment securities	$	1,085,016	$	1,039,924	$	422,213	$	384,822	Total investment securities	$	1,491,440	$	1,356,142	$	773,319	$	677,335

(1) Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.

There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at ~~March 31,~~September 30, 2022 and December 31, 2021.

(b) Unrealized Losses on Investment Securities Available for Sale

The following tables show the gross unrealized losses and fair value of the Company’s investment securities available for sale for which an ACL on investment securities available for sale has not been recorded, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at the dates indicated:


		March 31, 2022													September 30, 2022
		Less than 12 Months				12 Months or Longer				Total					Less than 12 Months				12 Months or Longer				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
		(In thousands)													(In thousands)
U.S. government and agency securities	U.S. government and agency securities	$	38,002	$	(1,764)	$	1,553	$	(170)	$	39,555	$	(1,934)	U.S. government and agency securities	$	58,025	$	(4,176)	$	5,724	$	(987)	$	63,749	$	(5,163)
Municipal securities	Municipal securities	90,266		(5,206)		16,837		(2,007)		107,103		(7,213)		Municipal securities	148,054		(12,031)		27,731		(9,074)		175,785		(21,105)
Residential CMO and MBS	Residential CMO and MBS	307,811		(19,312)		24,731		(1,432)		332,542		(20,744)		Residential CMO and MBS	308,142		(28,668)		128,304		(27,298)		436,446		(55,966)
Commercial CMO and MBS	Commercial CMO and MBS	307,598		(17,695)		1,717		(111)		309,315		(17,806)		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	12,476		(274)		1,004		(11)		13,480		(285)		Other asset-backed securities	17,410		(563)		834		(15)		18,244		(578)
Total	Total	$	756,153	$	(44,251)	$	45,842	$	(3,731)	$	801,995	$	(47,982)	Total	$	1,148,864	$	(94,682)	$	181,229	$	(40,721)	$	1,330,093	$	(135,403)


	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 ~~March 31,~~September 30, 2022 and December 31, 2021 and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all

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

~~Table of Contents~~

and December 31, 2021. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of ~~March 31,~~September 30, 2022 and December 31, 2021.

The Company also evaluated investment securities held to maturity for current expected credit losses as of ~~March 31,~~September 30, 2022 and December 31, 2021. There were no investment securities held to maturity classified as nonaccrual or past due as of ~~March 31,~~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 had a long history of no credit losses. Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Therefore, no ACL on investment securities held to maturity was recorded as of ~~March 31,~~September 30, 2022 and December 31, 2021.

(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 were recognized during the ~~following periods:~~

Three Months Ended
March 31,
2022 2021
(In thousands)
Gross realized gains $ — $ 29
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, 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 the dates indicated:


		March 31, 2022				December 31, 2021					September 30, 2022				December 31, 2021
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(In thousands)									(In thousands)
Washington and Oregon state public deposits	Washington and Oregon state public deposits	$	139,817	$	134,625	$	128,216	$	130,217	Washington and Oregon state public deposits	$	158,082	$	138,003	$	128,216	$	130,217
Federal Reserve Bank credit facility	Federal Reserve Bank credit facility	60,966		54,962		61,057		59,674		Federal Reserve Bank credit facility	60,763		49,037		61,057		59,674
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	63,088		59,144		59,887		59,655		Securities sold under agreement to repurchase	64,087		55,825		59,887		59,655
Other securities pledged	Other securities pledged	53,673		50,333		56,419		55,633		Other securities pledged	55,600		48,785		56,419		55,633
Total	Total	$	317,544	$	299,064	$	305,579	$	305,179	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 ~~$3.4~~$4.7 million and $3.5 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled ~~$1.2~~$2.3 million and $1.1 million at ~~March 31,~~September 30, 2022 and December 31, ~~2021.~~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 or nine months ended ~~March 31,~~September 30, 2022 and 2021.

(3)Loans Receivable

The Bank originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Bank's amortized cost of loans receivable as it was deemed insignificant.

(a) Loan Origination/Risk Management

The Bank categorizes the individual loans in the total loan portfolio into 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 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, consisted of the following portfolio segments and classes at the dates indicated:


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Commercial business:	Commercial business:					Commercial business:
Commercial and industrial	Commercial and industrial	$	651,523	$	621,567	Commercial and industrial	$	735,028	$	621,567
SBA PPP	SBA PPP	64,962		145,840		SBA PPP	3,593		145,840
Owner-occupied CRE	Owner-occupied CRE	935,705		931,150		Owner-occupied CRE	959,486		931,150
Non-owner occupied CRE	Non-owner occupied CRE	1,505,483		1,493,099		Non-owner occupied CRE	1,547,114		1,493,099
Total commercial business	Total commercial business	3,157,673		3,191,656		Total commercial business	3,245,221		3,191,656
Residential real estate	Residential real estate	223,442		164,582		Residential real estate	296,019		164,582
Real estate construction and land development:	Real estate construction and land development:					Real estate construction and land development:
Residential	Residential	83,529		85,547		Residential	92,297		85,547
Commercial and multifamily	Commercial and multifamily	138,583		141,336		Commercial and multifamily	160,723		141,336
Total real estate construction and land development	Total real estate construction and land development	222,112		226,883		Total real estate construction and land development	253,020		226,883
Consumer	Consumer	217,951		232,541		Consumer	207,035		232,541
Loans receivable	Loans receivable	3,821,178		3,815,662		Loans receivable	4,001,295		3,815,662
Allowance for credit losses on loans	Allowance for credit losses on loans	(40,333)		(42,361)		Allowance for credit losses on loans	(42,089)		(42,361)
Loans receivable, net	Loans receivable, net	$	3,780,845	$	3,773,301	Loans receivable, net	$	3,959,206	$	3,773,301

Balances included in the amortized cost of loans receivable:	Balances included in the amortized cost of loans receivable:					Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans	Unamortized net discount on acquired loans	$	(3,354)	$	(3,938)	Unamortized net discount on acquired loans	$	2,686	$	3,938
Unamortized net deferred fee	Unamortized net deferred fee	$	(5,310)	$	(7,952)	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, the Bank's loan portfolio is concentrated in commercial loans, including commercial business loans and commercial and multifamily real estate construction and land development loans. Commercial loans are generally considered as having more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, (v) past due status, and (vi) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon.

The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the 2021 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.

Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The SM loan grade is transitory in that the Bank is waiting on additional information to determine the likelihood and extent of any potential loss. The likelihood of loss for SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a SS grade are generally accrual loans at risk of being classified as nonaccrual loans and includes all of

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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.

The following table presents the amortized cost of loans receivable by risk grade at the dates indicated:


		March 31, 2022																					September 30, 2022
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (2)				Loans Receivable		Term Loans Amortized Cost Basis by Origination Year																			Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
		2022		2021(1)		2020		2019		2018		Prior								2022				2021				2020				2019			2018			Prior
		(In thousands)																					(In thousands)
Commercial business:	Commercial business:																					Commercial business:
Commercial and industrial	Commercial and industrial																					Commercial and industrial
Pass	Pass	$	39,162	$	98,276	$	95,753	$	80,825	$	43,389	$	98,840		$	152,708		$	—				$	608,953	Pass	$	133,352			$	97,240		$	89,078		$	68,237		$	36,505	$		83,371	$	193,558	$	108	$	701,449
SM	SM	245		1,090		957		5,350		1,306		3,108		1,350			—				13,406	SM	223				—				715			4,759			1,898			5,311		6,678		—		19,584
SS	SS	882		283		1,131		4,787		9,415		8,827		2,788			1,051				29,164	SS	764				275				1,057			3,141			687			5,381		2,322		368		13,995

Total	Total	40,289		99,649		97,841		90,962		54,110		110,775		156,846			1,051				651,523	Total	134,339				97,515				90,850			76,137			39,090			94,063		202,558		476		735,028
SBA PPP	SBA PPP																					SBA PPP
Pass	Pass	—		64,379		583		—		—		—		—			—				64,962	Pass	—				3,455				138			—			—			—		—		—		3,593

Owner-occupied CRE	Owner-occupied CRE																					Owner-occupied CRE
Pass	Pass	30,659		177,833		91,600		181,568		75,692		327,070		—			—				884,422	Pass	111,751				168,437				93,272			172,494			71,795			302,107		—		—		919,856
SM	SM	—		262		2,707		3,627		5,803		16,704		—			—				29,103	SM	—				1,009				—			1,237			2,558			16,313		—		—		21,117
SS	SS	—		—		683		—		3,770		17,727		—			—				22,180	SS	—				259				675			—			3,739			13,840		—		—		18,513

Total	Total	30,659		178,095		94,990		185,195		85,265		361,501		—			—				935,705	Total	111,751				169,705				93,947			173,731			78,092			332,260		—		—		959,486
Non-owner occupied CRE	Non-owner occupied CRE																					Non-owner occupied CRE
Pass	Pass	62,126		190,931		175,900		244,550		142,711		612,820		—			—				1,429,038	Pass	182,804				189,307				162,954			240,088			133,478			571,457		—		—		1,480,088
SM	SM	—		—		—		3,686		—		16,802		—			—				20,488	SM	—				8,392				—			3,619			—			24,127		—		—		36,138
SS	SS	—		—		—		—		3,298		52,659		—			—				55,957	SS	—				—				—			—			3,627			27,261		—		—		30,888

Total	Total	62,126		190,931		175,900		248,236		146,009		682,281		—			—				1,505,483	Total	182,804				197,699				162,954			243,707			137,105			622,845		—		—		1,547,114
Total commercial business	Total commercial business																					Total commercial business
Pass	Pass	131,947		531,419		363,836		506,943		261,792		1,038,730		152,708			—				2,987,375	Pass	427,907				458,439				345,442			480,819			241,778			956,935		193,558		108		3,104,986
SM	SM	245		1,352		3,664		12,663		7,109		36,614		1,350			—				62,997	SM	223				9,401				715			9,615			4,456			45,751		6,678		—		76,839
SS	SS	882		283		1,814		4,787		16,483		79,213		2,788			1,051				107,301	SS	764				534				1,732			3,141			8,053			46,482		2,322		368		63,396

Total	Total	133,074		533,054		369,314		524,393		285,384		1,154,557		156,846			1,051				3,157,673	Total	428,894				468,374				347,889			493,575			254,287			1,049,168		202,558		476		3,245,221
Residential real estate	Residential real estate																					Residential real estate
Pass(1)	Pass(1)	24,214		129,511		26,840		19,330		4,766		18,602		—			—				223,263	Pass(1)	94,144				140,093				24,191			17,030			4,501			15,885		—		—		295,844

SS	SS	—		—		—		—		—		179		—			—				179	SS	—				—				—			—			—			175		—		—		175

Total	Total	24,214		129,511		26,840		19,330		4,766		18,781		—			—				223,442	Total	94,144				140,093				24,191			17,030			4,501			16,060		—		—		296,019
Real estate construction and land development:	Real estate construction and land development:																					Real estate construction and land development:
Residential	Residential																					Residential
Pass	Pass	8,874		44,379		13,267		12,422		2,898		1,689		—			—				83,529	Pass	33,244				37,666				7,617			11,810			885			1,075		—		—		92,297
																													Commercial and multifamily
Pass	Pass	5,197		68,477		39,826		18,620		3,188		1,860		—			—				137,168	Pass	36,362				103,541				7,601			1,096			2,565			1,513		—		—		152,678
SM	SM	—		—		—		60		—		212		—			—				272	SM	—				—				1,913			5,687			—			—		—		—		7,600
SS	SS	—		—		571		—		—		572		—			—				1,143	SS	—				—				—			45			—			400		—		—		445

Total	Total	5,197		68,477		40,397		18,680		3,188		2,644		—			—				138,583	Total	36,362				103,541				9,514			6,828			2,565			1,913		—		—		160,723
Total real estate construction and land development	Total real estate construction and land development																					Total real estate construction and land development
Pass	Pass	14,071		112,856		53,093		31,042		6,086		3,549		—			—				220,697	Pass	69,606				141,207				15,218			12,906			3,450			2,588		—		—		244,975
SM	SM	—		—		—		60		—		212		—			—				272	SM	—				—				1,913			5,687			—			—		—		—		7,600
SS	SS	—		—		571		—		—		572		—			—				1,143	SS	—				—				—			45			—			400		—		—		445

Total	Total	14,071		112,856		53,664		31,102		6,086		4,333		—			—				222,112	Total	69,606				141,207				17,131			18,638			3,450			2,988		—		—		253,020
Consumer																						Consumer
Pass																						Pass	3,266				616				11,078			31,077			18,201			22,828		117,070		539		204,675

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		March 31, 2022																					September 30, 2022
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (2)			Loans Receivable			Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
		2022		2021(1)		2020		2019		2018		Prior
Consumer
Pass		937		1,141		13,991		40,242		25,342		22,871				110,749			1					215,274
																							2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
SS	SS	—		—		175		534		419		1,549		—			—			2,677		SS	—		—		164		582		361		1,241

Total	Total	937		1,141		14,166		40,776		25,761		24,420		110,749			1			217,951		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	171,169		774,927		457,760		597,557		297,986		1,083,752		263,457			1			3,646,609		Pass	594,923		740,355		395,929		541,832		267,930		998,236		310,628		647		3,850,480
SM	SM	245		1,352		3,664		12,723		7,109		36,826		1,350			—			63,269		SM	223		9,401		2,628		15,302		4,456		45,751		6,678		—		84,439
SS	SS	882		283		2,560		5,321		16,902		81,513		2,788			1,051			111,300		SS	764		534		1,896		3,768		8,414		48,298		2,333		369		66,376

Total	Total	$	172,296	$	776,562	$	463,984	$	615,601	$	321,997	$	1,202,091	$	267,595		$	1,052		$	3,821,178	Total	$	595,910	$	750,290	$	400,453	$	560,902	$	280,800	$	1,092,285	$	319,639	$	1,016	$	4,001,295

(1)The 2021 origination year includes $42.2 million of pass grade residential real estate loans purchased during the three months ended March 31, 2022 which were originated during the year ended December 31, 2021.

~~(2)~~ Represents the loans receivable balance at ~~March 31,~~September 30, 2022 which was converted from a revolving loan to an amortizing loan during the ~~three~~nine months ended ~~March 31,~~September 30, 2022.


		December 31, 2021																					December 31, 2021
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (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								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	$	95,960	$	100,193	$	94,657	$	54,707	$	28,558	$	77,294		$	127,651		$	1,035				$	580,055	Pass	$	95,960		$	100,193		$	94,657		$	54,707		$	28,558	$		77,294	$	127,651	$	1,035	$	580,055
SM	SM	326		884		5,998		1,425		2,223		2,401		2,048			353				15,658	SM	326				884			5,998			1,425			2,223			2,401		2,048		353		15,658
SS	SS	1,443		1,287		5,912		2,809		2,526		6,907		4,402			568				25,854	SS	1,443				1,287			5,912			2,809			2,526			6,907		4,402		568		25,854

Total	Total	97,729		102,364		106,567		58,941		33,307		86,602		134,101			1,956				621,567	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	139,253		6,587		—		—		—		—		—			—				145,840	Pass	139,253				6,587			—			—			—			—		—		—		145,840

Owner-occupied CRE	Owner-occupied CRE																					Owner-occupied CRE
Pass	Pass	182,742		90,609		188,380		73,714		66,039		273,518		—			72				875,074	Pass	182,742				90,609			188,380			73,714			66,039			273,518		—		72		875,074
SM	SM	264		—		3,079		7,521		3,937		16,724		—			—				31,525	SM	264				—			3,079			7,521			3,937			16,724		—		—		31,525
SS	SS	—		1,332		—		3,787		3,014		16,418		—			—				24,551	SS	—				1,332			—			3,787			3,014			16,418		—		—		24,551

Total	Total	183,006		91,941		191,459		85,022		72,990		306,660		—			72				931,150	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	187,860		185,650		244,863		149,090		144,896		499,486		—			—				1,411,845	Pass	187,860				185,650			244,863			149,090			144,896			499,486		—		—		1,411,845
SM	SM	—		—		5,674		—		15,482		2,400		—			—				23,556	SM	—				—			5,674			—			15,482			2,400		—		—		23,556
SS	SS	—		—		—		3,379		—		54,319		—			—				57,698	SS	—				—			—			3,379			—			54,319		—		—		57,698

Total	Total	187,860		185,650		250,537		152,469		160,378		556,205		—			—				1,493,099	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	605,815		383,039		527,900		277,511		239,493		850,298		127,651			1,107				3,012,814	Pass	605,815				383,039			527,900			277,511			239,493			850,298		127,651		1,107		3,012,814
SM	SM	590		884		14,751		8,946		21,642		21,525		2,048			353				70,739	SM	590				884			14,751			8,946			21,642			21,525		2,048		353		70,739
SS	SS	1,443		2,619		5,912		9,975		5,540		77,644		4,402			568				108,103	SS	1,443				2,619			5,912			9,975			5,540			77,644		4,402		568		108,103

Total	Total	607,848		386,542		548,563		296,432		266,675		949,467		134,101			2,028				3,191,656	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	85,089		27,090		23,295		5,672		6,141		16,891		—			—				164,178	Pass	85,089				27,090			23,295			5,672			6,141			16,891		—		—		164,178

SS	SS	—		—		—		—		—		404		—			—				404	SS	—				—			—			—			—			404		—		—		404

Total	Total	85,089		27,090		23,295		5,672		6,141		17,295		—			—				164,582	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

1618

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		December 31, 2021
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans			Revolving Loans Converted (1)			Loans Receivable
		2021		2020		2019		2018		2017		Prior
		(In thousands)
Real estate construction and land development:
Residential
Pass		44,892		23,728		12,266		2,921		389		1,351				—			—					85,547
																							December 31, 2021
																							Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted (1)		Loans Receivable
																							2021		2020		2019		2018		2017		Prior
																							(In thousands)
Commercial and multifamily
Pass	Pass	56,448		41,616		34,117		5,794		710		1,379		—			—			140,064		Pass	56,448		41,616		34,117		5,794		710		1,379		—		—		140,064
SM	SM	—		—		68		—		—		213		—			—			281		SM	—		—		68		—		—		213		—		—		281
SS	SS	—		571		—		—		—		420		—			—			991		SS	—		571		—		—		—		420		—		—		991

Total	Total	56,448		42,187		34,185		5,794		710		2,012		—			—			141,336		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	101,340		65,344		46,383		8,715		1,099		2,730		—			—			225,611		Pass	101,340		65,344		46,383		8,715		1,099		2,730		—		—		225,611
SM	SM	—		—		68		—		—		213		—			—			281		SM	—		—		68		—		—		213		—		—		281
SS	SS	—		571		—		—		—		420		—			—			991		SS	—		571		—		—		—		420		—		—		991

Total	Total	101,340		65,915		46,451		8,715		1,099		3,363		—			—			226,883		Total	101,340		65,915		46,451		8,715		1,099		3,363		—		—		226,883
Consumer	Consumer																					Consumer
Pass	Pass	1,286		15,737		46,041		29,819		15,068		13,026		108,492			120			229,589		Pass	1,286		15,737		46,041		29,819		15,068		13,026		108,492		120		229,589

SS	SS	—		181		657		476		542		1,043		36			17			2,952		SS	—		181		657		476		542		1,043		36		17		2,952

Total	Total	1,286		15,918		46,698		30,295		15,610		14,069		108,528			137			232,541		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	793,530		491,210		643,619		321,717		261,801		882,945		236,143			1,227			3,632,192		Pass	793,530		491,210		643,619		321,717		261,801		882,945		236,143		1,227		3,632,192
SM	SM	590		884		14,819		8,946		21,642		21,738		2,048			353			71,020		SM	590		884		14,819		8,946		21,642		21,738		2,048		353		71,020
SS	SS	1,443		3,371		6,569		10,451		6,082		79,511		4,438			585			112,450		SS	1,443		3,371		6,569		10,451		6,082		79,511		4,438		585		112,450

Total	Total	$	795,563	$	495,465	$	665,007	$	341,114	$	289,525	$	984,194	$	242,629		$	2,165		$	3,815,662	Total	$	795,563	$	495,465	$	665,007	$	341,114	$	289,525	$	984,194	$	242,629	$	2,165	$	3,815,662

(1) Represents the loans receivable balance at December 31, 2021 which was converted from a revolving loan to an amortizing loan during the year ended December 31, 2021.

(d) Nonaccrual Loans

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


		March 31, 2022							September 30, 2022
		Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual			Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
		(In thousands)							(In thousands)
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	$	4,694	$	1,921	$	6,615	Commercial and industrial	$	5,060	$	299	$	5,359
Owner-occupied CRE	Owner-occupied CRE	1,820		4,223		6,043		Owner-occupied CRE	—		875		875
Non-owner occupied CRE		—		3,298		3,298
Total commercial business		6,514		9,442		15,956

Real estate construction and land development:

Commercial and multifamily		—		571		571

Total	Total	$	6,514	$	10,013	$	16,527	Total	$	5,060	$	1,174	$	6,234


		December 31, 2021							December 31, 2021
		Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual			Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
		(In thousands)							(In thousands)
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	$	6,454	$	3,827	$	10,281	Commercial and industrial	$	6,454	$	3,827	$	10,281
Owner-occupied CRE	Owner-occupied CRE	3,036		5,138		8,174		Owner-occupied CRE	3,036		5,138		8,174
Non-owner occupied CRE								Non-owner occupied CRE	1,273		3,379		4,652
Total commercial business								Total commercial business	10,763		12,344		23,107
Residential real estate								Residential real estate	—		47		47
Real estate construction and land development:								Real estate construction and land development:

Commercial and multifamily								Commercial and multifamily	—		571		571

Consumer								Consumer	—		29		29
Total								Total	$	10,763	$	12,991	$	23,754

1719

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December 31, 2021
Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual
(In thousands)
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

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

Three Months Ended
March 31, 2022 Three Months Ended
March 31, 2021
Interest Income Reversed Interest Income Recognized Interest Income Reversed Interest Income Recognized
(In thousands)
Commercial business:
Commercial and industrial $ (2) $ 139 $ (2) $ 63
Owner-occupied CRE — 53 — 114
Non-owner occupied CRE — 774 — 313
Total commercial business (2) 966 (2) 490
Residential real estate — 19 — —
Real estate construction and land development:
Residential — — — 73
Consumer — 68 — —
Total $ (2) $ 1,053 $ (2) $ 563


	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, 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 ~~March 31,~~September 30, 2022 and 2021, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.

(e) Past due loans

The Bank performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The amortized cost of past due loans as of ~~March 31,~~September 30, 2022 and December 31, 2021 were as follows:


		March 31, 2022											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	$	2,139	$	6,069	$	8,208	$	643,315	$	651,523	Commercial and industrial	$	1,774	$	4,130	$	5,904	$	729,124	$	735,028
SBA PPP	SBA PPP	150		—		150		64,812		64,962		SBA PPP	167		—		167		3,426		3,593
Owner-occupied CRE	Owner-occupied CRE	—		188		188		935,517		935,705		Owner-occupied CRE	30		189		219		959,267		959,486
Non-owner occupied CRE	Non-owner occupied CRE	—		—		—		1,505,483		1,505,483		Non-owner occupied CRE	296		—		296		1,546,818		1,547,114
Total commercial business	Total commercial business	2,289		6,257		8,546		3,149,127		3,157,673		Total commercial business	2,267		4,319		6,586		3,238,635		3,245,221
Residential real estate	Residential real estate	994		—		994		222,448		223,442		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	—		—		—		83,529		83,529		Residential	—		—		—		92,297		92,297
Commercial and multifamily	Commercial and multifamily	—		571		571		138,012		138,583		Commercial and multifamily	—		—		—		160,723		160,723
Total real estate construction and land development	Total real estate construction and land development	—		571		571		221,541		222,112		Total real estate construction and land development	—		—		—		253,020		253,020

1820

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		March 31, 2022											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)
Consumer	Consumer	575		—		575		217,376		217,951		Consumer	736		20		756		206,279		207,035
Total	Total	$	3,858	$	6,828	$	10,686	$	3,810,492	$	3,821,178	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

~~There was one customer relationship and one SBA PPP loan~~Loans 90 days or more past due and still accruing interest were $20,000 and $293,000 as of ~~March 31,~~September 30, 2022 and December 31, 2021, ~~respectively,~~ ~~with an amortized cost of $1.3 million and $293,000,~~ respectively.

(f) Collateral-dependent Loans

The type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral as of ~~March 31,~~September 30, 2022 and December 31, 2021 was as follows, with balances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:


		March 31, 2022						September 30, 2022
		CRE		Farmland		Residential Real Estate			Total			CRE		Farmland		Residential Real Estate		Total
		(In thousands)						(In thousands)
Commercial business:	Commercial business:										Commercial business:
Commercial and industrial	Commercial and industrial	$	1,379	$	2,492	$	695		$	4,566	Commercial and industrial	$	1,239	$	2,082	$	1,271	$	4,592
Owner-occupied CRE	Owner-occupied CRE	1,820		—		—			1,820		Owner-occupied CRE	189		—		—		189

Total commercial business		3,199		2,492		695			6,386

Real estate construction and land development:

Commercial and multifamily		571		—		—			571

Total	Total	$	3,770	$	2,492	$	695		$	6,957	Total	$	1,428	$	2,082	$	1,271	$	4,781


		December 31, 2021											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	$	1,499	$	4,362	$	1,036	$	245	$	7,142	Commercial and industrial	$	1,499	$	4,362	$	1,036	$	245	$	7,142
Owner-occupied CRE	Owner-occupied CRE	3,035		—		—		—		3,035		Owner-occupied CRE	3,035		—		—		—		3,035
Non-owner occupied CRE	Non-owner occupied CRE	1,273		—		—		—		1,273		Non-owner occupied CRE	1,273		—		—		—		1,273
Total commercial business	Total commercial business	5,807		4,362		1,036		245		11,450		Total commercial business	5,807		4,362		1,036		245		11,450

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

1921

Table of Contents


		December 31, 2021											December 31, 2021
		CRE		Farmland		Residential Real Estate		Other		Total			CRE		Farmland		Residential Real Estate		Other		Total
		(In thousands)
Real estate construction and land development:
													(In thousands)
Commercial and multifamily	Commercial and multifamily	571		—		—		—		571		Commercial and multifamily	571		—		—		—		571

Total	Total	$	6,378	$	4,362	$	1,036	$	245	$	12,021	Total	$	6,378	$	4,362	$	1,036	$	245	$	12,021

There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the ~~three~~nine months ended ~~March 31,~~September 30, 2022, except changes due to additions or removals of loans from this classification.

(g) Troubled Debt Restructured Loans

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


		Three Months Ended March 31,							Three Months Ended September 30,
		2022			2021				2022			2021
		Number of Contracts (1)	Amortized Cost (1) (2)		Number of Contracts (1)	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	4	$	2,438	24	$	12,102	Commercial and industrial	4	$	2,150	5	$	1,861
Owner-occupied CRE	Owner-occupied CRE	—	—		2	4,660		Owner-occupied CRE	—	—		2	7,124
Non-owner occupied CRE	Non-owner occupied CRE	—	—		1	1,979		Non-owner occupied CRE	—	—		—	—
Total commercial business	Total commercial business	4	2,438		27	18,741		Total commercial business	4	2,150		7	8,985
Residential real estate		—	—		1	180

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

Commercial and multifamily	Commercial and multifamily	—	—		1	450		Commercial and multifamily	1	5,687		1	450

Consumer	Consumer	5	55		15	379		Consumer	2	238		5	94
Total	Total	9	$	2,493	44	$	19,750	Total	7	$	8,075	13	$	9,529


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

Commercial and multifamily	1	5,687		1	450

Consumer	9	307		22	487
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~~nine months ended ~~March 31,~~September 30, 2022 and 2021.

(2) As the Bank did not forgive any principal or interest balance as part of the loan modifications, the Bank’s amortized cost in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification).

The Bank had an ACL on loans of $~~56,000~~30,000 and ~~$2.4~~$3.4 million at ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2021, respectively, related to these TDR loans which were restructured during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2021, respectively.

The unfunded commitment to borrowers related to TDR loans was ~~$3.8~~$5.9 million and $5.7 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

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


		Three Months Ended March 31,							Three Months Ended September 30,
		2022			2021				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	—	$	—	2	$	2,792	Commercial and industrial	—	$	—	1	$	336
Owner-occupied CRE		1	189		—	—


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

(1) Number of contracts and amortized cost represent TDR loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021.

During the three months ended March 31, 2022 the TDR loan defaulted because the borrower was more than 90 days delinquent on their scheduled loan payment. During the three months ended March 31, 2021 both TDR loans defaulted because each was past its modified maturity date and the borrower had not subsequently repaid the credits. The Bank chose not to

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~~further extend the maturity date on these TDR loans.~~ The Bank had no$4,000 ACL on loans at ~~March 31,~~September 30, 2022 and ~~$94,000~~$13,000 at ~~March 31,~~September 30, 2021 related to these TDR loans which defaulted during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021.

(h) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled ~~$9.9~~$10.5 million and $10.1 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. It is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.

(i) Foreclosure proceedings in process

At ~~March 31,~~September 30, 2022, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

(4)Allowance for Credit Losses on Loans

The baseline loss rates used to calculate the ACL on loans at ~~March 31,~~September 30, 2022 utilized the Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date. There were no changes to this assumption during the ~~three~~nine months ended ~~March 31,~~September 30, 2022. The Bank believes the historic loss rates are viable inputs to the current CECL model as the Bank's lending practice and business has remained relatively stable throughout the periods. While the Bank's assets have grown, the credit culture has stayed relatively consistent.

Prepayments included in the CECL model at ~~March 31,~~September 30, 2022 were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation of future prepayment activity. There were no changes to this assumption during the ~~three~~nine months ended ~~March 31,~~September 30, 2022.

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

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, the ACL on loans decreased ~~$2.0 million,~~$272,000, or ~~4.8%~~0.6%, due primarily to a reversal of provision for credit losses on loans of ~~$2.5~~$1.3 million driven by a $3.4 million reduction in the ACL on loans individually evaluated for losses and their related ACL ~~as well as changes~~offset partially by an increase related to the growth in ~~the loan mix and continued improvement in forecasted economic indicators used to calculate credit losses.~~loans receivable. The ACL on loans at ~~March 31,~~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.

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.

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A summary of the changes in the ACL on loans during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021 is as follows:


		Three Months Ended March 31,					Nine Months Ended September 30,
		2022		2021			2022		2021
		(In thousands)					(In thousands)
Balance at the beginning of the year		$	42,361	$	70,185
Beginning balance						Beginning balance	$	42,361	$	70,185
Charge-offs	Charge-offs	(355)		(187)		Charge-offs	(742)		(1,267)
Recoveries of loans previously charged-off	Recoveries of loans previously charged-off	849		362		Recoveries of loans previously charged-off	1,722		1,207
Reversal of provision for credit losses on loans	Reversal of provision for credit losses on loans	(2,522)		(6,135)		Reversal of provision for credit losses on loans	(1,252)		(21,808)
Balance at the end of the year		$	40,333	$	64,225
Ending balance						Ending balance	$	42,089	$	48,317

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


		Three Months Ended March 31, 2022											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	$	17,777	$	(163)	$	272	$	(2,621)	$	15,265	Commercial and industrial	$	14,033	$	—	$	455	$	180	$	14,668
Owner-occupied CRE	Owner-occupied CRE	6,411		(36)		—		710		7,085		Owner-occupied CRE	8,162		—		—		(443)		7,719
Non-owner occupied CRE	Non-owner occupied CRE	8,861		—		—		721		9,582		Non-owner occupied CRE	9,512		—		—		41		9,553
Total commercial business	Total commercial business	33,049		(199)		272		(1,190)		31,932		Total commercial business	31,707		—		455		(222)		31,940
Residential real estate	Residential real estate	1,409		(30)		3		421		1,803		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	1,304		—		8		(188)		1,124		Residential	1,081		—		5		208		1,294
Commercial and multifamily												Commercial and multifamily	2,203		—		102		1,505		3,810
Total real estate construction and land development												Total real estate construction and land development	3,284		—		107		1,713		5,104
Consumer												Consumer	2,568		(138)		50		20		2,500
Total												Total	$	39,696	$	(138)	$	612	$	1,919	$	42,089


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

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		Three Months Ended March 31, 2022											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	8,562		—		12		(1,644)		6,930
Non-owner occupied CRE												Non-owner occupied CRE	10,630		—		—		(1,133)		9,497
Total commercial business												Total commercial business	36,677		(743)		385		(1,246)		35,073
Residential real estate												Residential real estate	1,153		—		—		(67)		1,086
Real estate construction and land development:												Real estate construction and land development:
Residential												Residential	1,636		—		8		136		1,780
Commercial and multifamily	Commercial and multifamily	3,972		—		—		(797)		3,175		Commercial and multifamily	8,835		—		—		(1,530)		7,305
Total real estate construction and land development	Total real estate construction and land development	5,276		—		8		(985)		4,299		Total real estate construction and land development	10,471		—		8		(1,394)		9,085
Consumer	Consumer	2,627		(126)		566		(768)		2,299		Consumer	3,261		(204)		161		(145)		3,073
Total	Total	$	42,361	$	(355)	$	849	$	(2,522)	$	40,333	Total	$	51,562	$	(947)	$	554	$	(2,852)	$	48,317


		Three Months Ended March 31, 2021											Nine 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 business:
Commercial and industrial	Commercial and industrial	$	30,010	$	(1)	$	205	$	(8,444)	$	21,770	Commercial and industrial	$	30,010	$	(757)	$	710	$	(11,317)	$	18,646
Owner-occupied CRE	Owner-occupied CRE	9,486		—		2		976		10,464		Owner-occupied CRE	9,486		—		25		(2,581)		6,930
Non-owner occupied CRE	Non-owner occupied CRE	10,112		—		—		2,858		12,970		Non-owner occupied CRE	10,112		—		—		(615)		9,497
Total commercial business	Total commercial business	49,608		(1)		207		(4,610)		45,204		Total commercial business	49,608		(757)		735		(14,513)		35,073
Residential real estate	Residential real estate	1,591		—		—		(189)		1,402		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	1,951		—		16		81		2,048		Residential	1,951		—		28		(199)		1,780
Commercial and multifamily	Commercial and multifamily	11,141		(1)		—		83		11,223		Commercial and multifamily	11,141		(1)		—		(3,835)		7,305
Total real estate construction and land development	Total real estate construction and land development	13,092		(1)		16		164		13,271		Total real estate construction and land development	13,092		(1)		28		(4,034)		9,085
Consumer	Consumer	5,894		(185)		139		(1,500)		4,348		Consumer	5,894		(509)		444		(2,756)		3,073
Total	Total	$	70,185	$	(187)	$	362	$	(6,135)	$	64,225	Total	$	70,185	$	(1,267)	$	1,207	$	(21,808)	$	48,317

(5)Goodwill and Other Intangible Assets

(a) Goodwill

There were no additions to goodwill during the three and nine months ended ~~March 31,~~September 30, 2022 and 2021. Additionally, management analyzes its goodwill on an annual basis on December 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2021 and concluded that there was no impairment.

(b) Other Intangible Assets

Other intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets during the three and nine months ended ~~March 31,~~September 30, 2022 and 2021.

(6)Derivative Financial Instruments

The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap

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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 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-~~

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~~back~~back-to-back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at the dates indicated:


		March 31, 2022				December 31, 2021					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)	$	319,526	$	12,975	$	322,726	$	15,219	Interest rate swap asset (1)	$	298,601	32,523	$	322,726	$	15,219
Interest rate swap liability (1)	Interest rate swap liability (1)	319,526		(12,989)		322,726		(15,286)		Interest rate swap liability (1)	298,601		(32,523)	322,726		(15,286)

(1) The estimated fair value of derivatives with customers was ~~$(8.7)~~$(32.5) million and $9.8 million as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. The estimated fair value of derivatives with third-parties was ~~$8.7~~$32.5 million and $(9.8) million as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk for derivatives with the customer is controlled through the credit approval process, amount limits, and monitoring procedures and is concentrated within our primary market areas. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.

(7)Stockholders’ Equity

(a) Earnings Per Common Share

The following table illustrates the calculation of weighted average shares used for earnings per common share computations for the periods indicated:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021					2022		2021		2022		2021
		(In thousands, except shares)				(In thousands, except shares)

Net income	Net income	$	19,757	$	25,344			Net income	$	20,990	$	20,592	$	59,331	$	78,638

Basic:	Basic:							Basic:
Weighted average common shares outstanding	Weighted average common shares outstanding	35,094,725		35,926,950				Weighted average common shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258

Diluted:	Diluted:							Diluted:
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	35,094,725		35,926,950				Basic weighted average common shares outstanding	35,103,984		35,644,192		35,103,048		35,854,258
Effect of potentially dilutive common shares (1)	Effect of potentially dilutive common shares (1)	317,373		305,254				Effect of potentially dilutive common shares (1)	364,906		285,326		335,624		297,794
Total diluted weighted average common shares outstanding	Total diluted weighted average common shares outstanding	35,412,098		36,232,204				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 (2)	Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)	17,041		15,538				Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)	3,026		16,002		13,662		7,083

(1)Represents the effect of the vesting of restricted stock units.

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

(b) Dividends

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

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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 ~~three~~nine months ended ~~March 31,~~September 30, 2022and the calendar year 2021:

Declared

Cash Dividend per Share

Record Date

Paid Date

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

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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 March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan. The number, timing and price of shares repurchased under the twelfth stock repurchase plan will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.

The following table provides total repurchased shares and average share prices under the ~~applicable plans~~repurchase plan for the periods indicated:


		Three Months Ended March 31,				Three Months Ended September 30,						Nine Months Ended September 30,
		2022		2021			Plan Total(1)			2022		2021		2022		2021		Plan Total(1)

Repurchased shares	Repurchased shares	80,559		—			1,141,309		Repurchased shares	—		841,088		100,090		841,088		1,160,840
Stock repurchase average share price	Stock repurchase average share price	$	25.17	$	—		$	23.92	Stock repurchase average share price	$	—	$	24.54	$	25.07	$	24.54	$	23.94

(1)Represents shares repurchased and average price per share paid during the duration of 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 March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021				2022		2021		2022		2021
Repurchased shares to pay withholding taxes	Repurchased shares to pay withholding taxes	24,531		23,246			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	$	25.46	$	29.54		Stock repurchase to pay withholding taxes average share price	$	26.94	$	23.91	$	25.40	$	29.29

(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

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valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Bank also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.

Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Bank. Once received, the Bank's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Derivative Financial Instruments:

The Bank obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Bank assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.

Branches held for sale:

Branches held for sale are recorded at fair value less costs to sell when transferred from premises and equipment, net to prepaid expenses and other assets on the unaudited Condensed Consolidated Statements of Financial Condition with any valuation adjustment recorded within other noninterest expense on the unaudited Condensed Consolidated Statements of Income. The fair value of branches held for sale is determined based on a real estate appraisal or broker price opinion. Adjustments are routinely made in the appraisal and broker price opinion process by independent appraisers and commercial real estate brokers, respectively, to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value. Additionally, the fair value of branches held for sale can be adjusted based on executed agreements of sale to be completed at a future date.

Recurring Basis

The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:

March 31, 2022
Total Level 1 Level 2 Level 3
(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities $ 39,555 $ — $ 39,555 $ —
Municipal securities 210,239 — 210,239 —
Residential CMO and MBS 358,409 — 358,409 —
Commercial CMO and MBS 404,505 — 404,505 —
Corporate obligations 2,009 — 2,009 —
Other asset-backed securities 25,207 — 25,207 —
Total investment securities available for sale 1,039,924 — 1,039,924 —
Equity security 224 224 — —
Derivative assets - interest rate swaps 12,975 — 12,975 —
Liabilities
Derivative liabilities - interest rate swaps $ 12,989 $ — 12,989 $ —


	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		—

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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 represent assets measured at fair value on a nonrecurring basis at the dates indicated:


				Fair Value at March 31, 2022											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		$	336	$	215	$	—	$	—	$	215

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

Real estate construction and land development:

Commercial and multifamily		991		534		—		—		534

Total assets measured at fair value on a nonrecurring basis	Total assets measured at fair value on a nonrecurring basis	$	1,327	$	749	$	—	$	—	$	749	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											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)											(In thousands)
Collateral-dependent loans:	Collateral-dependent loans:											Collateral-dependent loans:
Commercial business:	Commercial business:											Commercial business:
Commercial and industrial	Commercial and industrial	$	1,911	$	1,049	$	—	$	—	$	1,049	Commercial and industrial	$	1,911	$	1,049	$	—	$	—	$	1,049
Owner-occupied CRE	Owner-occupied CRE	613		189		—		—		189		Owner-occupied CRE	613		189		—		—		189

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

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

Commercial and multifamily		991		$	534	—		—		534

Total		3,515		1,772		—		—		1,772
Prepaid expenses and other assets:
Branch held for sale (2)		698		698		—		—		698
Total assets measured at fair value on a nonrecurring basis		$	4,213	$	2,470	$	—	$	—	$	2,470

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			Fair Value at December 31, 2021
	Basis(1)		Total		Level 1		Level 2		Level 3
	(In thousands)
Commercial and multifamily	991		$	534	—		—		534


Total	3,515		1,772		—		—		1,772
Prepaid expenses and other assets:
Branch held for sale (2)	698		698		—		—		698
Total assets measured at fair value on a nonrecurring basis	$	4,213	$	2,470	$	—	$	—	$	2,470

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

(2) In December 2021, one branch was written down to its net realizable value concurrent with the signing of an agreement for sale ~~at a future date.~~and was sold during the three months ended March 31, 2022.

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The following table represents the net (loss) gain recorded in earnings as a result of nonrecurring fair value adjustments recorded during the periods indicated:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021					2022		2021		2022		2021
		(In thousands)				(In thousands)
Collateral-dependent loans:	Collateral-dependent loans:							Collateral-dependent loans:
Commercial business:	Commercial business:							Commercial business:
Commercial and industrial	Commercial and industrial	$	(12)	$	(34)			Commercial and industrial	$	—	$	(54)	$	24	$	(563)
Owner-occupied CRE								Owner-occupied CRE	—		15		(4)		(61)

Total commercial business								Total commercial business	—		(39)		20		(624)

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

Commercial and multifamily	Commercial and multifamily	—		(14)				Commercial and multifamily	—		—		—		(38)
Total	Total	(12)		(48)				Total	—		(39)		20		(662)
Prepaid expenses and other assets:	Prepaid expenses and other assets:							Prepaid expenses and other assets:
Branch held for sale	Branch held for sale	—		20				Branch held for sale	—		(38)		—		(38)
Net loss from nonrecurring fair value adjustments		$	(12)	$	(28)
Net (loss) gain from nonrecurring fair value adjustments								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:

~~March 31,~~September 30, 2022

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs; Weighted
Average

(Dollars in thousands)

Collateral-dependent loans

~~749~~186

Market approach

Adjustment for differences between the comparable sales

~~35.0% - (11.0)%; 13.8%~~

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

1,772

Market approach

Adjustment for differences between the comparable sales

35.0% - (11.0%); 13.8%

Branch held for sale

698

Market approach

Sale agreement

~~Not applicable~~N/A

(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:


		March 31, 2022															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	$	1,576,722		$	1,576,722		$	1,576,722		$	—		$	—	Cash and cash equivalents	$	407,324		$	407,324		$	407,324		$	—		$	—
Investment securities available for sale	Investment securities available for sale	1,039,924			1,039,924			—			1,039,924			—		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	422,213			384,822			—			384,822			—		Investment securities held to maturity	773,319			677,335			—			677,335			—
Loans held for sale	Loans held for sale	1,142			1,181			—			1,181			—		Loans held for sale	—			—			—			—			—
Loans receivable, net	Loans receivable, net	3,780,845			3,808,897			—			—			3,808,897		Loans receivable, net	3,959,206			3,848,546			—			—			3,848,546
Accrued interest receivable	Accrued interest receivable	14,582			14,582			128			4,593			9,861		Accrued interest receivable	17,812			17,812			351			6,962			10,499
Derivative assets - interest rate swaps																Derivative assets - interest rate swaps	32,523			32,523			—			32,523			—
Equity security																Equity security	192			192			192			—			—
Financial Liabilities:																Financial Liabilities:
Non-maturity deposits																Non-maturity deposits	$	5,950,312		$	5,950,312		$	5,950,312		$	—		$	—
Certificates of deposit																Certificates of deposit	287,423			287,837			—			287,837			—

Securities sold under agreement to repurchase																Securities sold under agreement to repurchase	40,449			40,449			40,449			—			—
Junior subordinated debentures																Junior subordinated debentures	21,399			20,250			—			—			20,250
Accrued interest payable																Accrued interest payable	101			101			36			13			52
Derivative liabilities - interest rate swaps																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		—

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March 31, 2022
Carrying
Value Fair
Value Fair Value Measurements Using:
Level 1 Level 2 Level 3
(In thousands)
Derivative assets - interest rate swaps 12,975 12,975 — 12,975 —
Equity security 224 224 224 — —
Financial Liabilities:
Non-maturity deposits $ 6,163,084 $ 6,163,084 $ 6,163,084 $ — $ —
Certificates of deposit 328,416 329,358 — — 329,358
Securities sold under agreement to repurchase 49,069 49,069 49,069 — —
Junior subordinated debentures 21,253 18,750 — — 18,750
Accrued interest payable 75 75 33 15 27
Derivative liabilities - interest rate swaps 12,989 12,989 — 12,989 —

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 $ 6,038,498 $ 6,038,498 $ 6,038,498 $ — $ —
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 —

(9)Cash Restriction

The Bank had no cash restrictions at ~~March 31,~~September 30, 2022 and had restricted cash included in interest earning deposits of $9.8 million at December 31, 2021 relating to collateral required on interest rate swaps from third-parties as discussed in Note (6) Derivative Financial Instruments. The Bank does not have a collateral requirement with customers.

(10)Commitments and Contingencies

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

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


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Commercial business:	Commercial business:					Commercial business:
Commercial and industrial	Commercial and industrial	$	537,566	$	570,156	Commercial and industrial	$	528,690	$	570,156
Owner-occupied CRE	Owner-occupied CRE	7,932		2,252		Owner-occupied CRE	4,260		2,252
Non-owner occupied CRE	Non-owner occupied CRE	13,620		7,487		Non-owner occupied CRE	12,334		7,487
Total commercial business	Total commercial business	559,118		579,895		Total commercial business	545,284		579,895

Real estate construction and land development:	Real estate construction and land development:					Real estate construction and land development:
Residential	Residential	55,599		51,838		Residential	52,098		51,838
Commercial and multifamily	Commercial and multifamily	194,678		209,217		Commercial and multifamily	237,204		209,217
Total real estate construction and land development	Total real estate construction and land development	250,277		261,055		Total real estate construction and land development	289,302		261,055
Consumer	Consumer	288,621		285,010		Consumer	314,216		285,010
Total outstanding commitments	Total outstanding commitments	$	1,098,016	$	1,125,960	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					Three Months Ended September 30,				Nine Months Ended September 30,
		March 31, 2022		March 31, 2021					2022		2021		2022		2021
		(In thousands)				(In thousands)
Balance, beginning of period	Balance, beginning of period	$	2,607	$	4,681			Balance, beginning of period	$	997	$	2,451	$	2,607	$	4,681
Reversal of provision for credit losses on unfunded commitments		(1,055)		(1,064)
Provision for (reversal of) credit losses on unfunded commitments								Provision for (reversal of) credit losses on unfunded commitments	26		(297)		(1,584)		(2,527)
Balance, end of period	Balance, end of period	$	1,552	$	3,617			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 ~~March 31,~~September 30, 2022. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Forward-Looking Statements included herein and the December 31, 2021 audited Consolidated Financial Statements and the accompanying Notes included in our 2021 Annual Form 10-K.

Overview

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

Our business consists primarily of commercial lending and deposit relationships with small to medium sized businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and

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

Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, comprised primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates 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

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portfolio as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on our methodology.

Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees, card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consists primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services consists primarily of third-party service providers such as auditors, consultants and lawyers.

Results of operations may also be significantly affected by general and local economic and competitive conditions, governmental policies and actions of regulatory authorities, including changes resulting from the COVID-19 Pandemic and 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 and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. ~~As of March 31, 2022, all Bank branches are open with normal hours and all employees have returned to their go-forward working environments.~~ The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

~~Branch Consolidation Plan~~

The Company reduced the branch count to 49 from 61 branches during the year ended December 31, 2021, including the consolidation of eight branches and four branches during the three months ended March 31, 2021 and December 31, 2021, respectively. The Company integrated these locations into other branches within its network. These actions were the result of the Company’s increased focus on balancing physical locations and digital banking channels, driven by increased customer usage of online and mobile banking and a commitment to improve digital banking technology.

Results of Operations

Comparison of quarter ended ~~March 31,~~September 30, 2022 to the comparable quarter in the prior year

Net income was ~~$19.8~~$21.0 million, or ~~$0.56~~$0.59 per diluted common share, for the three months ended ~~March 31,~~September 30, 2022 compared to ~~$25.3~~$20.6 million, or ~~$0.70~~$0.58 per diluted common share, for the ~~three months ended March 31,~~same period in 2021. Net income ~~decreased $5.6 million,~~increased $398,000, or ~~22.0%~~1.9%, due primarily to ~~lower~~an increase in interest ~~income~~ earned on interest earning assets following increases in market interest rates partially offset by a $1.9 million provision for credit losses, compared to a $3.1 million reversal of provision for credit losses for the three months ended September 30, 2021 and ~~fees on loans.~~ increased noninterest expense. The Company’s efficiency ratio was ~~64.38%~~58.66% for the three months ended ~~March 31,~~September 30, 2022 compared to ~~61.57%~~62.35% for the ~~three~~same period in 2021.

Comparison of nine months ended ~~March 31, 2021.~~September 30, 2022 to the comparable period in the prior year.

Net income was $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. Net income decreased $19.3 million, or 24.6%, due primarily to a lower reversal of provision for credit losses. The Company’s efficiency ratio was 61.67% for the nine months endedSeptember 30, 2022 compared to 60.66% for the same period in 2021.

Average Balances, Yields and Rates Paid

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

Three Months Ended March 31,
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:
Loans receivable, net (2)(3)
$ 3,773,325 $ 41,025 4.41 % $ 4,490,499 $ 49,524 4.47 % $ (717,174) $ (8,499) (0.06) %
Taxable securities 1,271,557 6,003 1.91 674,268 3,534 2.13 597,289 2,469 (0.22)
Nontaxable securities (3)
146,409 860 2.38 163,914 958 2.37 (17,505) (98) 0.01
Interest earning deposits 1,503,287 706 0.19 713,885 175 0.10 789,402 531 0.09
Total interest earning assets 6,694,578 48,594 2.94 % 6,042,566 54,191 3.64 % 652,012 (5,597) (0.70) %
Noninterest earning assets 740,209 757,059 (16,850)
Total assets $ 7,434,787 $ 6,799,625 $ 635,162

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:

3033

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		Three Months Ended March 31,																			Three Months Ended September 30,
		2022						2021						Change							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			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)
Loans receivable, net (2)(3)																				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																				Taxable securities	1,868,900		12,362		2.62		893,374		4,711		2.09		975,526		7,651		0.53
Nontaxable securities (3)																				Nontaxable securities (3)	133,022		892		2.66		157,907		931		2.34		(24,885)		(39)		0.32
Interest earning deposits																				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																				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																				Noninterest earning assets	775,375						740,433						34,942
Total assets																				Total assets	$	7,367,736					$	7,214,960					$	152,776
Interest Bearing Liabilities:	Interest Bearing Liabilities:																			Interest Bearing Liabilities:
Certificates of Deposit	Certificates of Deposit	$	336,353	$	338	0.41	%	$	393,268	$	559	0.58	%	$	(56,915)	$	(221)	(0.17)	%	Certificates of Deposit	$	297,786	$	290	0.39	%	$	365,278	$	407	0.44	%	$	(67,492)	$	(117)	(0.05)	%
Savings accounts	Savings accounts	646,684		87		0.05		560,094		95		0.07		86,590		(8)		(0.02)		Savings accounts	654,697		99		0.06		609,818		90		0.06		44,879		9		—
Interest bearing demand and money market accounts	Interest bearing demand and money market accounts	3,066,320		999		0.13		2,732,134		1,074		0.16		334,186		(75)		(0.03)		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	Total interest bearing deposits	4,049,357		1,424		0.14		3,685,496		1,728		0.19		363,861		(304)		(0.05)		Total interest bearing deposits	4,017,490		1,478		0.15		3,856,663		1,444		0.15		160,827		34		—
Junior subordinated debentures	Junior subordinated debentures	21,214		194		3.71		20,913		187		3.63		301		7		0.08		Junior subordinated debentures	21,356		312		5.80		21,060		184		3.47		296		128		2.33
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	50,017		32		0.26		40,074		38		0.38		9,943		(6)		(0.12)		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	Total interest bearing liabilities	4,120,588		1,650		0.16	%	3,746,483		1,953		0.21	%	374,105		(303)		(0.05)	%	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	Noninterest bearing demand deposits	2,359,451						2,105,039						254,412						Noninterest bearing demand deposits	2,356,688						2,313,145						43,543
Other noninterest bearing liabilities	Other noninterest bearing liabilities	108,663						121,082						(12,419)						Other noninterest bearing liabilities	118,191						116,187						2,004
Stockholders’ equity	Stockholders’ equity	846,085						827,021						19,064						Stockholders’ equity	811,052						855,708						(44,656)
Total liabilities and stock-holders’ equity	Total liabilities and stock-holders’ equity	$	7,434,787					$	6,799,625					$	635,162					Total liabilities and stock-holders’ equity	$	7,367,736					$	7,214,960					$	152,776
Net interest income and spread	Net interest income and spread			$	46,944	2.78	%			$	52,238	3.43	%			$	(5,294)	(0.65)	%	Net interest income and spread			$	59,286	3.50	%			$	51,378	3.08	%			$	7,908	0.42	%
Net interest margin	Net interest margin					2.84	%					3.51	%					(0.67)	%	Net interest margin					3.57	%					3.15	%					0.42	%

(1) Average balances are calculated using daily balances.

(2) Average ~~loan~~loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of ~~$3.4 million~~$857,000 and ~~$7.3~~$7.8 million for the three months ended ~~March 31,~~September 30, 2022 and 2021, respectively.

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

Net Interest Income and Margin Overview

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

The following table provides the changes in net interest income for the three months ended ~~March 31,~~September 30, 2022 compared to the three months ended ~~March 31,~~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:								Increase (Decrease) Due to Changes In:
		Volume		Rate		Total		% Change				Volume		Yield/Rate		Total		% Change
		(Dollars in thousands)								(Dollars in thousands)
Interest Earning Assets:	Interest Earning Assets:										Interest Earning Assets:
Loans receivable, net	Loans receivable, net	$	(7,774)	$	(725)	$	(8,499)	(17.2)	%		Loans receivable, net	$	(1,678)	$	(1,338)	$	(3,016)	(6.4)	%
Taxable securities	Taxable securities	2,851		(382)		2,469		69.9			Taxable securities	6,206		1,445		7,651		162.4
Nontaxable securities	Nontaxable securities	(103)		5		(98)		(10.2)			Nontaxable securities	(158)		119		(39)		(4.2)
Interest earning deposits	Interest earning deposits	290		241		531		303.4			Interest earning deposits	(382)		3,854		3,472		646.6
Total interest income	Total interest income	$	(4,736)	$	(861)	$	(5,597)	(10.3)	%		Total interest income	$	3,988	$	4,080	$	8,068	15.2	%
Interest Bearing Liabilities:
Certificates of deposit		$	(73)	$	(148)	$	(221)	(39.5)	%
Savings accounts		13		(21)		(8)		(8.4)
Interest bearing demand and money market accounts		122		(197)		(75)		(7.0)
Total interest bearing deposits		62		(366)		(304)		(17.6)

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		Increase (Decrease) Due to Changes In:								Increase (Decrease) Due to Changes In:
		Volume		Rate		Total		% Change				Volume		Yield/Rate		Total		% Change
		(Dollars in thousands)								(Dollars in thousands)
Interest Bearing Liabilities:											Interest Bearing Liabilities:
Certificates of deposit											Certificates of deposit	$	(70)	$	(47)	$	(117)	(28.7)	%
Savings accounts											Savings accounts	7		2		9		10.0
Interest bearing demand and money market accounts											Interest bearing demand and money market accounts	62		80		142		15.0
Total interest bearing deposits											Total interest bearing deposits	(1)		35		34		2.4
Junior subordinated debentures	Junior subordinated debentures	3		4		7		3.7			Junior subordinated debentures	3		125		128		69.6
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	8		(14)		(6)		(15.8)			Securities sold under agreement to repurchase	(7)		5		(2)		(5.6)

Total interest expense	Total interest expense	$	73	$	(376)	$	(303)	(15.5)	%		Total interest expense	$	(5)	$	165	$	160	9.6	%
Net interest income	Net interest income	$	(4,809)	$	(485)	$	(5,294)	(10.1)	%		Net interest income	$	3,993	$	3,915	$	7,908	15.4	%

Comparison of quarter ended ~~March 31,~~September 30, 2022 to the comparable quarter in the prior year

Net interest income increased primarily as a result of higher yields earned on interest earning assets following increases in market interest rates as well as an increased average balance of taxable investment securities, offset partially by a decrease in deferred SBA PPP loan fees recognized due to a decline in the volume of forgiven SBA PPP loans. SBA PPP interest and fee income decreased $7.8 million compared to the three months ended September 30, 2021.

Net interest margin increased due to a 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.

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


	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" section below.

There was no impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual during the three months ended September 30, 2022 compared to two basis points during the same period in 2021.

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

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


	Nine 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:
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	1,532,450		25,972		2.27		789,691		12,295		2.08		742,759		13,677		0.19
Nontaxable securities (3)	138,904		2,645		2.55		160,748		2,836		2.36		(21,844)		(191)		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	6,632,924		161,436		3.25	%	6,283,004		163,243		3.47	%	349,920		(1,807)		(0.22)	%
Noninterest earning assets	762,877						749,781						13,096
Total assets	$	7,395,801					$	7,032,785					$	363,016

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	Nine 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 Bearing Liabilities:
Certificates of Deposit	$	318,547	$	952	0.40	%	$	379,885	$	1,447	0.51	%	$	(61,338)	$	(495)	(0.11)	%
Savings accounts	651,292		274		0.06		587,358		274		0.06		63,934		—		—
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	4,036,068		4,315		0.14		3,784,596		4,696		0.17		251,472		(381)		(0.03)
Junior subordinated debentures	21,286		745		4.68		20,987		557		3.55		299		188		1.13
Securities sold under agreement to repurchase	47,057		98		0.28		45,221		109		0.32		1,836		(11)		(0.04)

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	2,355,285						2,227,281						128,004
Other noninterest bearing liabilities	113,534						115,098						(1,564)
Stockholders’ equity	822,571						839,602						(17,031)
Total liabilities and stock-holders’ equity	$	7,395,801					$	7,032,785					$	363,016
Net interest income and spread			$	156,278	3.08	%			$	157,881	3.28	%			$	(1,603)	(0.20)	%
Net interest margin					3.15	%					3.36	%					(0.21)	%

(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 $6.7 million and $23.2 million for the nine months ended September 30, 2022 and 2021, respectively.

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

The following table provides the changes in net interest income for the nine months ended September 30, 2022 compared to the nine 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	$	(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

Net interest income decreased due primarily to a decrease in deferred SBA PPP loan fees recognized due to a ~~decrease~~decline in the volume of forgiven SBA PPP loans, ~~as well as a slightly lower loan yield. The decrease in net interest income was~~ offset partially by a higher average balance of taxable investment ~~securities.~~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 ~~including~~into a ~~significant increase in the balance~~higher proportion of lower yielding ~~average~~investment securities and interest earning ~~deposits, and secondarily due to lower loan yield.~~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:~~below:


		Three Months Ended
		March 31, 2022		March 31, 2021			Nine Months Ended September 30,
			2022		2021
Loan yield (GAAP)	Loan yield (GAAP)	4.41	%	4.47	%	Loan yield (GAAP)	4.41	%	4.58	%
Exclude impact from SBA PPP loans	Exclude impact from SBA PPP loans	(0.21)		0.01		Exclude impact from SBA PPP loans	(0.13)		(0.17)
Exclude impact from incremental accretion on purchased loans		(0.06)		(0.12)
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) (1)		4.14	%	4.36	%
Exclude impact from incremental accretion on acquired loans						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)						Loan yield, excluding SBA PPP loans and incremental accretion on acquired loans (non-GAAP) (1)	4.24	%	4.33	%

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

The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was 11four basis points during the ~~first quarter of~~nine months ended September 30, 2022 ~~including the recovery of $774,000 from a non-owner occupied CRE relationship,~~ compared to ~~five~~nine basis points ~~for~~during the same ~~quarter~~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 expenses and other liabilities.

Comparison of quarter ended ~~March 31,~~September 30, 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,
	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 continued improvements in the economic forecast at September 30, 2021 as compared to the forecast at June 30, 2021.

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

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


		Three Months Ended March 31,									Nine Months Ended September 30,
		2022		2021		Change		% Change			2022		2021		Change		Percentage Change
		(Dollars in thousands)									(Dollars in thousands)
Reversal of provision for credit losses on loans	Reversal of provision for credit losses on loans	$	(2,522)	$	(6,135)	$	3,613	(58.9)	%	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	Reversal of provision for credit losses on unfunded commitments	(1,055)		(1,064)		9		(0.8)		Reversal of provision for credit losses on unfunded commitments	(1,584)		(2,527)		943		(37.3)
Reversal of provision for credit losses	Reversal of provision for credit losses	$	(3,577)	$	(7,199)	$	3,622	(50.3)	%	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~~ losses recognized during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 was due primarily to a reduction of loans individually evaluated for losses and their related ACL ~~as well as changes in the loan mix and continued improvement in forecasted economic indicators used to calculate credit losses.~~.

The reversal of provision for credit losses recognized during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 was due ~~primarily~~substantially to continued improvements in the economic forecast at ~~March 31,~~September 30, 2021 as compared to the forecast ~~for~~ at December 31, ~~2020 and secondarily due to a decrease in total loans receivable, excluding SBA PPP loans.~~2020.

~~Table of Contents~~

Noninterest Income Overview

Comparison of quarter ended ~~March 31,~~September 30, 2022 to the comparable quarter in the prior year

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


		Three Months Ended March 31,									Three Months Ended September 30,
		2022		2021		Change		% Change			2022		2021		Change		% Change
		(Dollars in thousands)									(Dollars in thousands)
Service charges and other fees	Service charges and other fees	$	2,296	$	1,892	$	404	21.4	%	Service charges and other fees	$	2,688	$	2,400	$	288	12.0	%
Card revenue	Card revenue	2,441		2,097		344		16.4		Card revenue	2,365		2,150		215		10.0
Gain on sale of investment securities, net		—		29		(29)		(100.0)

Gain on sale of loans, net	Gain on sale of loans, net	241		1,370		(1,129)		(82.4)		Gain on sale of loans, net	133		765		(632)		(82.6)
Interest rate swap fees	Interest rate swap fees	279		152		127		83.6		Interest rate swap fees	78		126		(48)		(38.1)
Bank owned life insurance income	Bank owned life insurance income	1,695		656		1,039		158.4		Bank owned life insurance income	723		647		76		11.7
Gain on sale of other assets, net	Gain on sale of other assets, net	204		22		182		827.3		Gain on sale of other assets, net	265		942		(677)		(71.9)
Other income	Other income	1,382		2,033		(651)		(32.0)		Other income	1,201		1,198		3		0.3
Total noninterest income	Total noninterest income	$	8,538	$	8,251	$	287	3.5	%	Total noninterest income	$	7,453	$	8,228	$	(775)	(9.4)	%

Noninterest income ~~increased slightly~~decreased due primarily to 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 assets, net due to a higher gain on sale of branches held for sale recognized during the three months ended September 30, 2021.

Comparison of nine months ended September 30, 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,
	2022		2021		Change		% Change
	(Dollars in thousands)
Service charges and other fees	$	7,739	$	6,728	$	1,011	15.0	%
Card revenue	6,774		6,216		558		9.0
Gain on sale of investment securities, net	—		29		(29)		(100.0)
Gain on sale of loans, net	593		3,138		(2,545)		(81.1)
Interest rate swap fees	383		487		(104)		(21.4)
Bank owned life insurance income	3,182		2,020		1,162		57.5
Gain on sale of other assets, net	469		1,688		(1,219)		(72.2)
Other income	3,867		4,470		(603)		(13.5)
Total noninterest income	$	23,007	$	24,776	$	(1,769)	(7.1)	%

Noninterest income decreased due primarily to 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 assets, net due to a higher gain on sale of 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 ~~current quarter~~nine months ended September 30, 2022 as well as increases in service charges and other fees and card revenue reflecting increased customer transactions as businesses reopened in our market ~~areas, offset partially by reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined.~~areas.

Table of Contents

Noninterest Expense Overview

Comparison of quarter ended ~~March 31,~~September 30, 2022 to the comparable quarter in the prior year

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


		Three Months Ended March 31,									Three Months Ended September 30,
		2022		2021		Change		% Change			2022		2021		Change		% Change
		(Dollars in thousands)									(Dollars in thousands)
Compensation and employee benefits	Compensation and employee benefits	$	21,252	$	22,201	$	(949)	(4.3)	%	Compensation and employee benefits	$	24,206	$	21,963	$	2,243	10.2	%
Occupancy and equipment	Occupancy and equipment	4,331		4,454		(123)		(2.8)		Occupancy and equipment	4,422		4,373		49		1.1
Data processing	Data processing	4,061		3,812		249		6.5		Data processing	4,185		4,029		156		3.9
Marketing	Marketing	266		513		(247)		(48.1)		Marketing	358		486		(128)		(26.3)
Professional services	Professional services	699		1,270		(571)		(45.0)		Professional services	639		776		(137)		(17.7)
State/municipal business and use tax	State/municipal business and use tax	796		972		(176)		(18.1)		State/municipal business and use tax	963		1,071		(108)		(10.1)
Federal deposit insurance premium	Federal deposit insurance premium	600		589		11		1.9		Federal deposit insurance premium	500		550		(50)		(9.1)

Amortization of intangible assets	Amortization of intangible assets	704		797		(93)		(11.7)		Amortization of intangible assets	671		758		(87)		(11.5)
Other expense	Other expense	3,011		2,634		377		14.3		Other expense	3,203		3,160		43		1.4
Total noninterest expense	Total noninterest expense	$	35,720	$	37,242	$	(1,522)	(4.1)	%	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 compensation and employee benefits from lower headcount and secondarily due~~ to a decrease in professional services, which was elevated during the ~~first quarter of~~nine months ended September 30, 2021 due to costs associated with our participation in the ~~second tranche of~~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 ~~SBA PPP.~~Bank continues to invest in its technology platforms.

3339

Table of Contents

Income Tax Expense Overview

Comparison of quarter ended ~~March 31,~~September 30, 2022 to the comparable quarter in the prior year

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


		Three Months Ended March 31,												Three Months Ended September 30,
		2022			2021			Change			% Change			2022			2021			Change			% Change
		(Dollars in thousands)												(Dollars in thousands)
Income before income taxes	Income before income taxes	$	23,339		$	30,446		$	(7,107)		(23.3)	%	Income before income taxes	$	25,647		$	25,589		$	58		0.2	%
Income tax expense	Income tax expense	$	3,582		$	5,102		$	(1,520)		(29.8)	%	Income tax expense	$	4,657		$	4,997		$	(340)		(6.8)	%
Effective income tax rate	Effective income tax rate	15.3		%	16.8		%	(1.5)		%	(8.9)	%	Effective income tax rate	18.2		%	19.5		%	(1.3)		%	(6.7)	%

Income tax expense decreased due primarily to ~~the change in income before income taxes earned between the periods. Additionally, the~~a lower effective ~~income~~ tax rate ~~was~~as a result of lower ~~due primarily to 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.~~LIHTC.

Comparison of nine months ended September 30, 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,
	2022			2021			Change			% Change
	(Dollars in thousands)
Income before income taxes	$	71,547		$	96,188		$	(24,641)		(25.6)	%
Income tax expense	$	12,216		$	17,550		$	(5,334)		(30.4)	%
Effective income tax rate	17.1		%	18.2		%	(1.1)		%	(6.0)	%

Income tax expense decreased also due primarily to the change in income before income taxes earned between the periods and lower estimated annual pre-tax income for the year ended December 31, 2022.

Financial Condition Overview

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


		March 31, 2022		December 31, 2021		Change		% 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	$	1,576,722	$	1,723,292	$	(146,570)	(8.5)	%	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	1,039,924		894,335		145,589		16.3		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	422,213		383,393		38,820		10.1		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	1,142		1,476		(334)		(22.6)		Loans held for sale	—		1,476		(1,476)		(100.0)	%
Loans receivable, net	Loans receivable, net	3,780,845		3,773,301		7,544		0.2		Loans receivable, net	3,959,206		3,773,301		185,905		4.9	%

Premises and equipment, net	Premises and equipment, net	78,737		79,370		(633)		(0.8)		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	8,916		7,933		983		12.4		Federal Home Loan Bank stock, at cost	8,916		7,933		983		12.4	%
Bank owned life insurance	Bank owned life insurance	119,929		120,196		(267)		(0.2)		Bank owned life insurance	121,369		120,196		1,173		1.0	%
Accrued interest receivable	Accrued interest receivable	14,582		14,657		(75)		(0.5)		Accrued interest receivable	17,812		14,657		3,155		21.5	%
Prepaid expenses and other assets	Prepaid expenses and other assets	190,592		183,543		7,049		3.8		Prepaid expenses and other assets	230,704		183,543		47,161		25.7	%
Other intangible assets, net	Other intangible assets, net	9,273		9,977		(704)		(7.1)		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	$	7,483,814	$	7,432,412	$	51,402	0.7	%	Total assets	$	7,200,312	$	7,432,412	$	(232,100)	(3.1)	%
Liabilities and Stockholders' Equity
Deposits		$	6,491,500	$	6,394,290	$	97,210	1.5	%

Junior subordinated debentures		21,253		21,180		73		0.3
Securities sold under agreement to repurchase		49,069		50,839		(1,770)		(3.5)
Accrued expenses and other liabilities		100,543		111,671		(11,128)		(10.0)
Total liabilities		6,662,365		6,577,980		84,385		1.3
Common stock		550,096		551,798		(1,702)		(0.3)
Retained earnings		305,581		293,238		12,343		4.2
Accumulated other comprehensive (loss) income, net		(34,228)		9,396		(43,624)		(464.3)
Total stockholders' equity		821,449		854,432		(32,983)		(3.9)
Total liabilities and stockholders' equity		$	7,483,814	$	7,432,412	$	51,402	0.7	%

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 ~~an increase~~a decrease in ~~total~~cash and cash equivalents reflecting deployment of excess liquidity into purchases of higher yielding investment securities ~~following~~and loans. Total liabilities and stockholders' equity decreased due primarily to a decrease in deposits as well as an ~~increase in total deposits, which is discussed in more detail in the "Deposit Activities Overview" section below. Partially offsetting this increase was a decrease~~increased loss in AOCI following an increase in market interest rates during the ~~three~~nine months ended ~~March 31,~~September 30, 2022, which negatively impacted the fair value of our investment securities available for sale portfolio at ~~March 31,~~September 30, 2022.

~~Table of Contents~~

Investment Activities Overview

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


		March 31, 2022				December 31, 2021									September 30, 2022				December 31, 2021
		Balance		% of Total		Balance		% of Total		Change		% Change			Balance		% of Total		Balance		% of Total		Change		% Change
		(Dollars in thousands)													(Dollars in thousands)
Investment securities available for sale, at fair value:	Investment securities available for sale, at fair value:													Investment securities available for sale, at fair value:
U.S. government and agency securities	U.S. government and agency securities	$	39,555	2.7	%	$	21,373	1.7	%	$	18,182	85.1	%	U.S. government and agency securities	$	63,749	3.0	%	$	21,373	1.7	%	$	42,376	198.3	%
Municipal securities	Municipal securities	210,239		14.4		221,212		17.3	%	(10,973)		(5.0)		Municipal securities	185,713		8.7		221,212		17.3	%	(35,499)		(16.0)
Residential CMO and MBS	Residential CMO and MBS	358,409		24.5		306,884		24.0	%	51,525		16.8		Residential CMO and MBS	438,370		20.6		306,884		24.0	%	131,486		42.8
Commercial CMO and MBS	Commercial CMO and MBS	404,505		27.7		315,861		24.7	%	88,644		28.1		Commercial CMO and MBS	639,441		30.0		315,861		24.7	%	323,580		102.4
Corporate obligations	Corporate obligations	2,009		0.1		2,014		0.2	%	(5)		(0.2)		Corporate obligations	5,834		0.3		2,014		0.2	%	3,820		189.7
Other asset-backed securities	Other asset-backed securities	25,207		1.7		26,991		2.1	%	(1,784)		(6.6)		Other asset-backed securities	23,035		1.1		26,991		2.1	%	(3,956)		(14.7)
Total	Total	$	1,039,924	71.1	%	$	894,335	70.0	%	$	145,589	16.3	%	Total	$	1,356,142	63.7	%	$	894,335	70.0	%	$	461,807	51.6	%

Investment securities held to maturity, at amortized cost:	Investment securities held to maturity, at amortized cost:													Investment securities held to maturity, at amortized cost:
U.S. government and agency securities	U.S. government and agency securities	$	150,973	10.3	%	$	141,011	11.0	%	$	9,962	7.1	%	U.S. government and agency securities	$	150,948	7.1	%	$	141,011	11.0	%	$	9,937	7.0	%

Residential CMO and MBS	Residential CMO and MBS	54,486		3.7		24,529		1.9		29,957		122.1		Residential CMO and MBS	296,432		13.9		24,529		1.9		271,903		1,108.5
Commercial CMO and MBS	Commercial CMO and MBS	216,754		14.9		217,853		17.1		(1,099)		(0.5)		Commercial CMO and MBS	325,939		15.3		217,853		17.1		108,086		49.6

Total	Total	$	422,213	28.9	%	$	383,393	30.0	%	$	38,820	10.1	%	Total	$	773,319	36.3	%	$	383,393	30.0	%	$	389,926	101.7	%

Total investment securities	Total investment securities	$	1,462,137	100.0	%	$	1,277,728	100.0	%	$	184,409	14.4	%	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, ~~assets,~~longer duration assets. Purchases of investment securities available for sale were offset partially by a ~~$55.6~~$145.8 million decrease in the fair value of these investment securities ~~available for sale~~as a result of an increase in market interest rates resulting in an unrealized loss at ~~March 31,~~September 30, 2022 compared to an unrealized gain at December 31, ~~2021 following an increase in market rates during the quarter.~~2021.

Table of Contents

Loan Portfolio Overview

Changes by loan type

The Bank originates a wide variety of loans with a focus on commercial business loans. The following table provides information about our loan portfolio by type of loan at the dates indicated:

March 31, 2022 December 31, 2021
Amortized Cost % of Loans Receivable Amortized Cost % of Loans Receivable Change % Change
(Dollars in thousands)
Commercial business:
Commercial and industrial $ 651,523 17.1 % $ 621,567 16.3 % $ 29,956 4.8 %
SBA PPP 64,962 1.7 145,840 3.8 (80,878) (55.5)
Owner-occupied CRE 935,705 24.5 931,150 24.4 4,555 0.5
Non-owner occupied CRE 1,505,483 39.4 1,493,099 39.2 12,384 0.8
Total commercial business 3,157,673 82.7 3,191,656 83.7 (33,983) (1.1)
Residential real estate 223,442 5.8 164,582 4.3 58,860 35.8
Real estate construction and land development:
Residential 83,529 2.2 85,547 2.2 (2,018) (2.4)
Commercial and multifamily 138,583 3.6 141,336 3.7 (2,753) (1.9)
Total real estate construction and land development 222,112 5.8 226,883 5.9 (4,771) (2.1)
Consumer 217,951 5.7 232,541 6.1 (14,590) (6.3)
Total $ 3,821,178 100.0 % $ 3,815,662 100.0 % $ 5,516 0.1 %

~~Table of Contents~~


	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 increased due primarily to ~~$42.2~~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 ~~and higher commercial business loan demand,~~as well as lower prepayments. This increase was offset partially by repayments of SBA PPP ~~loans.~~loans and a decrease in consumer loans due primarily to a $42.2 million decline in indirect loans outstanding as the Bank ceased indirect auto loan 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 dates indicated:


		March 31, 2022			December 31, 2021			Change			% Change			September 30, 2022			December 31, 2021			Change			% Change
		(Dollars in thousands)												(Dollars in thousands)
Nonaccrual loans: (1)	Nonaccrual loans: (1)												Nonaccrual loans: (1)
Commercial business	Commercial business	$	15,956		$	23,107		$	(7,151)		(30.9)	%	Commercial business	$	6,234		$	23,107		$	(16,873)		(73.0)	%
Residential real estate	Residential real estate	—			47			(47)			(100.0)		Residential real estate	—			47			(47)			(100.0)
Real estate construction and land development	Real estate construction and land development	571			571			—			—		Real estate construction and land development	—			571			(571)			(100.0)
Consumer	Consumer	—			29			(29)			(100.0)		Consumer	—			29			(29)			(100.0)
Total nonaccrual loans	Total nonaccrual loans	16,527			23,754			(7,227)			(30.4)		Total nonaccrual loans	6,234			23,754			(17,520)			(73.8)
Other real estate owned	Other real estate owned	—			—			—			n/a		Other real estate owned	—			—			—			n/a
Total nonperforming assets	Total nonperforming assets	$	16,527		$	23,754		$	(7,227)		(30.4)	%	Total nonperforming assets	$	6,234		$	23,754		$	(17,520)		(73.8)	%

Accruing loans past due 90 days or more	Accruing loans past due 90 days or more	$	1,318		$	293		$	1,025		349.8	%	Accruing loans past due 90 days or more	$	20		$	293		$	(273)		(93.2)	%

Credit quality ratios:	Credit quality ratios:												Credit quality ratios:
Nonaccrual loans to loans receivable	Nonaccrual loans to loans receivable	0.43		%	0.62		%	(0.19)		%	(30.6)	%	Nonaccrual loans to loans receivable	0.16		%	0.62		%	(0.46)		%	(74.2)	%
Nonaccrual loans to total assets	Nonaccrual loans to total assets	0.22			0.32			(0.10)			(31.3)		Nonaccrual loans to total assets	0.09			0.32			(0.23)			(71.9)

Performing TDR loans: (1)	Performing TDR loans: (1)												Performing TDR loans: (1)
Commercial business	Commercial business	$	61,111		$	57,142		$	3,969		6.9	%	Commercial business	$	64,739		$	57,142		$	7,597		13.3	%
Residential real estate	Residential real estate	179			358			(179)			(50.0)		Residential real estate	175			358			(183)			(51.1)
Real estate construction and land development	Real estate construction and land development	450			450			—			—		Real estate construction and land development	6,137			450			5,687			1,263.8
Consumer		887			1,160			(273)			(23.5)
Total performing TDR loans		$	62,627		$	59,110		$	3,517		5.9	%

Table of Contents


	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) At ~~March 31,~~September 30, 2022 and December 31, 2021, ~~$1.4~~$1.7 million and $1.4 million of nonaccrual loans, respectively, and ~~$2.3~~$2.2 million and $1.6 million of performing TDR loans, respectively, were guaranteed by government agencies.

The following table provides the changes in nonaccrual loans during the ~~three~~nine months ended ~~March 31,~~September 30, 2022:

(In thousands)

Balance, beginning of period

23,754

Additions ~~to nonaccrual loan classification~~

—720

Net principal payments, sales and transfers to accruing status

~~(3,804)~~(13,784)

Payoffs

~~(3,369)~~(4,285)

Charge-offs

~~(54)~~(171)

Balance, end of period

~~16,527~~6,234

Nonaccrual loans ~~declined $7.2~~decreased $17.5 million, or ~~30.4%~~73.8%, due primarily to ongoing collection efforts, including the partial payoff of ~~two~~three large commercial and industrial loan relationships, the payoff of ~~one non-owner occupied CRE relationship,~~four commercial business loan relationships, and the transfer of ~~two~~five commercial business 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 totaling $1.0 million.~~2022.

~~Table of Contents~~

Allowance for Credit Losses on Loans Overview

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


		At or For the Three Months Ended March 31,												At or For the Nine Months Ended September 30,
		2022			2021			Change			% Change			2022			2021			Change			% Change
		(Dollars in thousands)												(Dollars in thousands)
ACL on loans at the end of period	ACL on loans at the end of period	$	40,333		$	64,225		$	(23,892)		(37.2)	%	ACL on loans at the end of period	$	42,089		$	48,317		$	(6,228)		(12.9)	%

Credit quality ratios:	Credit quality ratios:												Credit quality ratios:
ACL on loans to loans receivable	ACL on loans to loans receivable	1.06		%	1.40		%	(0.34)		%	(24.3)	%	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)	ACL on loans to loans receivable, excluding SBA PPP loans (1)	1.07			1.73			(0.66)			(38.2)		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	ACL on loans to nonaccrual loans	244.04		%	121.48		%	122.56		%	100.9	%	ACL on loans to nonaccrual loans	675.15			186.60			496.82			278.60

Net recoveries		494			175			319			182.3
Net (recoveries) charge-offs													Net (recoveries) charge-offs	$	(980)		$	60		$	(1,040)		0.02
Average loans receivable, net during the period (2)	Average loans receivable, net during the period (2)	3,836,029			4,490,499			(654,470)			(14.6)		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)	Net recoveries on loans to average loans receivable, net (3)	(0.05)		%	(0.02)		%	(0.03)		%	150.0	%	Net recoveries on loans to average loans receivable, net(3)	(0.03)		%	—		%	(0.03)		%	—	%

(1) The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. See "Reconciliations of Non-GAAP Measures" section below.

(2) Average loan receivable, net includes loans held for sale.

(3) Annualized.

The ACL on loans decreased during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 due primarily to a reduction of loans individually evaluated for losses and as a result, their related ACL of $3.9 million as well as ~~changes~~improvements in the ~~loan mix~~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 ~~continued improvement in forecasted economic indicators used to calculate credit losses.~~related variants.

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


		March 31, 2022				December 31, 2021									September 30, 2022				December 31, 2021
		ACL on loans		% of Total (1)		ACL on loans		% of Total (1)		Change		% Change			ACL on loans		% of Total (1)		ACL on loans		% of Total (1)		Change		% Change
		(Dollars in thousands)													(Dollars in thousands)
Commercial business	Commercial business	$	31,932	82.7	%	$	33,049	83.7	%	$	(1,117)	(3.4)	%	Commercial business	$	31,940	81.1	%	$	33,049	83.7	%	$	(1,109)	(3.4)	%
Residential real estate	Residential real estate	1,803		5.8		1,409		4.3		394		28.0		Residential real estate	2,545		7.4		1,409		4.3		1,136		80.6
Real estate construction and land development	Real estate construction and land development	4,299		5.8		5,276		5.9		(977)		(18.5)		Real estate construction and land development	5,104		6.3		5,276		5.9		(172)		(3.3)
Consumer	Consumer	2,299		5.7		2,627		6.1		(328)		(12.5)		Consumer	2,500		5.2		2,627		6.1		(127)		(4.8)
Total ACL on loans	Total ACL on loans	$	40,333	100.0	%	$	42,361	100.0	%	$	(2,028)	(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 Overview

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


		March 31, 2022				December 31, 2021									September 30, 2022				December 31, 2021
		Balance		% of Total		Balance		% of Total		Change		% Change			Balance		% of Total		Balance		% of Total		Change		% Change
		(Dollars in thousands)													(Dollars in thousands)
Noninterest demand deposits	Noninterest demand deposits	$	2,393,972	36.9	%	$	2,343,909	36.7	%	$	50,063	2.1	%	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	2,018,032		31.1		1,946,605		30.4		71,427		3.7		Interest bearing demand deposits	1,997,989		32.0	%	1,946,605		30.4		51,384		2.6
Money market accounts	Money market accounts	1,099,539		16.9		1,120,174		17.5		(20,635)		(1.8)		Money market accounts	996,214		16.0	%	1,120,174		17.5		(123,960)		(11.1)
Savings accounts	Savings accounts	651,541		10.0		640,763		10.0		10,778		1.7		Savings accounts	647,526		10.4	%	640,763		10.0		6,763		1.1
Total non-maturity deposits	Total non-maturity deposits	6,163,084		94.9		6,051,451		94.6		111,633		1.8		Total non-maturity deposits	5,950,312		95.4		6,051,451		94.6		(101,139)		(1.7)
Certificates of deposit	Certificates of deposit	328,416		5.1		342,839		5.4		(14,423)		(4.2)		Certificates of deposit	287,423		4.6		342,839		5.4		(55,416)		(16.2)
Total deposits	Total deposits	$	6,491,500	100.0	%	$	6,394,290	100.0	%	$	97,210	1.5	%	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 Bank entered into a purchase and sale agreement with a third party to sell and transfer assets, deposits and other liabilities of its branch in Ellensburg during the three months ended September 30, 2022. As a result of entering into this purchase and sale agreement, $22.7 million in deposits were transferred to held for sale. The lower of amortized cost or fair value adjustment upon transferring these deposits to held for sale was not material. The sale is expected to be completed during the three months ended March 31, 2023; however, the completion of this sale depends on many factors including regulatory approval.

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Stockholders' Equity Overview

The Company’s stockholders' equity to assets ratio was ~~11.0%~~10.8% and 11.5% at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, and decreased due primarily to a decrease in ~~accumulated other comprehensive income~~AOCI of ~~$43.6~~$114.4 million following ~~an increase~~increases in market interest rates during the ~~first quarter,~~nine months ended September 30, 2022, which negatively impacted the fair value of our investment securities available for ~~sale at March 31, 2022.~~sale. AOCI has no effect on our regulatory capital ratios as the Company opted to 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 of directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. On ~~April 20,~~October 19, 2022, the Company’s board of directors declared a regular quarterly dividend of $0.21 per common share payable on ~~May 18,~~November 16, 2022 to shareholders of record on ~~May 4,~~November 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. Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Management believes that as of ~~March 31,~~September 30, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of ~~March 31,~~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
March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021
Common equity Tier 1 capital to risk-weighted assets 13.4 % 13.5 % 13.7 % 13.8 %
Tier 1 leverage capital to average assets 8.8 8.7 8.7 8.6
Tier 1 capital to risk-weighted assets 13.9 13.9 13.7 13.8
Total capital to risk-weighted assets 14.7 14.8 14.6 14.7
Capital conservation buffer 6.7 6.8 6.6 6.7


	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 ~~March 31,~~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 ~~allow~~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.

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Critical Accounting Policies

Our critical accounting policies are described in detail in the "Critical Accounting Policies" section within Item 7 of our 2021 Annual Form the Form 10-K. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's critical accounting policies include estimates of the ACL on investment securities, the ACL on loans, the ACL on unfunded commitments and goodwill. There have been no material changes in these policies during the ~~three~~nine months ended ~~March 31,~~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 they provide useful and comparative information to assess trends in the Company’s performance and asset quality and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.

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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 its balance sheet. Incremental accretion on ~~purchased~~acquired loans represents the amount of interest income recorded on ~~purchased~~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 ~~purchased~~acquired loans decreases. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that ~~are anticipated to~~have substantially ~~decrease~~decreased within a short time frame.

Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Loan yield, excluding SBA PPP Loans and Incremental Accretion on Purchased Loans, annualized:
Interest and fees on loans (GAAP) $ 41,025 $ 49,524
Exclude interest and fees on SBA PPP loans (3,081) (9,136)
Exclude incremental accretion on purchased loans (584) (1,075)
Adjusted interest and fees on loans (non-GAAP) $ 37,360 $ 39,313
Average loans receivable, net (GAAP) $ 3,773,325 $ 4,490,499
Exclude average SBA PPP loans (109,594) (832,148)
Adjusted average loans receivable, net (non-GAAP) $ 3,663,731 $ 3,658,351
Loan yield, annualized (GAAP) 4.41 % 4.47 %
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) 4.14 % 4.36 %

~~Table of Contents~~


	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.


		March 31, 2022			December 31, 2021				September 30, 2022			December 31, 2021
		(Dollars in thousands)							(Dollars in thousands)
ACL on Loans to Loans Receivable, excluding SBA PPP Loans:	ACL on Loans to Loans Receivable, excluding SBA PPP Loans:							ACL on Loans to Loans Receivable, excluding SBA PPP Loans:
Allowance for credit losses on loans (GAAP)	Allowance for credit losses on loans (GAAP)	$	40,333		$	42,361		Allowance for credit losses on loans (GAAP)	$	42,089		$	42,361

Loans receivable (GAAP)	Loans receivable (GAAP)	$	3,821,178		$	3,815,662		Loans receivable (GAAP)	$	4,001,295		$	3,815,662
Exclude SBA PPP loans	Exclude SBA PPP loans	64,962			145,840			Exclude SBA PPP loans	(3,593)			(145,840)
Loans receivable, excluding SBA PPP (non-GAAP)	Loans receivable, excluding SBA PPP (non-GAAP)	$	3,756,216		$	3,669,822		Loans receivable, excluding SBA PPP (non-GAAP)	$	3,997,702		$	3,669,822

ACL on loans to loans receivable (GAAP)	ACL on loans to loans receivable (GAAP)	1.06		%	1.11		%	ACL on loans to loans receivable (GAAP)	1.05		%	1.11		%
ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP)	ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP)	1.07		%	1.15		%	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

In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2021 Annual Form 10-K. Neither we, nor the Bank, maintain a trading account for any class of financial instrument, nor do we, or the Bank, engage in hedging activities or purchase high risk derivative instruments. Moreover, neither we, nor the Bank, are subject to foreign currency exchange rate risk or commodity price risk.

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ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and the Company’s Disclosure Committee as of the end of the period covered by this quarterly report. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of ~~March 31,~~September 30, 2022 are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the three months ended ~~March 31,~~September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Neither the Company nor the Bank is a party to any material pending legal proceedings other than ordinary routine litigation incidental to the business of the Bank.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors set forth in Item 1A of the Company’s 2021 Annual Form 10-K.

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

(a) Not applicable.

(b) Not applicable.

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The following table provides information about repurchases of common stock by the Company during the three months ended ~~March 31,~~September 30, 2022:

Period
Total Number
of Shares
Purchased (1)
Average Price
Paid Per
Share (1)
Total number of shares purchased as part of publicly announced plans or programs
Maximum number of shares that may yet be purchased under the plans or programs (2)
January 1, 2022— January 31, 2022 — $ — 9,886,773 738,304
February 1, 2022— February 28, 2022 30,602 24.84 9,917,332 707,745
March 1, 2022— March 31, 2022 74,488 25.41 9,967,332 657,745
Total 105,090 $ 25.24


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 ~~January~~July 1, 2022 and ~~March 31,~~September 30, 2022, ~~24,531~~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

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ITEM 6. EXHIBITS

~~Incorporated by Reference~~

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)

(*) Indicates management contract or compensatory plan or arrangement.

~~Exhibit No.~~

~~Description of Exhibit~~

~~Form~~

~~Exhibit~~

~~Filing Date/Period End Date~~

~~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) Filed herewith.

SIGNATURES

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


						HERITAGE FINANCIAL CORPORATION
Date:
~~May 4,~~November 8, 2022						/S/ JEFFREY J. DEUEL
						Jeffrey J. Deuel
						President and Chief Executive Officer
Date:
~~May 4,~~November 8, 2022						/S/ DONALD J. HINSON
						Donald J. Hinson
						Executive Vice President and Chief Financial Officer

4148


	Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(In thousands)
Commercial business:
Commercial and industrial	$	(2)	$	139	$	(2)	$	63
Owner-occupied CRE	—		53		—		114
Non-owner occupied CRE	—		774		—		313
Total commercial business	(2)		966		(2)		490
Residential real estate	—		19		—		—
Real estate construction and land development:
Residential	—		—		—		73


Consumer	—		68		—		—
Total	$	(2)	$	1,053	$	(2)	$	563