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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021 or

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer  
☐
Non-accelerated filer  
☐
Smaller reporting company  
☐
Emerging growth company 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐    No  ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
As of October 29, 2021, there were 35,166,599 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
September 30, 2021
TABLE OF CONTENTS
Page
PART I.
ITEM 1.
NOTE 1.
NOTE 2.
NOTE 3.
NOTE 4.
NOTE 5.
NOTE 6.
NOTE 7.
NOTE 8.
NOTE 9.
NOTE 10.
ITEM 2.
ITEM 3.
ITEM 4.
PART II.
OTHER INFORMATION
ITEM 1.
ITEM 1A.
2

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ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms “we”, “our”, or “us” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.
2020 Annual Form 10-KCompany's Annual Report on Form 10-K for the year ended December 31, 2020
ACLAllowance for credit losses
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankHeritage Bank
CA ActConsolidated Appropriations Act of 2021
CARES ActCoronavirus Aid, Relief, and Economic Security Act of 2020
CECLCurrent Expected Credit Loss
CECL Adoption
Company's adoption on January 1, 2020 of FASB ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology
CMOCollateralized Mortgage Obligation
CompanyHeritage Financial Corporation
COVID ModificationsLoans with modifications made in compliance with the CARES Act, as amended, and related regulatory guidance
COVID-19 PandemicCoronavirus Disease of 2019 pandemic
CRECommercial real estate
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
Federal ReserveBoard of Governors of the Federal Reserve System
Federal Reserve BankFederal Reserve Bank of San Francisco
FHLBFederal Home Loan Bank of Des Moines
GAAPU.S. Generally Accepted Accounting Principles
LIBORLondon Interbank Offering Rate
MBSMortgage-backed security
PPPPaycheck Protection Program
SBASmall Business Administration
SECSecurities and Exchange Commission
SMSpecial Mention
SSSubstandard
TDRTroubled debt restructured

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

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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 any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price performance.
The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to the COVID-19 pandemic, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to:
•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our ACL on loans and provision for credit losses on loans that may be affected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;
•changes in general economic conditions, either nationally or in our market areas;
•changes in the levels of general interest rates, and the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
•risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar;
•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;
•results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;
•legislative or regulatory changes that adversely affect our business;
•implementing regulations, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;
•our ability to control operating costs and expenses;
•increases in premiums for deposit insurance;
•the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
•difficulties in reducing risk associated with the loans on our Condensed Consolidated Statements of Financial Condition;
•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
•our ability to retain key members of our senior management team;
•costs and effects of litigation, including settlements and judgments;
•our ability to implement our growth strategies;
•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;
•increased competitive pressures among financial service companies;
•changes in consumer spending, borrowing and savings habits;
•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
•adverse changes in the securities markets;
•inability of key third-party providers to perform their obligations to us;
•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods and as a result of the CARES Act and the CA Act; and
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including as a result of the CARES Act, CA Act and recent COVID-19 pandemic vaccination efforts, and the other risks detailed from time to time in our filings with the SEC including our 2020 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)
September 30,
2021		December 31,
2020
ASSETS
Cash on hand and in banks$86,954 $91,918 
Interest earning deposits1,547,785 651,404 
Cash and cash equivalents1,634,739 743,322 
Investment securities available for sale, at fair value, net (amortized cost of $744,336 and $770,195, respectively)
761,526 802,163 
Investment securities held to maturity, at amortized cost, net (fair value of $307,330 and $0, respectively)
311,074 — 
Total investment securities1,072,600 802,163 
Loans held for sale2,636 4,932 
Loans receivable3,953,884 4,468,647 
Allowance for credit losses on loans(48,317)(70,185)
Loans receivable, net3,905,567 4,398,462 
Other real estate owned— — 
Premises and equipment, net79,958 85,452 
Federal Home Loan Bank stock, at cost7,933 6,661 
Bank owned life insurance109,634 107,580 
Accrued interest receivable14,802 19,418 
Prepaid expenses and other assets179,494 193,301 
Other intangible assets, net10,736 13,088 
Goodwill240,939 240,939 
Total assets$7,259,038 $6,615,318 
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits$6,215,558 $5,597,990 
Junior subordinated debentures21,107 20,887 
Securities sold under agreement to repurchase44,096 35,683 
Accrued expenses and other liabilities129,873 140,319 
Total liabilities6,410,634 5,794,879 
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively
— — 
Common stock, no par value, 50,000,000 shares authorized; 35,166,599 and 35,912,243 shares issued and outstanding, respectively
552,385 571,021 
Retained earnings281,285 224,400 
Accumulated other comprehensive income, net14,734 25,018 
Total stockholders’ equity848,404 820,439 
Total liabilities and stockholders’ equity$7,259,038 $6,615,318 

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts and shares outstanding)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
INTEREST INCOME:
Interest and fees on loans$46,863 $47,647 $147,137 $142,328 
Taxable interest on investment securities4,711 3,865 12,295 14,068 
Nontaxable interest on investment securities931 953 2,836 2,686 
Interest on interest earning deposits537 98 975 561 
Total interest income53,042 52,563 163,243 159,643 
INTEREST EXPENSE:
Deposits1,444 2,639 4,696 10,272 
Junior subordinated debentures184 196 557 699 
Other borrowings36 50 109 130 
Total interest expense1,664 2,885 5,362 11,101 
Net interest income51,378 49,678 157,881 148,542 
(Reversal of) provision for credit losses(3,149)2,730 (24,335)39,239 
Net interest income after (reversal of) provision for credit losses54,527 46,948 182,216 109,303 
NONINTEREST INCOME:
Service charges and other fees4,566 4,039 12,988 12,015 
Gain on sale of investment securities, net— 40 29 1,463 
Gain on sale of loans, net765 1,443 3,138 3,125 
Interest rate swap fees126 396 487 1,461 
Bank owned life insurance income647 909 2,020 2,439 
Other income2,124 1,383 6,114 5,441 
Total noninterest income8,228 8,210 24,776 25,944 
NONINTEREST EXPENSE:
Compensation and employee benefits22,176 21,416 66,725 65,849 
Occupancy and equipment4,373 4,348 12,918 13,247 
Data processing4,029 3,691 11,839 10,735 
Marketing775 755 2,336 2,317 
Professional services816 1,086 3,249 4,632 
State/municipal business and use taxes1,071 964 3,034 2,626 
Federal deposit insurance premium550 848 1,478 1,086 
Other real estate owned, net— — — (145)
Amortization of intangible assets758 860 2,352 2,666 
Other expense2,618 2,077 6,873 7,365 
Total noninterest expense37,166 36,045 110,804 110,378 
Income before income taxes25,589 19,113 96,188 24,869 
Income tax expense4,997 2,477 17,550 2,181 
Net income$20,592 $16,636 $78,638 $22,688 
Basic earnings per share$0.58 $0.46 $2.19 $0.63 
Diluted earnings per share$0.58 $0.46 $2.18 $0.63 
Dividends declared per share$0.20 $0.20 $0.60 $0.60 
Average number of basic shares outstanding35,644,192 35,908,845 35,854,258 36,049,369 
Average number of diluted shares outstanding35,929,518 35,988,734 36,152,052 36,193,615 

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Net income$20,592 $16,636 $78,638 $22,688 
Change in fair value of investment securities available for sale, net of tax of $(362), $(206), $(2,844) and $4,437, respectively
(1,305)(741)(10,239)15,975 
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $0, $(8), $(6) and $(318), respectively
— (32)(23)(1,145)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(6), $0, $(6) and $0, respectively
(22)— (22)— 
Other comprehensive (loss) income(1,327)(773)(10,284)14,830 
Comprehensive income$19,265 $15,863 $68,354 $37,518 

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except per share amounts)

Three Months Ended September 30, 2021
Number of
common
shares		Common
stock		Retained
earnings		Accumulated other comprehensive income (loss), netTotal
stockholders’
equity
Balance at June 30, 202136,006 $572,060 $267,863 $16,061 $855,984 
Restricted stock units vested2 — — — — 
Stock-based compensation expense— 966 — — 966 
Common stock repurchased(841)(20,641)— — (20,641)
Net income— — 20,592 20,592 
Other comprehensive loss, net of tax— — — (1,327)(1,327)
Cash dividends declared on common stock ($0.20 per share)
— — (7,170)— (7,170)
Balance at September 30, 202135,167 $552,385 $281,285 $14,734 $848,404 
Nine Months Ended September 30, 2021
Number of
common
shares		Common
stock		Retained
earnings		Accumulated other comprehensive income (loss), netTotal
stockholders’
equity
Balance at December 31, 202035,912 $571,021 $224,400 $25,018 $820,439 
Restricted stock units vested122 — — — — 
Stock-based compensation expense— 2,762 — — 2,762 
Common stock repurchased(867)(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, 202135,167 $552,385 $281,285 $14,734 $848,404 

Three Months Ended September 30, 2020
Number of
common
shares		Common
stock		Retained
earnings		Accumulated other comprehensive income (loss), netTotal
stockholders’
equity
Balance at June 30, 202035,909 $569,329 $198,342 $25,981 $793,652 
Restricted stock units vested2 — — — — 
Stock-based compensation expense— 848 — — 848 
Common stock repurchased(1)(7)— — (7)
Net income— — 16,636 16,636 
Other comprehensive loss, net of tax— — — (773)(773)
Cash dividends declared on common stock ($0.20 per share)
— — (7,227)— (7,227)
Balance at September 30, 202035,910 $570,170 $207,751 $25,208 $803,129 

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Nine Months Ended September 30, 2020
Number of
common
shares		Common
stock		Retained
earnings		Accumulated other comprehensive income, netTotal
stockholders’
equity
Balance at December 31, 201936,619 $586,459 $212,474 $10,378 $809,311 
Cumulative effect from change in accounting policy (1)
— — (5,615)— (5,615)
Restricted stock units vested108 — — — — 
Exercise of stock options8 122 — — 122 
Stock-based compensation expense— 2,694 — — 2,694 
Common stock repurchased(825)(19,105)— — (19,105)
Net income— — 22,688 — 22,688 
Other comprehensive income, net of tax— — — 14,830 14,830 
Cash dividends declared on common stock ($0.60 per share)
— — (21,796)— (21,796)
Balance at September 30, 202035,910 $570,170 $207,751 $25,208 $803,129 
(1) Effective January 1, 2020, Company adopted ASU 2016-13, Financial Instruments - Credit Losses.

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
September 30,
20212020
Cash flows from operating activities:
Net income$78,638 $22,688 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion(18,356)(5,926)
(Reversal of) provision for credit losses(24,335)39,239 
Net change in accrued interest receivable, prepaid expenses and other assets, and accrued expenses and other liabilities11,043 (12,298)
Stock-based compensation expense2,762 2,694 
Amortization of intangible assets2,352 2,666 
Origination of mortgage loans held for sale(74,325)(93,422)
Proceeds from sale of mortgage loans held for sale79,759 93,830 
Bank owned life insurance income(2,020)(2,439)
Valuation adjustment on interest rate swaps(296)— 
Gain on sale of other real estate owned, net— (179)
Gain on sale of mortgage loans held for sale, net(3,138)(3,125)
Gain on sale of investment securities available for sale, net(29)(1,463)
Gain on sale of assets held for sale(1,691)(9)
Impairment of assets held for sale38 — 
Impairment of right of use asset160 102 
Loss (gain) on sale or write-off of premises and equipment, net91 (25)
Net cash provided by operating activities50,653 42,333 
Cash flows from investing activities:
Loan repayments (originations), net555,784 (890,667)
Maturities and repayments of investment securities available for sale200,242 207,955 
Maturities and repayments of investment securities held to maturity423 — 
Purchase of investment securities available for sale(421,566)(117,456)
Purchase of investment securities held to maturity(66,821)— 
Proceeds from sales of investment securities available for sale1,248 44,970 
Purchase of premises and equipment(2,148)(6,136)
Proceeds from sales of other real estate owned— 1,290 
Proceeds from sales of assets held for sale5,642 394 
Proceeds from redemption of Federal Home Loan Bank stock— 2,560 
Purchases of Federal Home Loan Bank stock(1,272)(2,844)
Proceeds from sales of premises and equipment12 53 
Purchases of bank owned life insurance(104)(3,580)
Proceeds from bank owned life insurance death benefit— 1,324 
Cash received from return of New Market Tax Credit equity method investment9,642 — 
Capital contributions to low-income housing tax credit partnerships(23,349)(7,109)
Net cash provided (used) by investing activities257,733 (769,246)
Cash flows from financing activities:
Net increase in deposits617,568 1,106,372 
Federal Home Loan Bank advances10 19,000 
Repayment of Federal Home Loan Bank advances(10)(19,000)
Common stock cash dividends paid(21,552)(21,676)
Net increase in securities sold under agreement to repurchase8,413 8,874 
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Nine Months Ended
September 30,
20212020
Proceeds from exercise of stock options— 122 
Repurchase of common stock(21,398)(19,105)
Net cash provided by financing activities583,031 1,074,587 
Net increase in cash and cash equivalents891,417 347,674 
Cash and cash equivalents at beginning of period743,322 228,568 
Cash and cash equivalents at end of period$1,634,739 $576,242 
Supplemental disclosures of cash flow information:
Cash paid for interest$5,162 $10,972 
Cash paid for income taxes, net of refunds10,944 8,279 
Supplemental non-cash disclosures of cash flow information:
Transfers of loans receivable to other real estate owned$— $270 
Transfer of investment securities available for sale to held to maturity244,778 — 
Loans received from return of New Market Tax Credit equity method investment15,596 — 
Transfers of properties classified as held for sale to prepaid expenses and other assets from premises and equipment, net3,556 — 
Investment in low-income housing tax credit partnership and related funding commitment17,458 10,237 
Cumulative effect from change in accounting policy (1)
— 7,175 
Right of use assets obtained in exchange for new operating lease liabilities12,134 273 
(1) Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses.

See accompanying Notes to Condensed Consolidated Financial Statements.
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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, Heritage Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 53 branch offices as of September 30, 2021 located throughout Washington State and the greater Portland, Oregon area. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, consumer loans and originates first mortgage loans on residential properties primarily located in its market areas. The Bank's deposits are insured by the FDIC.
The Company consolidated four branches during October 2021 to create a more efficient branch footprint. This consolidation reduced the number of branches from 53 to 49. The Company integrated these locations into other branches within its network.

(b) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is recommended that these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2020 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes that the judgments, estimates, and assumptions used in the preparation of the 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 ACL on loans, management's estimate of ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.
The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.
Certain prior year amounts in the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year’s presentation. Reclassifications had no effect on the prior year's net income or stockholders’ equity.

(c) Significant Accounting Policies
The significant accounting policies used in preparation of the Condensed Consolidated Financial Statements are disclosed in greater detail in the 2020 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the 2020 Annual Form 10-K during the nine months ended September 30, 2021 except for accounting policies related to investment securities and the ACL on investment securities held to maturity as follows:
Investment Securities
Investment securities for which the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Investment securities held primarily for the purpose of selling in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in income. Investment securities not classified as held to maturity or trading are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. The Bank determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. When the Company acquires another entity, all investment securities are recorded at fair value and classified as available for sale at the acquisition date.
Realized gains and losses on sales of investment securities are recorded on the trade date in gain on sale of investment securities, net on the Consolidated Statements of Income and determined using the specific identification method. Premiums and discounts on investment securities available for sale and held to maturity are amortized or accreted into income using the interest method. The objective of the interest method is to calculate periodic interest income at a constant effective
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yield. An investment security available for sale or held to maturity is placed on nonaccrual status at the time any principal or payments become more than 90 days delinquent and classified as past due after 30 days of nonpayment. Interest accrued, but not received for an investment security classified as nonaccrual is reversed against interest income during the period that the investment security is placed on nonaccrual status.
ACL on Investment Securities Held to Maturity
The Company measures expected credit losses on investment securities held to maturity on a pooled, collective basis by major investment security type with similar risk characteristics. A historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the investment securities on those historical credit losses. Expected credit losses on investment securities in the held to maturity portfolio that do not share similar risk characteristics with any of the pools are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the investment securities.
Accrued interest receivable on investment securities held to maturity is excluded from the estimate of expected credit losses. Changes in the ACL on investment securities held to maturity are recorded as provision for credit losses expense. Losses are charged against the ACL when management believes the uncollectability of an investment security held to maturity is confirmed.

(d) Recently Issued or Adopted Accounting Pronouncements
FASB ASU 2016-13, Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, and ASU 2020-02, was originally issued in June 2016. This ASU replaced the incurred loss methodology with an expected loss methodology, which is commonly referred to as the "CECL" methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, CECL Adoption made changes to the accounting for credit losses on investment securities available for sale. This ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for fiscal years after December 15, 2018 and can be delayed under a provision of the CARES Act until the end of the official health emergency declaration. The Bank adopted ASU 2016-13 on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and unfunded commitments. At adoption, the Bank elected not to measure an ACL on accrued interest receivable on loans receivable or accrued interest receivable on investment securities available for sale as Bank policy is to reverse interest income for uncollectible accrued interest receivable balances in a timely manner.
The adoption of ASU 2016-13 included an increase to the ACL on loans of $3.4 million and an increase to the ACL on unfunded commitments of $3.7 million, resulting in a pretax cumulative-effect adjustment of $7.1 million. The impact of this adjustment to beginning retained earnings on January 1, 2020 was $5.6 million, net of tax.
FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Bank’s interest rate swap-related transactions are the majority of the Company's LIBOR exposure. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. The Company does not expect this ASU to have a material impact on its business operations and the Condensed Consolidated Financial Statements.

(2)Investment Securities
The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.
During the three months ended September 30, 2021, the Company reassessed and transferred, at fair value, $244.8 million of U.S. government and agency securities from the available for sale classification to the held to maturity classification. The net unrealized after tax gain of $1.3 million remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer.
There were no investment securities classified as trading at September 30, 2021 or December 31, 2020. There were no investment securities classified as held to maturity at December 31, 2020.

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(a) Investment Securities by Classification, Type and Maturity
The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in accumulated other comprehensive income:
September 30, 2021
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
(In thousands)
Investment securities available for sale:
U.S. government and agency securities$26,000 $146 $(40)$26,106 
Municipal securities219,737 9,385 (956)228,166 
Residential CMO and MBS240,018 3,065 (390)242,693 
Commercial CMO and MBS229,518 5,861 (361)235,018 
Corporate obligations2,009 14 — 2,023 
Other asset-backed securities27,054 475 (9)27,520 
Total$744,336 $18,946 $(1,756)$761,526 
Investment securities held to maturity:
U.S. government and agency securities$82,577 $46 $(563)$82,060 
Residential CMO and MBS10,000 — — 10,000 
Commercial CMO and MBS218,497 — (3,227)215,270 
Total$311,074 $46 $(3,790)$307,330 
December 31, 2020
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
(In thousands)
Investment securities available for sale:
U.S. government and agency securities$44,713 $947 $— $45,660 
Municipal securities197,634 12,561 (227)209,968 
Residential CMO and MBS196,956 5,125 (209)201,872 
Commercial CMO and MBS290,638 13,198 (90)303,746 
Corporate obligations10,971 125 — 11,096 
Other asset-backed securities29,283 565 (27)29,821 
Total$770,195 $32,521 $(553)$802,163 
The amortized cost and fair value of investment securities at September 30, 2021, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for SaleSecurities Held to Maturity
Amortized CostFair
Value		Amortized CostFair
Value
(In thousands)
Due in one year or less$36,745 $37,158 $— $— 
Due after one year through five years122,029 126,853 — — 
Due after five years through ten years174,729 179,546 205,748 203,119 
Due after ten years410,833 417,969 105,326 104,211 
Total$744,336 $761,526 $311,074 $307,330 
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There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at September 30, 2021 and December 31, 2020.

(b) Unrealized Losses on Investment Securities Available for Sale
The following tables show the gross unrealized losses and fair value of the Company’s investment securities available for sale for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020:
September 30, 2021
Less than 12 Months12 Months or LongerTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
(In thousands)
U.S. government and agency securities$1,695 $(40)$— $— $1,695 $(40)
Municipal securities42,397 (675)6,427 (281)48,824 (956)
Residential CMO and MBS74,409 (267)21,480 (123)95,889 (390)
Commercial CMO and MBS30,070 (354)2,583 (7)32,653 (361)
Other asset-backed securities— — 1,209 (9)1,209 (9)
Total$148,571 $(1,336)$31,699 $(420)$180,270 $(1,756)
December 31, 2020
Less than 12 Months12 Months or LongerTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
(In thousands)
Municipal securities$10,264 $(227)$— $— $10,264 $(227)
Residential CMO and MBS— — 25,293 (209)25,293 (209)
Commercial CMO and MBS11,404 (29)7,499 (61)18,903 (90)
Other asset-backed securities— — 4,570 (27)4,570 (27)
Total$21,668 $(256)$37,362 $(297)$59,030 $(553)

(c) ACL on Investment Securities
The Company evaluated investment securities available for sale as of September 30, 2021 and December 31, 2020 and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of both September 30, 2021 and December 31, 2020. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of September 30, 2021 and December 31, 2020.
The Company also evaluated investment securities held to maturity for current expected credit losses. There were no investment securities held to maturity classified as nonaccrual or past due as of September 30, 2021 and all were issued by the U.S. government and its agencies and either explicitly or implicitly guaranteed by the U.S. government, highly rated by major credit rating agencies and have a long history of no credit losses. Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Therefore, no ACL on investment securities held to maturity was recorded as of September 30, 2021.

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(d) Realized Gains and Losses
The following table presents the gross realized gains and losses on the sale of investment securities available for sale for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(In thousands)
Gross realized gains$— $40 $29 $1,482 
Gross realized losses— — — (19)
Net realized gains$— $40 $29 $1,463 

(e) Pledged Securities
The following table summarizes the amortized cost and fair value of investment securities that are pledged as collateral for the following obligations at September 30, 2021 and December 31, 2020:
September 30, 2021December 31, 2020
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
(In thousands)
Washington and Oregon state public deposits$127,486 $130,675 $119,652 $124,228 
Securities sold under agreement to repurchase68,297 68,424 38,630 39,945 
Other securities pledged57,728 57,307 29,665 30,717 
Total$253,511 $256,406 $187,947 $194,890 

(f) Accrued Interest Receivable
Accrued interest receivable excluded from amortized cost on investment securities available for sale totaled $3.0 million and $3.6 million at September 30, 2021 and December 31, 2020, respectively. Accrued interest receivable excluded from amortized cost on investment securities held to maturity totaled $0.6 million at September 30, 2021.
No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities during the three and nine months ended September 30, 2021 and September 30, 2020.

(3)Loans Receivable
(a) Loan Origination/Risk Management
The Bank originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Bank's amortized cost of loans receivable as it was deemed insignificant.
The Bank categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; real estate construction and land development; and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the 2020 Annual Form 10-K.
The amortized cost of loans receivable, net of ACL on loans at September 30, 2021 and December 31, 2020 consisted of the following portfolio segments and classes:
September 30,
2021		December 31,
2020
(In thousands)
Commercial business:
Commercial and industrial$652,776 $733,098 
SBA PPP266,896 715,121 
Owner-occupied CRE907,568 856,684 
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September 30,
2021		December 31,
2020
(In thousands)
Non-owner occupied CRE1,459,795 1,410,303 
Total commercial business3,287,035 3,715,206 
Residential real estate125,697 122,756 
Real estate construction and land development:
Residential
90,081 78,259 
Commercial and multifamily
205,516 227,454 
Total real estate construction and land development295,597 305,713 
Consumer245,555 324,972 
Loans receivable3,953,884 4,468,647 
Allowance for credit losses on loans(48,317)(70,185)
Loans receivable, net$3,905,567 $4,398,462 
Balances included in the amortized cost of Loans receivable:
Unamortized net discount on acquired loans$(4,325)$(6,575)
Unamortized net deferred fee$(11,497)$(15,458)

(b) Concentrations of Credit
Most of the Bank’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State and Multnomah County and Washington County in Oregon, as well as other contiguous markets and represents a geographic concentration. Additionally, our loan portfolio is concentrated in commercial-type loans, including commercial business loans and commercial and multifamily real estate construction and land development loans.

(c) Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, (v) past due status, and (vi) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon.
The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the 2020 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower, or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.
Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The SM loan grade is transitory in that the Bank is waiting on additional information to determine the likelihood and extent of the 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 loans with higher risk of loss if the deficiencies are not corrected. For Doubtful and Loss graded loans, the Bank is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value.
Regulatory agencies provided guidance regarding credit risk ratings, delinquency reporting and nonaccrual status for loans adversely impacted by the COVID-19 pandemic. The Bank has and will continue to exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely classify credits that are affected by the COVID-19 pandemic. The Bank also will not designate loans with payment deferrals granted due to the COVID-19 pandemic as past due because of the deferral. Due to the short-term nature of the forbearance and other relief programs the Bank is offering as a result
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of the COVID-19 pandemic, management expects that borrowers granted relief under these programs will generally not be reported as nonaccrual during the deferral period.
The following table presents the amortized cost of loans receivable by risk grade as of September 30, 2021 and December 31, 2020:
September 30, 2021
Term Loans
Amortized Cost Basis by Origination Year		Revolving Loans
Revolving Loans Converted to Term Loans (1)
Loans Receivable
20212020201920182017Prior
(In thousands)
Commercial business:
Commercial and industrial
Pass$74,653 $107,406 $103,431 $55,513 $34,254 $102,143 $120,622 $877 $598,899 
SM532 700 6,192 6,682 1,252 5,716 2,693 242 24,009 
SS1,057 1,369 5,533 1,219 3,034 6,276 10,772 608 29,868 
Total76,242 109,475 115,156 63,414 38,540 114,135 134,087 1,727 652,776 
SBA PPP
Pass247,213 19,683 — — — — — — 266,896 
Owner-occupied CRE
Pass114,176 86,004 183,540 92,201 70,672 277,948 — 73 824,614 
SM— 5,102 3,086 12,366 4,504 24,793 — — 49,851 
SS— 691 — 3,803 6,995 21,614 — — 33,103 
Total114,176 91,797 186,626 108,370 82,171 324,355 — 73 907,568 
Non-owner occupied CRE
Pass132,922 182,994 218,203 155,131 164,632 530,818 — — 1,384,700 
SM— 5,034 5,715 352 2,215 2,713 — — 16,029 
SS— — — 3,460 — 55,606 — — 59,066 
Total132,922 188,028 223,918 158,943 166,847 589,137 — — 1,459,795 
Total commercial business
Pass568,964 396,087 505,174 302,845 269,558 910,909 120,622 950 3,075,109 
SM532 10,836 14,993 19,400 7,971 33,222 2,693 242 89,889 
SS1,057 2,060 5,533 8,482 10,029 83,496 10,772 608 122,037 
Total570,553 408,983 525,700 330,727 287,558 1,027,627 134,087 1,800 3,287,035 
Residential real estate
Pass43,126 24,715 25,443 6,619 7,275 17,821 — — 124,999 
SS— — — — — 698 — — 698 
Total43,126 24,715 25,443 6,619 7,275 18,519 — — 125,697 
Real estate construction and land development:
Residential
Pass35,506 30,987 19,044 2,781 394 1,369 — — 90,081 
Commercial and multifamily
Pass38,144 50,546 106,428 5,587 1,606 1,542 — — 203,853 
SM— — 450 — — 215 — — 665 
SS— 571 — — — 427 — — 998 
Total38,144 51,117 106,878 5,587 1,606 2,184 — — 205,516 
Total real estate construction and land development
Pass73,650 81,533 125,472 8,368 2,000 2,911 — — 293,934 
SM— — 450 — — 215 — — 665 
SS— 571 — — — 427 — — 998 
Total73,650 82,104 125,922 8,368 2,000 3,553 — — 295,597 
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September 30, 2021
Term Loans
Amortized Cost Basis by Origination Year		Revolving Loans
Revolving Loans Converted to Term Loans (1)
Loans Receivable
20212020201920182017Prior
Consumer
Pass20,185 18,083 52,803 34,571 18,109 15,863 82,780 200 242,594 
SS— 186 685 549 564 939 38 — 2,961 
Total20,185 18,269 53,488 35,120 18,673 16,802 82,818 200 245,555 
Loans receivable
Pass705,925 520,418 708,892 352,403 296,942 947,504 203,402 1,150 3,736,636 
SM532 10,836 15,443 19,400 7,971 33,437 2,693 242 90,554 
SS1,057 2,817 6,218 9,031 10,593 85,560 10,810 608 126,694 
Total$707,514 $534,071 $730,553 $380,834 $315,506 $1,066,501 $216,905 $2,000 $3,953,884 
(1) Represents loans receivable balance at September 30, 2021 which was converted from a revolving loan to an amortizing loan during the nine months ended September 30, 2021.

December 31, 2020
Term Loans
Amortized Cost Basis by Origination Year		Revolving Loans
Revolving Loans Converted to Term Loans (1)
Loans Receivable
20202019201820172016Prior
(In thousands)
Commercial business:
Commercial and industrial
Pass$118,971 $127,919 $70,766 $44,231 $37,658 $95,958 $121,440 $819 $617,762 
SM14,430 9,162 10,878 4,171 5,700 3,579 11,790 814 60,524 
SS2,199 11,835 3,416 9,348 1,052 7,651 15,484 3,827 54,812 
Total135,600 148,916 85,060 57,750 44,410 107,188 148,714 5,460 733,098 
SBA PPP
Pass715,121 — — — — — — — 715,121 
Owner-occupied CRE
Pass89,224 167,095 94,830 80,138 74,902 254,864 — — 761,053 
SM6,146 4,540 16,386 11,231 5,464 12,105 — — 55,872 
SS— — 114 7,320 3,313 29,012 — — 39,759 
Total95,370 171,635 111,330 98,689 83,679 295,981 — — 856,684 
Non-owner-occupied CRE
Pass197,548 173,153 148,830 172,438 240,614 406,817 — — 1,339,400 
SM— 1,979 357 2,448 6,210 3,539 — — 14,533 
SS— — 3,623 — 35,455 17,292 — — 56,370 
Total197,548 175,132 152,810 174,886 282,279 427,648 — — 1,410,303 
Total commercial business
Pass1,120,864 468,167 314,426 296,807 353,174 757,639 121,440 819 3,433,336 
SM20,576 15,681 27,621 17,850 17,374 19,223 11,790 814 130,929 
SS2,199 11,835 7,153 16,668 39,820 53,955 15,484 3,827 150,941 
Total1,143,639 495,683 349,200 331,325 410,368 830,817 148,714 5,460 3,715,206 
Residential real estate
Pass30,141 41,829 15,730 10,362 7,322 16,825 — — 122,209 
SS— — — 59 — 488 — — 547 
Total30,141 41,829 15,730 10,421 7,322 17,313 — — 122,756 
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Real estate construction and land development:
Residential
Pass33,801 36,697 2,725 1,097 971 1,042 — — 76,333 
SS— — — 1,926 — — — — 1,926 
Total33,801 36,697 2,725 3,023 971 1,042 — — 78,259 
Commercial and multifamily
Pass27,423 151,020 38,682 5,660 689 1,407 — — 224,881 
SM67 1,011 — — — 29 — — 1,107 
SS572 450 — — — 444 — — 1,466 
Total28,062 152,481 38,682 5,660 689 1,880 — — 227,454 
Total real estate construction and land development
Pass61,224 187,717 41,407 6,757 1,660 2,449 — — 301,214 
SM67 1,011 — — — 29 — — 1,107 
SS572 450 — 1,926 — 444 — — 3,392 
Total61,863 189,178 41,407 8,683 1,660 2,922 — — 305,713 
Consumer
Pass43,742 77,083 53,195 30,559 13,443 15,453 87,547 315 321,337 
SS34 404 684 648 420 1,319 78 48 3,635 
Total43,776 77,487 53,879 31,207 13,863 16,772 87,625 363 324,972 
Loans receivable
Pass1,255,971 774,796 424,758 344,485 375,599 792,366 208,987 1,134 4,178,096 
SM20,643 16,692 27,621 17,850 17,374 19,252 11,790 814 132,036 
SS2,805 12,689 7,837 19,301 40,240 56,206 15,562 3,875 158,515 
Total$1,279,419 $804,177 $460,216 $381,636 $433,213 $867,824 $236,339 $5,823 $4,468,647 
(1) Represents loans receivable balance at December 31, 2020 which was converted from a revolving loan to an amortizing loan during the year ended December 31, 2020.

(d) Nonaccrual Loans
The following table presents the amortized cost of nonaccrual loans for the dates indicated:
September 30, 2021
Nonaccrual without ACLNonaccrual with ACLTotal Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial$6,952 $4,013 $10,965 
Owner-occupied CRE3,714 5,786 9,500 
Non-owner occupied CRE1,318 3,460 4,778 
Total commercial business11,984 13,259 25,243 
Residential real estate— 51 51 
Real estate construction and land development:
Commercial and multifamily
— 571 571 
Consumer— 29 29 
Total$11,984 $13,910 $25,894 

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December 31, 2020
Nonaccrual without ACLNonaccrual with ACLTotal Nonaccrual
(In thousands)
Commercial business:
Commercial and industrial$22,039 $9,208 $31,247 
Owner-occupied CRE4,693 13,700 18,393 
Non-owner occupied CRE3,424 3,722 7,146 
Total commercial business30,156 26,630 56,786 
Residential real estate
67 117 184 
Real estate construction and land development:
Commercial and multifamily
572 450 1,022 
Consumer31 69 100 
Total$30,826 $27,266 $58,092 

The following table presents the reversal of interest income on loans due to the write-off of accrued interest receivable upon the initial classification of loans as nonaccrual loans and the interest income recognized due to payment in full of previously classified nonaccrual loans during the following periods:
Three Months Ended
September 30, 2021		Three Months Ended
September 30, 2020
Interest Income ReversedInterest Income RecognizedInterest Income ReversedInterest Income Recognized
(In thousands)
Commercial business:
Commercial and industrial$(1)$184 $(59)$111 
Owner-occupied CRE— — (219)29 
Non-owner occupied CRE— — (102)— 
Total commercial business(1)184 (380)140 
Residential real estate
— — (1)2 
Real estate construction and land development:
Commercial and multifamily
— — (11)— 
Consumer— 32 — — 
Total$(1)$216 $(392)$142 
Nine Months Ended
September 30, 2021		Nine months ended
September 30, 2020
Interest Income ReversedInterest Income RecognizedInterest Income ReversedInterest Income Recognized
(in thousands)
Commercial business:
Commercial and industrial$(11)$2,228 $(75)$419 
Owner-occupied CRE— 117 (219)89 
Non-owner occupied CRE— 313 (102)67 
Total commercial business(11)2,658 (396)575 
One-to-four family residential(1)2 
Real estate construction and land development:
Residential
— 73 — — 
Commercial and multifamily
— — (11)— 
Consumer— 32 — 47 
Total$(11)$2,763 $(408)$624 
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For the three and nine months ended September 30, 2021 and 2020, 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.

(e) Past due loans
The Bank performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The amortized cost of past due loans as of September 30, 2021 and December 31, 2020 were as follows:
September 30, 2021
30-89 Days90 Days or
Greater		Total Past 
Due		CurrentLoans Receivable
(In thousands)
Commercial business:
Commercial and industrial$440 $6,219 $6,659 $646,117 $652,776 
SBA PPP— — — 266,896 266,896 
Owner-occupied CRE283 — 283 907,285 907,568 
Non-owner occupied CRE6,165 — 6,165 1,453,630 1,459,795 
Total commercial business6,888 6,219 13,107 3,273,928 3,287,035 
Residential real estate
25 — 25 125,672 125,697 
Real estate construction and land development:
Residential
— — — 90,081 90,081 
Commercial and multifamily
— 571 571 204,945 205,516 
Total real estate construction and land development— 571 571 295,026 295,597 
Consumer643 — 643 244,912 245,555 
Total$7,556 $6,790 $14,346 $3,939,538 $3,953,884 
December 31, 2020
30-89 Days90 Days or
Greater		Total Past 
Due		CurrentLoans Receivable
(In thousands)
Commercial business:
Commercial and industrial$4,621 $8,082 $12,703 $720,395 $733,098 
SBA PPP— — — 715,121 715,121 
Owner-occupied CRE991 403 1,394 855,290 856,684 
Non-owner occupied CRE412 1,970 2,382 1,407,921 1,410,303 
Total commercial business6,024 10,455 16,479 3,698,727 3,715,206 
Residential real estate
765 16 781 121,975 122,756 
Real estate construction and land development:
Residential
— — — 78,259 78,259 
Commercial and multifamily
2,225 — 2,225 225,229 227,454 
Total real estate construction and land development2,225 — 2,225 303,488 305,713 
Consumer1,407 30 1,437 323,535 324,972 
Total$10,421 $10,501 $20,922 $4,447,725 $4,468,647 

There were no loans 90 days or more past due that were still accruing interest as of September 30, 2021 and December 31, 2020.

(f) Collateral-dependent Loans
The type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral as of September 30, 2021 and December 31, 2020
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were as follows, with balances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:
September 30, 2021
CREFarmlandResidential Real EstateOtherTotal
(In thousands)
Commercial business:
Commercial and industrial$1,504 $4,384 $727 $595 $7,210 
Owner-occupied CRE4,261 — — — 4,261 
Non-owner occupied CRE1,318 — — — 1,318 
Total commercial business7,083 4,384 727 595 12,789 
Real estate construction and land development:
Commercial and multifamily
571 — — — 571 
Total$7,654 $4,384 $727 $595 $13,360 
December 31, 2020
CREFarmlandResidential Real EstateOtherTotal
(In thousands)
Commercial business:
Commercial and industrial$1,893 $18,738 $584 $1,405 $22,620 
Owner-occupied CRE4,693 — — — 4,693 
Non-owner occupied CRE3,424 — — — 3,424 
Total commercial business10,010 18,738 584 1,405 30,737 
Residential real estate
— — 67 — 67 
Real estate construction and land development:
Commercial and multifamily
572 — — — 572 
Consumer— — 30 — 30 
Total$10,582 $18,738 $681 $1,405 $31,406 
There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the nine months ended September 30, 2021, except changes due to additions or removals of loans in this classification.

(g) Troubled Debt Restructured Loans
A TDR is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider. The TDR modifications or concessions are made to increase the likelihood that these borrowers with financial difficulties will be able to satisfy their debt obligations as amended.
The concessions granted in the restructurings largely consisted of maturity extensions. The Bank typically grants shorter extension periods to continually monitor these TDR loans despite the fact that the extended date might not be the date the Bank expects the scheduled cash flow from these borrowers. The Bank does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted.
The CARES Act, CA Act and regulatory agencies provided guidance around the modification of loans as a result of the COVID-19 pandemic, and outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined by the guidance are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers were considered current if they were less than 30 days past due on the contractual payments as of December 31, 2019 under the CARES Act and at the time a modification program is implemented under related regulatory guidance. The CA Act extended relief offered under the CARES Act through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier. The Bank elected to apply the temporary relief under the applicable guidance to certain eligible short-term modifications and did not classify the modifications as TDRs for accounting or disclosure purposes. However, COVID Modifications whose payment deferral exceeded 180 days following the loans' initial modification were classified as TDRs based on the Bank's internal policy.
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Loans that were modified as TDR loans are set forth in the following tables for the periods indicated:
Three Months Ended September 30,
20212020
Number of
Contracts
Amortized Cost (1) (2)
Number of
Contracts
Amortized Cost (1) (2)
(Dollars in thousands)
Commercial business:
Commercial and industrial5$1,861 12$7,217 
Owner-occupied CRE27,124 52,312 
Non-owner occupied CRE—— 2438 
Total commercial business78,985 199,967 
Residential real estate
—— 122 
Real estate construction and land development:
Residential
—— 41,812 
Commercial and multifamily
1 450 — — 
Total real estate construction and land development1450 41,812 
Consumer594 9127 
Total13$9,529 33$11,928 
Nine Months Ended September 30,
20212020
Number of
Contracts
Amortized Cost (1) (2)
Number of
Contracts
Amortized Cost (1) (2)
(Dollars in thousands)
Commercial business:
Commercial and industrial32$10,380 37$17,694 
Owner-occupied CRE616,710 73,227 
Non-owner occupied CRE35,673 42,417 
Total commercial business4132,763 4823,338 
Residential real estate
1180 122 
Real estate construction and land development:
Residential
—— 41,812 
Commercial and multifamily
1 450 — — 
Total real estate construction and land development1450 41,812 
Consumer22487 20251 
Total65$33,880 73$25,423 
(1) Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the three or nine months ended September 30, 2021 and September 30, 2020.
(2) As the Bank did not forgive any principal or interest balance as part of the loan modifications, the Bank’s amortized cost in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification).
The Bank had an ACL on loans of $3.4 million and $1.6 million at September 30, 2021 and September 30, 2020, respectively, related to these TDR loans which were restructured during the nine months ended September 30, 2021 and September 30, 2020, respectively.
The unfunded commitment to borrowers related to TDR loans was $4.3 million and $2.6 million at September 30, 2021 and December 31, 2020, respectively.
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The following tables present loans that were modified in a troubled debt restructure and subsequently defaulted within twelve months from the modification date during the periods indicated:
Three Months Ended September 30,
20212020
Number of
Contracts (1)
Amortized Cost (1)
Number of
Contracts (1)
Amortized Cost (1)
(Dollars in thousands)
Commercial business:
Commercial and industrial1$336 1$229 
Total1$336 1$229 
Nine Months Ended September 30,
20212020
Number of
Contracts (1)
Amortized Cost (1)
Number of
Contracts (1)
Amortized Cost (1)
(Dollars in thousands)
Commercial business:
Commercial and industrial3$976 4$2,152 
Owner-occupied CRE—— 1431 
Non-owner occupied CRE—— 2376 
Total3$976 7$2,959 
(1) Number of contracts and amortized cost represent TDR loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the nine months ended September 30, 2021 and September 30, 2020.

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

(h) Accrued interest receivable on loans receivable
Accrued interest receivable on loans receivable totaled $11.2 million and $15.8 million at September 30, 2021 and December 31, 2020, respectively. It is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.

(i) Foreclosure proceedings in process
At September 30, 2021, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

(4)Allowance for Credit Losses on Loans
Effective January 1, 2020, the Bank adopted ASU 2016-13. Risk characteristics by segment considered in the CECL model are the same as those disclosed in the 2020 Annual Form 10-K.
The baseline loss rates used to calculate the ACL on loans at September 30, 2021 utilized the Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date. There were no changes to this assumption during the nine months ended September 30, 2021. The Bank believes the historic loss rates are viable inputs to the current CECL model as the Bank's lending practice and business has remained relatively stable throughout the periods. While the Bank's assets have grown, the credit culture has stayed relatively consistent.
Prepayments included in the CECL model at September 30, 2021 were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation of future prepayment activity. There were no changes to this assumption during the nine months ended September 30, 2021.
The reasonable and supportable period used in the CECL model as of September 30, 2021 was five quarters. There were no changes to this assumption during the nine months ended September 30, 2021. Management believes that forecasts beyond this five quarter time period tend to diverge in economic assumptions and may be less comparable to actual future
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events. As the length of the reasonable and supportable period increases, the degree of judgment involved in estimating the allowance will likely increase.
The Bank used a two-quarter reversion period in calculating the ACL on loans as of September 30, 2021 as it believes the historical loss information is relevant to the expected credit losses and recognizes the declining precision and increasing uncertainty of estimating credit losses in those periods beyond which it can make reasonable and supportable forecasts. There were no changes to this assumption during the nine months ended September 30, 2021.
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.
A summary of the changes in the ACL on loans during the nine months ended September 30, 2021 and 2020 is as follows:
Nine Months Ended
September 30,
20212020
(In thousands)
Balance at the beginning of the year$70,185 $36,171 
Impact of CECL Adoption— 1,822 
Balance at the beginning of the year, as adjusted70,185 37,993 
Charge-offs(1,267)(4,694)
Recoveries of loans previously charged-off1,207 1,816 
(Reversal of) provision for credit losses on loans(21,808)38,225 
Balance at the end of the year$48,317 $73,340 

The following tables detail the activity in the ACL on loans disaggregated by segment and class for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30, 2021
Beginning BalanceCharge-offs Recoveries(Reversal of) Provision for Credit LossesEnding Balance
(In thousands)
Commercial business:
Commercial and industrial$17,485 $(743)$373 $1,531 $18,646 
SBA PPP
— — — — — 
Owner-occupied CRE8,562 — 12 (1,644)6,930 
Non-owner occupied CRE10,630 — — (1,133)9,497 
Total commercial business36,677 (743)385 (1,246)35,073 
Residential real estate
1,153 — — (67)1,086 
Real estate construction and land development:
Residential
1,636 — 8 136 1,780 
Commercial and multifamily
8,835 — — (1,530)7,305 
Total real estate construction and land development10,471 — 8 (1,394)9,085 
Consumer3,261 (204)161 (145)3,073 
Total$51,562 $(947)$554 $(2,852)$48,317 

Nine Months Ended September 30, 2021
Beginning BalanceCharge-offs RecoveriesReversal of Provision for Credit LossesEnding Balance
(In thousands)
Commercial business:
Commercial and industrial$30,010 $(757)$710 $(11,317)$18,646 
SBA PPP— — — — — 
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Nine Months Ended September 30, 2021
Beginning BalanceCharge-offs RecoveriesReversal of Provision for Credit LossesEnding Balance
(In thousands)
Owner-occupied CRE9,486 — 25 (2,581)6,930 
Non-owner occupied CRE10,112 — — (615)9,497 
Total commercial business49,608 (757)735 (14,513)35,073 
Residential real estate
1,591 — — (505)1,086 
Real estate construction and land development:
Residential1,951 — 28 (199)1,780 
Commercial and multifamily
11,141 (1)— (3,835)7,305 
Total real estate construction and land development13,092 (1)28 (4,034)9,085 
Consumer5,894 (509)444 (2,756)3,073 
Total$70,185 $(1,267)$1,207 $(21,808)$48,317 

Three Months Ended September 30, 2020
Beginning BalanceCharge-offs RecoveriesProvision for (Reversal of Provision for) Credit LossesEnding Balance
(In thousands)
Commercial business:
Commercial and industrial$29,773 $(507)$78 $1,815 $31,159 
SBA PPP
— — — — — 
Owner-occupied CRE10,003 — 2 3,027 13,032 
Non-owner occupied CRE10,666 — — (124)10,542 
Total commercial business50,442 (507)80 4,718 54,733 
Residential real estate
2,223 — — (398)1,825 
Real estate construction and land development:
Residential
567 — 139 (42)664 
Commercial and multifamily
8,557 — — 70 8,627 
Total real estate construction and land development9,124 — 139 28 9,291 
Consumer9,712 (335)142 (2,028)7,491 
Total$71,501 $(842)$361 $2,320 $73,340 
Nine Months Ended September 30, 2020
Beginning BalanceImpact of CECL AdoptionBeginning Balance,
as Adjusted		Charge-offs RecoveriesProvision for (Reversal of Provision for) Credit LossesEnding Balance
(In thousands)
Commercial business:
Commercial and industrial$11,739 $(1,348)$10,391 $(3,418)$1,204 $22,982 $31,159 
SBA PPP— — — — — — — 
Owner-occupied CRE4,512 452 4,964 (135)16 8,187 13,032 
Non-owner occupied CRE7,682 (2,039)5,643 — — 4,899 10,542 
Total commercial business23,933 (2,935)20,998 (3,553)1,220 36,068 54,733 
Residential real estate1,458 1,471 2,929 — 3 (1,107)1,825 
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Nine Months Ended September 30, 2020
Beginning BalanceImpact of CECL AdoptionBeginning Balance,
as Adjusted		Charge-offs RecoveriesProvision for (Reversal of Provision for) Credit LossesEnding Balance
(In thousands)
Real estate construction and land development:
Residential
1,455 (571)884 — 160 (380)664 
Commercial and multifamily
1,605 7,240 8,845 — — (218)8,627 
Total real estate construction and land development3,060 6,669 9,729 — 160 (598)9,291 
Consumer6,821 (2,484)4,337 (1,141)433 3,862 7,491 
Unallocated899 (899)— — — — — 
Total$36,171 $1,822 $37,993 $(4,694)$1,816 $38,225 $73,340 

(5)Goodwill and Other Intangible Assets
(a) Goodwill
The Company’s goodwill represents the excess of the purchase price over the fair value of net assets acquired in the following mergers: Premier Commercial Bancorp and Puget Sound Bancorp in 2018; Washington Banking Company in 2014; Valley Community Bancshares in 2013; Western Washington Bancorp in 2006 and North Pacific Bank in 1998. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit).
There were no additions to goodwill during the three and nine months ended September 30, 2021 and 2020.
Management analyzes its goodwill on an annual basis on December 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2020 and concluded that there was no impairment.

(b) Other Intangible Assets
Other intangible assets represent core deposit intangibles acquired in business combinations. The useful life of the core deposit intangibles was estimated to be ten years for the acquisitions of Premier Commercial Bancorp, Puget Sound Bancorp, Washington Banking Company, and Valley Community Bancshares.
The following table presents the change in other intangible assets for the periods indicated:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(In thousands)
Balance at the beginning of the period$11,494 $14,807 $13,088 $16,613 
Amortization(758)(860)(2,352)(2,666)
Balance at the end of the period$10,736 $13,947 $10,736 $13,947 
    
(6)Derivative Financial Instruments
The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap 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 Consolidated Statements of Income. The fair value of derivative positions outstanding is included in Prepaid expenses and other
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assets and Accrued expenses and other liabilities in the 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 Consolidated Statements of Income, but typically net to zero based on the identical back-to-back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2021 and December 31, 2020:
September 30, 2021December 31, 2020
Notional AmountsEstimated Fair ValueNotional AmountsEstimated Fair Value
(In thousands)
Non-hedging interest rate derivatives
Interest rate swap asset (1)
$323,706 $17,843 $308,126 $25,740 
Interest rate swap liability (1)
323,706 (17,970)308,126 (26,162)
 (1) The estimated fair value of derivatives with customers was $13.0 million and $25.4 million as of September 30, 2021 and December 31, 2020, respectively. The estimated fair value of derivatives with third parties was $(13.2) million and $(25.9) million as of September 30, 2021 and December 31, 2020, respectively.

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

(7)Stockholders’ Equity
(a) Earnings Per Common Share
The following table illustrates the calculation of weighted average shares used for earnings per common share computations at September 30, 2021 and September 30, 2020:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(In thousands, except shares)
Net income:
Net income$20,592 $16,636 $78,638 $22,688 
Dividends and undistributed earnings allocated to participating securities (1)
— — — (5)
Net income allocated to common shareholders$20,592 $16,636 $78,638 $22,683 
Basic:
Weighted average common shares outstanding35,644,192 35,909,148 35,854,258 36,054,906 
Restricted stock awards— (303)— (5,537)
Total basic weighted average common shares outstanding35,644,192 35,908,845 35,854,258 36,049,369 
Diluted:
Basic weighted average common shares outstanding35,644,192 35,908,845 35,854,258 36,049,369 
Effect of potentially dilutive common shares (2)
285,326 79,889 297,794 144,246 
Total diluted weighted average common shares outstanding35,929,518 35,988,734 36,152,052 36,193,615 
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (3)
16,002 222,818 7,083 140,217 
(1)Represents dividends paid and undistributed earnings allocated to unvested restricted stock awards.
(2)Represents the effect of the assumed exercise of stock options and vesting of restricted stock awards and units.
(3) Anti-dilution occurs when the exercise price of a stock option or the unrecognized compensation cost per share of a restricted stock award exceeds the market price of the Company’s stock.
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(b) Dividends
The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.
The following table summarizes the dividend activity during the nine months ended September 30, 2021 and the calendar year 2020:
DeclaredCash Dividend per ShareRecord DatePaid Date
January 22, 2020$0.20February 6, 2020February 20, 2020
April 29, 2020$0.20May 13, 2020May 27, 2020
July 22, 2020$0.20August 5, 2020August 19, 2020
October 21, 2020$0.20November 4, 2020November 18, 2020
January 27, 2021$0.20February 10, 2021February 24, 2021
April 21, 2021$0.20May 5, 2021May 19, 2021
July 21, 2021$0.20August 4, 2021August 18, 2021
The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.

(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On October 23, 2014, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,512,600 shares, under the eleventh stock repurchase plan. On March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan after all shares under the eleventh stock repurchase plan had been repurchased. The number, timing and price of shares repurchased under the twelfth stock repurchase plan will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.
The following table provides total repurchased shares and average share prices under the applicable plans for the periods indicated:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Plan Total(1)
Eleventh Stock Repurchase Plan
Repurchased shares— — — 639,922 1,512,600 
Stock repurchase average share price$— $— $— $23.95 $21.69 
Twelfth Stock Repurchase Plan
Repurchased shares841,088 — 841,088 155,778 996,866 
Stock repurchase average share price$24.54 $— $24.54 $20.34 $23.88 
(1)Represents shares repurchased and average price per share paid during the duration of each plan.
In addition to the stock repurchases under a stock repurchase plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units. The following table provides total shares repurchased to pay withholding taxes during the periods indicated:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Repurchased shares to pay withholding taxes 220 378 26,023 28,306 
Stock repurchase to pay withholding taxes average share price$23.91 $19.84 $29.29 $21.54 

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(8)Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

(a) Recurring and Nonrecurring Basis
The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:
Investment Securities:
The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third-party pricing services.
Collateral-Dependent Loans:
Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Bank also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.
Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Bank. Once received, the Bank reviews the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Derivative Financial Instruments:
The Bank obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2021 and December 31, 2020, the Bank assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined that the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.
Branches held for sale:
Branches held for sale are recorded at fair value less costs to sell when transferred from Premises and equipment, net to Prepaid expenses and other assets on the Consolidated Statements of Financial Condition with any valuation adjustment recorded within Other noninterest expense on the Consolidated Statements of Income. The fair value of branches held for sale is determined based on a real estate appraisal or broker price opinion. Adjustments are routinely made in the appraisal and broker price opinion process by independent appraisers and commercial real estate brokers, respectively, to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3
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classification of the inputs for determining fair value.

Recurring Basis
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:
September 30, 2021
TotalLevel 1Level 2Level 3
(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities$26,106 $— $26,106 $— 
Municipal securities228,166 — 228,166 — 
Residential CMO and MBS242,693 — 242,693 — 
Commercial CMO and MBS235,018 — 235,018 — 
Corporate obligations2,023 — 2,023 — 
Other asset-backed securities27,520 — 27,520 — 
Total investment securities available for sale761,526 — 761,526 — 
Equity security210 210 — — 
Derivative assets - interest rate swaps17,843 — 17,843 — 
Liabilities
Derivative liabilities - interest rate swaps$17,970 $— 17,970 $— 
December 31, 2020
TotalLevel 1Level 2Level 3
(In thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities$45,660 $— $45,660 $— 
Municipal securities209,968 — 209,968 — 
Residential CMO and MBS201,872 — 201,872 — 
Commercial CMO and MBS303,746 — 303,746 — 
Corporate obligations11,096 — 11,096 — 
Other asset-backed securities29,821 — 29,821 — 
Total investment securities available for sale802,163 — 802,163 — 
Equity security131 131 — — 
Derivative assets - interest rate swaps25,740 — 25,740 — 
Liabilities
Derivative liabilities - interest rate swaps$26,162 $— $26,162 $— 

Nonrecurring Basis
The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following tables below represent assets measured at fair value on a nonrecurring basis at the dates indicated:
Fair Value at September 30, 2021
Basis(1)
TotalLevel 1Level 2Level 3
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial$2,058 $1,222 $— $— $1,222 
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Fair Value at September 30, 2021
Basis(1)
TotalLevel 1Level 2Level 3
(In thousands)
Owner-occupied CRE613 486 — — 486 
Total commercial business2,671 1,708 — — 1,708 
Real estate construction and land development:
Commercial and multifamily
991 534 — — 534 
Total$3,662 $2,242 $— $— $2,242 
Prepaid expenses and other assets:
Branch held for sale (2)
805 805 — — 805 
Total assets measured at fair value on a nonrecurring basis$4,467 $3,047 $— $— $3,047 
(1) Basis represents the outstanding principal balance of collateral-dependent loans and the carrying value of the branch held for sale.
(2) In July 2021, three branches were reclassified as held for sale in accordance with ASC 360-10. As part of the transfer, one branch was written down to its net realizable value at that time.
Fair Value at December 31, 2020
Basis(1)
TotalLevel 1Level 2Level 3
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial$1,305 $1,289 $— $— $1,289 
Prepaid expenses and other assets:
Branch held for sale (2)
1,330 1,330 — — 1,330 
Total assets measured at fair value on a nonrecurring basis$2,635 $2,619 $— $— $2,619 
(1) Basis represents the outstanding principal balance of collateral-dependent loans and the carrying value of the branch held for sale.
(2) In October 2020, one branch was reclassified as held for sale in accordance with ASC 360-10. As part of the transfer, the branch was written down to its net realizable value at that time.

The following table represents the net (loss) gain recorded in earnings as a result of nonrecurring fair value adjustments recorded during the periods indicated:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(In thousands)
Collateral-dependent loans:
Commercial business:
Commercial and industrial$(54)$— $(563)$(10)
Owner-occupied CRE15 — (61)— 
Total commercial business(39)— (624)(10)
Real estate construction and land development:
Commercial and multifamily
— — (38)— 
Total(39)— (662)(10)
Prepaid expenses and other assets:
Branch held for sale(38)— (38)— 
Net loss from nonrecurring fair value adjustments$(77)$— $(700)$(10)

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The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the dates indicated:
September 30, 2021
Fair
Value		Valuation
Technique(s)		Unobservable Input(s)Range of Inputs; Weighted
Average
(Dollars in thousands)
Collateral-dependent loans$2,242 Market approachAdjustment for differences between the comparable sales
55.0% - (20.0)%; 9.6%
Branch held for sale$805 Market approachAdjustment for differences between the comparable sales
51.8% - (26.0)%; 6.4%
December 31, 2020
Fair
Value		Valuation
Technique(s)		Unobservable Input(s)Range of Inputs; Weighted
Average
(Dollars in thousands)
Collateral-dependent loans$1,289 Market approachAdjustment for differences between the comparable sales
0.6% - (40.1%); (24.1%)
Branch held for sale$1,330 Market approachAdjustment for differences between the comparable sales
140.7% - (40.3%); 33.2%
(b) Fair Value of Financial Instruments
Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following tables present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated:
September 30, 2021
Carrying
Value		Fair
Value		Fair Value Measurements Using:
Level 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents$1,634,739 $1,634,739 $1,634,739 $— $— 
Investment securities available for sale761,526 761,526 — 761,526 — 
Investment securities held to maturity311,074 307,330 — 307,330 — 
Loans held for sale2,636 2,726 — — 2,726 
Loans receivable, net3,905,567 4,014,701 — — 4,014,701 
Accrued interest receivable14,802 14,802 51 3,578 11,173 
Bank owned life insurance109,634 109,634 109,634 — — 
Derivative assets - interest rate swaps17,843 17,843 — 17,843 — 
Equity security210 210 210 — — 
Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts$5,859,762 $5,859,762 $5,859,762 $— $— 
Certificates of deposit 355,796 357,266 — 357,266 — 
Securities sold under agreement to repurchase44,096 44,096 44,096 — — 
Junior subordinated debentures21,107 18,250 — — 18,250 
Accrued interest payable74 74 31 25 18 
Derivative liabilities - interest rate swaps17,970 17,970 — 17,970 — 
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December 31, 2020
Carrying
Value		Fair
Value		Fair Value Measurements Using:
Level 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and cash equivalents$743,322 $743,322 $743,322 $— $— 
Investment securities available for sale802,163 802,163 — 802,163 — 
Loans held for sale4,932 5,156 — — 5,156 
Loans receivable, net4,398,462 4,556,862 — — 4,556,862 
Accrued interest receivable19,418 19,418 2 3,648 15,768 
Bank owned life insurance107,580 107,580 107,580 — — 
Derivative assets - interest rate swaps25,740 25,740 — 25,740 — 
Equity security131 131 131 — — 
Financial Liabilities:
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts$5,198,456 $5,198,456 $5,198,456 $— $— 
Certificates of deposit 399,534 402,701 — 402,701 — 
Securities sold under agreement to repurchase35,683 35,683 35,683 — — 
Junior subordinated debentures20,887 18,500 — — 18,500 
Accrued interest payable94 94 42 33 19 
Derivative liabilities - interest rate swaps26,162 26,162 — 26,162 — 

(9)Cash Restriction
The Bank had restricted cash included in interest earning deposits on the Condensed Consolidated Statements of Financial Condition of $13.2 million and $25.9 million as of September 30, 2021 and December 31, 2020, respectively, 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 Condensed Consolidated Financial Statements. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The majority of the commitments presented below are variable rate. Loan commitments can be either revolving or non-revolving. The Bank’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.
The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:
 September 30,
2021		December 31, 2020
 (In thousands)
Commercial business:
Commercial and industrial$577,284 $640,018 
Owner-occupied CRE1,533 3,488 
Non-owner occupied CRE8,311 18,396 
Total commercial business587,128 661,902 
Real estate construction and land development:
Residential
46,911 52,453 
Commercial and multifamily
137,161 127,821 
Total real estate construction and land development184,072 180,274 
Consumer282,850 263,249 
Total outstanding commitments$1,054,050 $1,105,425 
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Upon CECL adoption, as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements, the Bank recorded an increase in the beginning ACL on unfunded commitments of $3.7 million as of January 1, 2020, representing the change in methodology from an estimate of incurred losses at the balance sheet date, with an estimated probability of funding, to an estimate of credit losses on future utilization over the entire contractual period.
The following table details the activity in the ACL on unfunded commitments during the periods indicated:
Three Months EndedNine Months Ended
September 30,
2021		September 30,
2020		September 30,
2021		September 30,
2020
(In thousands)
Balance, beginning of period$2,451 $4,612 $4,681 $306 
Impact of CECL Adoption— — — 3,702 
Adjusted balance, beginning of period2,451 4,612 4,681 4,008 
(Reversal of) provision for credit losses on unfunded commitments(297)410 (2,527)1,014 
Balance, end of period$2,154 $5,022 $2,154 $5,022 

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three and nine months ended September 30, 2021. The information contained in this section should be read with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Forward Looking Statements included herein and the December 31, 2020 audited Consolidated Financial Statements and the accompanying Notes included in our 2020 Annual Form 10-K.

Overview
Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our local communities with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.
Our business consists primarily of commercial lending and deposit relationships with small to medium sized businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and land development loans and consumer loans. During the three months ended March 31, 2020, we ceased indirect auto loan originations, included in our consumer portfolio. We additionally originate for sale or for investment purposes residential real estate loans on single family properties located primarily in our markets.
Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, comprised primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.
Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on our consistent methodology.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment, and consists primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing
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of products and services, and internet and mobile banking channels as well as 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, especially changes resulting from the COVID-19 pandemic and the governmental actions taken to address it. Net income is also impacted by growth of operations through organic growth or acquisitions.

COVID-19 Pandemic Response
The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As of September 30, 2021, all Bank branches are open with normal hours, remote employees commenced a phased-in return to the office and substantially all employees are expected to return to their go-forward working environments by the end of 2021. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Branch Consolidation Plan
The Company reduced the branch count to 49 from 62 branches at September 30, 2020, including the consolidation of one branch during the three months ended December 31, 2020, eight branches during the three months ended March 31, 2021, and four branches in October 2021. The Company integrated these locations into other branches within its network. These actions were the result of the Company’s increased focus on balancing physical locations and digital banking channels, driven by increased customer usage of online and mobile banking and a commitment to improve digital banking technology. All significant expenses related to the Branch Consolidation Plan for the four branches closed during October 2021 have been included in results of operations for the three months ended September 30, 2021.

Earnings Summary
Comparison of quarter ended September 30, 2021 to the comparable quarter in the prior year
Net income was $20.6 million, or $0.58 per diluted common share, for the three months ended September 30, 2021 compared to $16.6 million, or $0.46 per diluted common share, for the three months ended September 30, 2020. Net income increased $4.0 million, or 23.8%, due primarily to a reversal of provision for credit losses of $3.1 million during the three months ended September 30, 2021 compared to a provision for credit losses of $2.7 million for the same period in 2020.
The efficiency ratio consists of noninterest expense divided by the sum of net interest income plus noninterest income. The Company’s efficiency ratio was 62.35% for the three months ended September 30, 2021 compared to 62.27% for the three months ended September 30, 2020.
Comparison of nine months ended September 30, 2021 to the comparable period in the prior year.
Net income was $78.6 million, or $2.18 per diluted common share, for the nine months ended September 30, 2021 compared to $22.7 million, or $0.63 per diluted common share, for the nine months ended September 30, 2020. Net income increased $56.0 million, or 246.6%, due primarily to a reversal of provision for credit losses of $24.3 million during the nine months ended September 30, 2021 compared to a provision for credit losses of $39.2 million for the same period in 2020.
The Company’s efficiency ratio was 60.66% for the nine months ended September 30, 2021 compared to 63.26% for the nine months ended September 30, 2020. The improvement in the efficiency ratio was attributable primarily to the increase in net interest income.

Net Interest Income and Net Interest Margin Overview
One of the Company's key sources of earnings is net interest income. There are several factors that affect net interest income including, but not limited to, the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.
Comparison of quarter ended September 30, 2021 to the comparable quarter in the prior year
Net interest income increased $1.7 million, or 3.4%, to $51.4 million for the three months ended September 30, 2021 compared to $49.7 million for the same period in 2020 due primarily to the Bank decreasing deposit rates following decreases in short-term market interest rates. Additionally, net interest income benefited from the recognition of a $412,000 prepayment penalty on an investment security.
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The following table provides relevant net interest income information for the periods indicated:
 Three Months Ended September 30,
 20212020Change
 Average
Balance		Interest
Earned/
Paid
Average
Yield/
Rate (1)
Average
Balance		Interest
Earned/
Paid
Average
Yield/
Rate (1)
Average
Balance		Interest
Earned/
Paid		Average
Yield/
Rate
 (Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2) (3)
$4,005,585 $46,863 4.64 %$4,605,389 $47,647 4.12 %$(599,804)$(784)0.52 %
Taxable securities893,374 4,711 2.09 697,128 3,865 2.21 196,246 846 (0.12)
Nontaxable securities (3)
157,907 931 2.34 163,070 953 2.32 (5,163)(22)0.02 
Interest earning deposits1,417,661 537 0.15 389,653 98 0.10 1,028,008 439 0.05 
Total interest earning assets6,474,527 53,042 3.25 %5,855,240 52,563 3.57 %619,287 479 (0.32)%
Noninterest earning assets740,433 765,740 (25,307)
Total assets$7,214,960 $6,620,980 $593,980 
Interest Bearing Liabilities:
Certificates of Deposit$365,278 $407 0.44 %$466,920 $1,133 0.97 %$(101,642)$(726)(0.53)%
Savings accounts609,818 90 0.06 514,072 117 0.09 95,746 (27)(0.03)
Interest bearing demand and money market accounts2,881,567 947 0.13 2,639,511 1,389 0.21 242,056 (442)(0.08)
Total interest bearing deposits3,856,663 1,444 0.15 3,620,503 2,639 0.29 236,160 (1,195)(0.14)
Junior subordinated debentures21,060 184 3.47 20,766 196 3.75 294 (12)(0.28)
Securities sold under agreement to repurchase52,197 36 0.27 32,856 50 0.61 19,341 (14)(0.34)
Total interest bearing liabilities3,929,920 1,664 0.17 %3,674,125 2,885 0.31 %255,795 (1,221)(0.14)%
Noninterest bearing demand deposits2,300,795 1,998,772 302,023 
Other noninterest bearing liabilities128,537 148,345 (19,808)
Stockholders’ equity855,708 799,738 55,970 
Total liabilities and stock-holders’ equity$7,214,960 $6,620,980 $593,980 
Net interest income$51,378 $49,678 $1,700 
Net interest spread3.08 %3.26 %(0.18)%
Net interest margin3.15 %3.38 %(0.23)%
Average interest earning assets to average interest bearing liabilities164.75 %159.36 %5.39 %
Cost of total deposits0.09 %0.19 %(0.10)%
(1) Annualized
(2) Average loan balances are net of ACL on loans. Nonaccrual loans have been included as loans carrying a zero yield.
(3) Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
Net interest income as a percentage of average interest earning assets, or net interest margin, decreased due primarily to the decrease in the average yield on interest earning assets, primarily reflecting a significant increase in average interest earning deposits to 21.9% of total earning assets at September 30, 2021 compared to 6.7% at September 30, 2020, offset partially by a decrease in the cost of total interest bearing liabilities. The decrease in net interest margin was also offset partially by an increase in deferred SBA PPP loan fees recognized due to an increase in the volume of forgiven SBA PPP loans during the three months ended September 30, 2021 which benefited net interest margin compared to a reduction in net interest margin from the Company's participation in the SBA PPP loans during the same period in 2020.
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The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:
 Three Months Ended
 September 30,
2021		September 30,
2020
Non-GAAP reconciliation of loan yield: (1)
Loan yield (GAAP)4.64 %4.12 %
Exclude impact from SBA PPP loans(0.38)0.33 
Exclude impact from incremental accretion on purchased loans (2)
(0.07)(0.10)
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP)4.19 %4.35 %
(1) For additional information, see "Reconciliations of Non-GAAP Measures."
(2)Represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by CECL Adoption. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.
The impact to loan yield from net recoveries of interest and fees on loans classified as nonaccrual was an increase of two basis points during the three months ended September 30, 2021. The impact to loan yield from net charge-offs of interest and fees on loans classified as nonaccrual was a decrease of two basis points during the three months ended September 30, 2020.
Comparison of nine months ended September 30, 2021 to the comparable period in the prior year
Net interest income increased $9.3 million, or 6.3%, to $157.9 million for the nine months ended September 30, 2021 compared to $148.5 million for the same period in 2020 due primarily to the Bank decreasing deposit rates following decreases in short-term market interest rates and secondarily due to an increase in the yield of loans receivable, net, predominately from higher deferred SBA PPP loan fees recognized from forgiven SBA PPP loans and higher recoveries of interest and fees on loans classified as nonaccrual. The increase in net interest income was offset partially by decreases in the yield for all interest earning assets, excluding the impact of SBA PPP loans and recoveries of interest and fees on loans classified as nonaccrual.
The following table provides relevant net interest income information for the periods indicated:
 Nine Months Ended September 30,
 20212020Change
 Average
Balance		Interest
Earned/
Paid
Average
Yield/
Rate (1)
Average
Balance		Interest
Earned/
Paid
Average
Yield/
Rate (1)
Average
Balance		Interest
Earned/
Paid		Average
Yield/
Rate
 (Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2) (3)
$4,297,875 $147,137 4.58 %$4,266,598 $142,328 4.46 %$31,277 $4,809 0.12 %
Taxable securities789,691 12,295 2.08 758,941 14,068 2.48 30,750 (1,773)(0.40)
Nontaxable securities (3)
160,748 2,836 2.36 148,560 2,686 2.42 12,188 150 (0.06)
Interest earning deposits1,034,690 975 0.13 234,040 561 0.32 800,650 414 (0.19)
Total interest earning assets6,283,004 163,243 3.47 %5,408,139 159,643 3.94 %874,865 3,600 (0.47)%
Noninterest earning assets749,781 757,269 (7,488)
Total assets$7,032,785 $6,165,408 $867,377 
Interest Bearing Liabilities:
Certificates of deposit$379,885 $1,447 0.51 %$502,691 $4,955 1.32 %$(122,806)$(3,508)(0.81)%
Savings accounts587,358 274 0.06 475,091 420 0.12 112,267 (146)(0.06)
Interest bearing demand and money market accounts2,817,353 2,975 0.14 2,428,148 4,897 0.27 389,205 (1,922)(0.13)
Total interest bearing deposits3,784,596 4,696 0.17 3,405,930 10,272 0.40 378,666 (5,576)(0.23)
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 Nine Months Ended September 30,
 20212020Change
 Average
Balance		Interest
Earned/
Paid
Average
Yield/
Rate (1)
Average
Balance		Interest
Earned/
Paid
Average
Yield/
Rate (1)
Average
Balance		Interest
Earned/
Paid		Average
Yield/
Rate
 (Dollars in thousands)
Junior subordinated debentures20,987 557 3.55 20,693 699 4.51 294 (142)(0.96)
Securities sold under agreement to repurchase45,221 109 0.32 25,296 122 0.64 19,925 (13)(0.32)
FHLB advances and other borrowings— — — 1,959 8 0.55 (1,959)(8)(0.55)
Total interest bearing liabilities3,850,804 5,362 0.19 %3,453,878 11,101 0.43 %396,926 (5,739)(0.24)%
Noninterest bearing demand deposits2,213,795 1,768,260 445,535 
Other noninterest bearing liabilities128,584 138,837 (10,253)
Stockholders’ equity839,602 804,433 35,169 
Total liabilities and stockholders’ equity$7,032,785 $6,165,408 $867,377 
Net interest income$157,881 $148,542 $9,339 
Net interest spread3.28 %3.51 %(0.23)%
Net interest margin3.36 %3.67 %(0.31)%
Average interest earning assets to average interest bearing liabilities163.16 %156.58 %6.58 %
Cost of total deposits0.10 %0.27 %(0.17)%
(1)Annualized
(2)Average loan balances are net of ACL on loans. Nonaccrual loans have been included as loans carrying a zero yield.
(3)Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
Net interest margin decreased due primarily to the significant increase in average interest earning deposits to 16.5% of total earning assets during the nine months ended September 30, 2021 compared to 4.3% for the same period in the prior year.
The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:
 Nine Months Ended
September 30,
 20212020
Non-GAAP reconciliation of loan yield: (1)
Loan yield (GAAP)4.58 %4.46 %
Exclude Impact on loan yield from SBA PPP loans(0.17)0.22 
Exclude impact on loan yield from incremental accretion on purchased loans (2)
(0.08)(0.09)
Loan yield excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP)4.33 %4.59 %
(1)    For additional information, see "Reconciliations of Non-GAAP Measures."
(2)    Represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by CECL Adoption. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.
The impact to loan yield from net recoveries of interest and fees on loans classified as nonaccrual was nine basis points and one basis point, during the nine months ended September 30, 2021 and 2020, respectively.

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 Condensed Consolidated Statements of Income as the provision for credit losses. The ACL on unfunded commitments is included on the Condensed Consolidated Statements of Financial Condition within Accrued expenses and other liabilities. The methodology for determining the ACL on loans is disclosed in the Analysis of Allowance for Credit Losses on Loans section below. The methodology for determining the ACL on unfunded commitments uses loss rates calculated in the ACL
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on loans by segment and an estimate of the likelihood of utilization of the unfunded commitment, both applied to the outstanding balance of unfunded commitments by segment.
Comparison of quarter ended September 30, 2021 to the comparable quarter in the prior year
The following table presents the provision for credit losses for the periods indicated:
Three Months Ended
September 30,
20212020Change Percentage Change
(Dollars in thousands)
(Reversal of) provision for credit losses on loans$(2,852)$2,320 $(5,172)(222.9)%
(Reversal of) provision for credit losses on unfunded commitments(297)410 (707)(172.4)
(Reversal of) provision for credit losses$(3,149)$2,730 $(5,879)(215.3)%
The reversal of provision for credit losses recognized during the three months ended September 30, 2021 was due primarily to the reduction of the ACL on nonaccrual loans of $2.0 million following a decrease in nonaccrual loan balances of $9.4 million as well as changes in the loan mix. The provision for credit losses on loans of $2.3 million for the three months ended September 30, 2020 was due primarily to the economic forecast at that time reflecting the uncertain economic conditions stemming from the continued impacts from the COVID-19 pandemic.
Comparison of nine months ended September 30, 2021 to the comparable period in the prior year
The following table presents the provision for credit losses for the periods indicated:
Nine Months Ended
September 30,
20212020Change Percentage Change
(Dollars in thousands)
(Reversal of) provision for credit losses on loans$(21,808)$38,225 $(60,033)(157.1)%
(Reversal of) provision for credit losses on unfunded commitments(2,527)1,014 (3,541)(349.2)
(Reversal of) provision for credit losses$(24,335)$39,239 $(63,574)(162.0)%
The reversal of provision for credit losses recognized during the nine months ended September 30, 2021 was primarily due to improvements in the economic forecast during the nine months ended September 30, 2021 compared to the worsening of economic conditions during the nine months ended September 30, 2020 stemming from the onset of the COVID-19 pandemic.

Noninterest Income Overview
Comparison of quarter ended September 30, 2021 to the comparable quarter in the prior year
The following table presents the key components of noninterest income and the change for the periods indicated:
Three Months Ended
September 30,
20212020ChangePercentage Change
(Dollars in thousands)
Service charges and other fees$4,566 $4,039 $527 13.0 %
Gain on sale of investment securities, net— 40 (40)(100.0)
Gain on sale of loans, net765 1,443 (678)(47.0)
Interest rate swap fees126 396 (270)(68.2)
Bank owned life insurance income647 909 (262)(28.8)
Other income2,124 1,383 741 53.6 
Total noninterest income$8,228 $8,210 $18 0.2 %
Noninterest income slightly increased due primarily to an increase in other income as a result of gain on sale of branches held for sale and an increase in service charges and other fees due mostly to higher interchange income and increased deposit fee income, offset partially by a decrease in gain on sale of loans due primarily to lower sales volume of secondary market mortgage loans. Included in other income was gain on sale of $0.9 million during the three months ended September 30, 2021 from branches classified as held for sale as part of the Branch Consolidation Plan.
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Comparison of nine months ended September 30, 2021 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,
20212020ChangePercentage Change
(Dollars in thousands)
Service charges and other fees$12,988 $12,015 $973 8.1 %
Gain on sale of investment securities, net29 1,463 (1,434)(98.0)
Gain on sale of loans, net3,138 3,125 13 0.4 
Interest rate swap fees487 1,461 (974)(66.7)
Bank owned life insurance income2,020 2,439 (419)(17.2)
Other income6,114 5,441 673 12.4 
Total noninterest income$24,776 $25,944 $(1,168)(4.5)%
Noninterest income decreased due primarily to reduced gain on sale of investment securities due to fewer sales and a decline in interest rate swap fees due to fewer executions of interest rate swap contracts. Partially offsetting these decreases was an increase in service charges and other fees due primarily to higher interchange income and an increase in other income as a result of gains on sale of branches of $1.6 million related to the Branch Consolidation Plan, previously discussed.

Noninterest Expense Overview
Comparison of quarter ended September 30, 2021 to the comparable quarter in the prior year
The following table presents the key components of noninterest expense and the change for the periods indicated:
Three Months Ended
September 30,
20212020ChangePercentage Change
(Dollars in thousands)
Compensation and employee benefits$22,176 $21,416 $760 3.5 %
Occupancy and equipment4,373 4,348 25 0.6 
Data processing4,029 3,691 338 9.2 
Marketing775 755 20 2.6 
Professional services816 1,086 (270)(24.9)
State/municipal business and use tax1,071 964 107 11.1 
Federal deposit insurance premium550 848 (298)(35.1)
Amortization of intangible assets758 860 (102)(11.9)
Other expense2,618 2,077 541 26.0 
Total noninterest expense$37,166 $36,045 $1,121 3.1 %
Noninterest expense increased due primarily to an increase in compensation and employee benefits from upward market pressure on salaries and wages and an increase in other expenses related to the Branch Consolidation Plan.
Comparison of nine months ended September 30, 2021 to the comparable period in the prior year
The following table presents changes in the key components of noninterest expense for the periods indicated:
Nine Months Ended
September 30,
20212020ChangePercentage Change
(Dollars in thousands)
Compensation and employee benefits$66,725 $65,849 $876 1.3 %
Occupancy and equipment12,918 13,247 (329)(2.5)
Data processing11,839 10,735 1,104 10.3 
Marketing2,336 2,317 19 0.8 
Professional services3,249 4,632 (1,383)(29.9)
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Nine Months Ended
September 30,
20212020ChangePercentage Change
(Dollars in thousands)
State/municipal business and use tax3,034 2,626 408 15.5 
Federal deposit insurance premium1,478 1,086 392 36.1 
Other real estate owned, net— (145)145 (100.0)
Amortization of intangible assets2,352 2,666 (314)(11.8)
Other expense6,873 7,365 (492)(6.7)
Total noninterest expense$110,804 $110,378 $426 0.4 %
Noninterest expense increased due primarily to an increase in data processing expense as the Bank continues to invest in technology and an increase in compensation and employee benefits from upward market pressure on salaries and wages. The increase in noninterest expense was offset partially by lower professional services expense due to costs incurred during the nine months ended September 30, 2020 related to the launch of the new mobile and online commercial banking platform, "Heritage Direct" last year and secondarily due to the decrease in other expense driven primarily by a reduction of discretionary expenses, including employee business travel as a result of the Company's suspension of non-essential travel due to the COVID-19 pandemic.

Income Tax Expense Overview
Comparison of quarter ended September 30, 2021 to the comparable quarter in the prior year
The following table presents the income tax expense and related metrics and the change for the periods indicated:
Three Months Ended
September 30,
20212020ChangePercentage Change
(Dollars in thousands)
Income before income taxes$25,589 $19,113 $6,476 33.9 %
Income tax expense$4,997 $2,477 $2,520 101.7 %
Effective income tax rate19.5 %13.0 %6.5 %50.0 %
Income tax expense increased due primarily to a higher effective income tax rate and secondarily due to higher income before income taxes. The effective income tax rate increased due primarily to an increase in the estimated annual pre-tax income for the year ended December 31, 2021, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits. Additionally, there remain no gross tax credits related to the Company's New Market Tax Credit as these credits were fully utilized during the seven year period ending December 31, 2020.
Comparison of nine months ended September 30, 2021 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,
20212020ChangePercentage Change
(Dollars in thousands)
Income before income taxes$96,188 $24,869 $71,319 286.8 %
Income tax expense$17,550 $2,181 $15,369 704.7 %
Effective income tax rate18.2 %8.8 %9.4 %106.8 %
Income tax expense and the effective income tax rate both increased due primarily to higher pre-tax income, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits, and secondarily due to a provision in the CARES Act, which permitted the Company to recognize a $1.0 million benefit from net operating losses related to prior acquisitions during the nine months ended September 30, 2020. Additionally, there remain no gross tax credits related to the Company's New Market Tax Credit as these credits were fully utilized during the seven year period ending December 31, 2020.

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Consolidated Financial Condition Overview
The table below provides a comparison of the changes in the Company's financial condition from December 31, 2020 to September 30, 2021:
September 30,
2021		December 31, 2020ChangePercentage Change
(Dollars in thousands)
Assets
Cash and cash equivalents$1,634,739 $743,322 $891,417 119.9 %
Investment securities available for sale, at fair value, net761,526 802,163 (40,637)(5.1)
Investment securities held to maturity, at amortized cost, net
311,074 — 311,074 100.0 
Loans held for sale2,636 4,932 (2,296)(46.6)
Loans receivable, net3,905,567 4,398,462 (492,895)(11.2)
Other real estate owned— — — — 
Premises and equipment, net79,958 85,452 (5,494)(6.4)
Federal Home Loan Bank stock, at cost7,933 6,661 1,272 19.1 
Bank owned life insurance109,634 107,580 2,054 1.9 
Accrued interest receivable14,802 19,418 (4,616)(23.8)
Prepaid expenses and other assets179,494 193,301 (13,807)(7.1)
Other intangible assets, net10,736 13,088 (2,352)(18.0)
Goodwill240,939 240,939 — — 
Total assets$7,259,038 $6,615,318 $643,720 9.7 %
Liabilities
Deposits$6,215,558 $5,597,990 $617,568 11.0 %
Junior subordinated debentures21,107 20,887 220 1.1 
Securities sold under agreement to repurchase44,096 35,683 8,413 23.6 
Accrued expenses and other liabilities129,873 140,319 (10,446)(7.4)
Total liabilities6,410,634 5,794,879 615,755 10.6 
Stockholders' equity
Common stock552,385 571,021 (18,636)(3.3)
Retained earnings281,285 224,400 56,885 25.3 
Accumulated other comprehensive income, net14,734 25,018 (10,284)(41.1)
Total stockholders' equity848,404 820,439 27,965 3.4 
Total liabilities and stockholders' equity$7,259,038 $6,615,318 $643,720 9.7 %
Total assets increased due primarily to increases in cash and cash equivalents and total investment securities. The change in total investment securities included the transfer of $244.8 million of investment securities available for sale to investment securities held to maturity in order to mitigate market price volatility and its impact to accumulated comprehensive income within stockholders' equity. These increases were primarily the result of the significant increase in total deposits, which is discussed in more detail in the "Deposit Activities Overview" section below. The increase in total assets was offset partially by a decrease in loan receivable, net, which is discussed in more detail in the "Lending Activities Overview" section below.

Lending Activities Overview
Changes by loan type
The Bank is a full-service commercial bank which originates a wide variety of loans with a focus on commercial business loans. Loans receivable decreased $514.8 million compared to December 31, 2020 due primarily to a decrease in SBA PPP loans as a result of forgiveness payments received from the SBA in excess of originations, a decrease in demand for commercial and industrial loans and a decrease in consumer loans primarily from continued runoff of the indirect auto loan portfolio following the cessation of this business line during the three months ended March 31, 2020. Offsetting these decreases was an increase in CRE loans which includes the transfer of completed projects from real estate construction and land development loans.
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The following table provides a comparison of the changes in the Company's loan portfolio by type of loan at the dates indicated:
September 30, 2021December 31, 2020
Balance (1)
% of Total (2)
Balance (1)
% of Total (2)
ChangePercentage Change
(Dollars in thousands)
Commercial business:
Commercial and industrial$652,776 16.5 %$733,098 16.4 %$(80,322)(11.0)%
SBA PPP266,896 6.8 715,121 16.0 (448,225)(62.7)
Owner-occupied CRE907,568 23.0 856,684 19.2 50,884 5.9 
Non-owner occupied CRE1,459,795 36.8 1,410,303 31.5 49,492 3.5 
Total commercial business3,287,035 83.1 3,715,206 83.1 (428,171)(11.5)
Residential real estate (3)
125,697 3.2 122,756 2.7 2,941 2.4 
Real estate construction and land development:
Residential
90,081 2.3 78,259 1.8 11,822 15.1 
Commercial and multifamily
205,516 5.2 227,454 5.1 (21,938)(9.6)
Total real estate construction and land development 295,597 7.5 305,713 6.9 (10,116)(3.3)
Consumer245,555 6.2 324,972 7.3 (79,417)(24.4)
Total$3,953,884 100.0 %$4,468,647 100.0 %$(514,763)(11.5)%
(1) Balances do not include unfunded loan commitments.
(2) Percent of loans receivable.
(3) Excludes loans held for sale of $2.6 million and $4.9 million at September 30, 2021 and December 31, 2020, respectively.
SBA Paycheck Protection Program
The Company has supported its community and customers during the COVID-19 pandemic through its participation in the SBA's PPP. The Company has identified its SBA PPP loans separately in two tranches based on the date of origination with the first tranche comprised of the SBA PPP loans originated in accordance with the CARES Act ("PPP1") and the second tranche comprised of SBA PPP loans originated under the SBA's PPP in accordance with the CA Act ("PPP2"). The SBA PPP ended on May 31, 2021.
The Bank earns 1% interest on these loans as well as a fee from the SBA to cover processing costs, which is amortized over the life of the loan and recognized fully at payoff or forgiveness. The Bank began processing loan forgiveness applications and receiving SBA PPP forgiveness payments during the three months ended December 31, 2020.
The following are key statistics of the Company's SBA PPP loan activity for both tranches since inception:
As of September 30, 2021
PPP1PPP2Total SBA PPP
(Dollars in thousands)
Total number of funded loans4,642 2,542 7,184 
Total amount funded$897,353 $380,014 $1,277,367 
Average funded loan size$193 $149 $178 
Total net fees deferred at funding$28,805 $16,041 $44,846 
The following table summarizes key statistics of the SBA PPP loans as of and for the period indicated:
As of or for the Three Months Ended
September 30, 2021
PPP1PPP2Total SBA PPP
(In thousands)
Net deferred fees recognized during the period$2,276 $4,754 $7,030 
Net deferred fees unrecognized as of period end280 9,055 9,335 
Principal payments received during the period, including forgiveness payments from the SBA179,030 105,355 284,385 
Amortized cost as of period end19,683 247,213 266,896 

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Nonperforming Assets and Credit Quality Metrics
The following table provides information about our nonaccrual loans, other real estate owned and performing TDR loans for the dates indicated:
September 30,
2021		December 31, 2020
(Dollars in thousands)
Nonaccrual loans:
Commercial business$25,243 $56,786 
Residential real estate
51 184 
Real estate construction and land development571 1,022 
Consumer29 100 
Total nonaccrual loans25,894 58,092 
Other real estate owned— — 
Total nonperforming assets$25,894 $58,092 
ACL on loans$48,317 $70,185 
Nonperforming loans to loans receivable0.65 %1.30 %
ACL on loans to nonperforming loans186.60 120.82 
Nonperforming assets to total assets0.36 0.88 
Performing TDR loans:
Commercial business$58,633 $49,403 
Residential real estate361 188 
Real estate construction and land development450 1,926 
Consumer1,240 1,355 
Total performing TDR loans$60,684 $52,872 
Accruing loans past due 90 days or more$— $— 

Nonaccrual Loans
Nonaccrual loans decreased $32.2 million to 0.65% of loans receivable and 0.36% of total assets at September 30, 2021 from 1.30% of loans receivable and 0.88% of total assets at December 31, 2020. The following table reflects the changes in nonaccrual loans during the periods indicated:
Nine Months Ended
September 30,
20212020
(In thousands)
Nonaccrual loans
Balance, beginning of period$58,092 $44,525 
Additions to nonaccrual loan classification1,162 24,679 
Net principal payments and transfers to accruing status(13,351)(4,277)
Payoffs(19,317)(10,951)
Charge-offs(692)(1,102)
Transfer to OREO— (270)
Balance, end of period$25,894 $52,604 
The decrease in nonaccrual loans during the nine months ended September 30, 2021 was due primarily to payoffs, including a payoff of an agricultural business relationship of $10.7 million, which was initially classified as nonaccrual during the three months ended September 30, 2019, and the return to accrual status of an owner-occupied CRE relationship of $7.0 million. The Company recovered $1.5 million of interest and fees on loans related to the payoff of the agricultural business relationship.

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Analysis of Allowance for Credit Losses on Loans
We adopted CECL on January 1, 2020. Under this methodology, certain nonaccrual loans and certain performing TDR loans are not considered to have similar risk characteristics as other loans; therefore, they are evaluated for credit loss on an individual basis. The allowance for individually evaluated loans is calculated using either the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell if applicable, or the net present value method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt.
The remaining loans not individually evaluated are disaggregated based on similar risk characteristics into segments and collectively evaluated for ACL using baseline loss rates that are calculated using the Bank's average quarterly historical loss information for those segments. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan under the remaining life method, including prepayment estimates, to determine the baseline loss estimate for each loan. The CECL methodology also includes consideration of the forecasted direction of the economic and business environment and its likely impact to the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. The impact of those macroeconomic factors to each segment, positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss rate and are used to establish a macroeconomic allowance. After the reasonable and supportable period, the estimated credit losses revert back to historical baseline loss levels under a reversion period on a straight-lined, input reversion basis. Management can also consider other qualitative factors to adjust the ACL on loans if internal or external conditions suggest changes to the modeled ACL on loans are appropriate.
The following table provides information regarding changes in the ACL on loans at and for the periods indicated:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(Dollars in thousands)
ACL on loans at the beginning of the period$51,562 $71,501 $70,185 $36,171 
Impact of CECL Adoption— — — 1,822 
Adjusted ACL on loans, beginning of period51,562 71,501 70,185 37,993 
Charge-offs:
Commercial business(743)(507)(757)(3,553)
Real estate construction and land development— — (1)— 
Consumer(204)(335)(509)(1,141)
Total charge-offs(947)(842)(1,267)(4,694)
Recoveries:
Commercial business385 80 735 1,220 
Residential real estate
— — — 3 
Real estate construction and land development8 139 28 160 
Consumer161 142 444 433 
Total recoveries554 361 1,207 1,816 
Net charge-offs(393)(481)(60)(2,878)
(Reversal of) provision for credit losses on loans(2,852)2,320 (21,808)38,225 
ACL on loans at the end of period$48,317 $73,340 $48,317 $73,340 
Net charge-offs on loans to average loans receivable, net (1)
(0.04)%(0.04)%— %(0.09)%
Loans receivable at the end of the period$3,953,884 $4,666,730 $3,953,884 $4,666,730 
Average loans receivable, net during the period (2)
4,005,585 4,605,389 4,297,875 4,266,598 
(1) Annualized.
(2) The average loan balances are net of the ACL on loans and include loans held for sale.
The ACL on loans decreased $21.9 million, or 31.2%, to $48.3 million, or 1.22% of loans receivable, at September 30, 2021 from $70.2 million, or 1.57% of loans receivable, at December 31, 2020. The decrease in the ACL on loans was due primarily to a reversal of provision for credit losses on loans of $21.8 million recorded during the nine months ended September 30, 2021 following improvements in the economic forecast used in the CECL model at September 30, 2021 as compared to the forecast at December 31, 2020. The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. The ACL on loans receivable, excluding SBA PPP loans was 1.31% and 1.87% at September 30, 2021 and December 31, 2020, respectively. See "Reconciliations of Non-GAAP Measures" for the calculation of the ACL on loans receivable, excluding SBA PPP.

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Deposits and Other Borrowings Overview
The following table summarizes the Company's deposits at the dates indicated:
September 30, 2021December 31, 2020
Balance% of TotalBalance% of TotalChangePercentage Change
(Dollars in thousands)
Noninterest demand deposits$2,299,248 37.0 %$1,980,531 35.4 %$318,717 16.1 %
Interest bearing demand deposits1,870,618 30.1 1,716,123 30.7 154,495 9.0 
Money market accounts1,072,427 17.3 962,983 17.2 109,444 11.4 
Savings accounts617,469 9.9 538,819 9.6 78,650 14.6 
Total non-maturity deposits5,859,762 94.3 5,198,456 92.9 661,306 12.7 
Certificates of deposit355,796 5.7 399,534 7.1 (43,738)(10.9)
Total deposits$6,215,558 100.0 %$5,597,990 100.0 %$617,568 11.0 %
The increase in deposits is primarily due to proceeds from SBA PPP loans originated during the nine months ended September 30, 2021 which were deposited directly into the customers' deposit accounts.
The Bank also utilizes securities sold under agreement to repurchase, which are secured by investment securities, as a supplement to its funding sources. As of September 30, 2021 and December 31, 2020, three customers utilized this product with total balances of $44.1 million and $35.7 million, respectively.
In addition to deposits and securities sold under agreement to repurchase, borrowings may be used on a short-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets.
The Company has junior subordinated debentures with a par value of $25.0 million which pay quarterly interest based on the three-month LIBOR plus 1.56% and mature in 2037. The balance of the junior subordinated debentures was $21.1 million at September 30, 2021, which reflects the fair value of the junior subordinated debentures established as part of the merger with Washington Banking Company on May 1, 2014, adjusted for the accretion of discount from purchase accounting fair value adjustment.
Additionally, the Bank maintained credit facilities with the FHLB for $992.3 million and credit facilities with the Federal Reserve Bank for $50.2 million at September 30, 2021. There were no FHLB or Federal Reserve Bank advances outstanding under either facility at September 30, 2021 and these credit facilities were not utilized during the nine months ended September 30, 2021. The average balance of FHLB advances was $2.0 million during the nine months ended September 30, 2020. The credit facility with the Federal Reserve Bank was not utilized during the nine months ended September 30, 2020.
The Bank also maintains lines of credit with five correspondent banks to purchase federal funds totaling $215.0 million as of September 30, 2021. These lines of credit were not utilized during both the nine months ended September 30, 2021 and 2020.

Liquidity and Cash Flows
Our primary sources of funds are customer and local government deposits, loan principal and interest payments, loan sales and payments of interest earned on and proceeds from sales, and maturities of investment securities. These funds, together with retained earnings, equity and other borrowed funds, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition.
Heritage Bank: The principal objective of the Bank’s liquidity management program is to maintain the ability to meet day-to-day cash flow requirements of its customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayment and maturities of loans and investment securities, the Bank can utilize established credit facilities and lines of credit totaling $1.26 billion, as discussed in the Deposits and Other Borrowings Overview section above or may initiate the sale of investment securities.
Heritage Financial Corporation: The Company is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all of the Company’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. However, management believes that such restrictions will not have an adverse impact on the ability of the Company to meets its ongoing cash obligations. At September 30, 2021, the Company (on an unconsolidated basis) had cash and cash equivalents of $9.8 million.
We are required to maintain an adequate level of liquidity to ensure the availability of sufficient funds for loan originations and deposit withdrawals, satisfy other financial commitments and fund operations. We generally maintain sufficient
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cash and investments to meet short-term liquidity needs. At September 30, 2021, cash and cash equivalents totaled $1.63 billion, or 22.5% of total assets. Management considers unpledged investment securities available for sale to be another source of liquidity. The fair value of investment securities available for sale that were unpledged totaled $589.7 million, or 8.1% of total assets, at September 30, 2021. The fair value of investment securities available for sale with maturities of one year or less totaled $37.2 million, or 0.5% of total assets, at September 30, 2021.
Consolidated Cash Flows: As disclosed in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $50.7 million for the nine months ended September 30, 2021, and primarily consisted of net income of $78.6 million, offset partially by non-cash adjustments, including reversal of provision for credit losses of $24.3 million and depreciation, amortization, and accretion of $18.4 million. During the nine months ended September 30, 2021, net cash provided by investing activities was $257.7 million, which consisted primarily of net loan repayments of $555.8 million (including SBA PPP loan principal reduction of $834.4 million compared to SBA PPP originations of $380.0 million) and net cash use in investment securities of $286.5 million (including $488.4 million of purchases). Net cash provided by financing activities was $583.0 million for the nine months ended September 30, 2021 and primarily consisted of a net increase in deposits of $617.6 million, as discussed above.

Stockholders' Equity and Regulatory Capital Requirements Overview
The Company’s stockholders' equity to assets ratio was 11.7% and 12.4% at September 30, 2021 and December 31, 2020, respectively. The following table reflects the changes to stockholders' equity during the periods indicated:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(In thousands)
Balance, beginning of period$855,984 $793,652 $820,439 $809,311 
Cumulative effect from change in accounting policy(1)
— — — (5,615)
Net income20,592 16,636 78,638 22,688 
Dividends declared(7,170)(7,227)(21,753)(21,796)
Other comprehensive (loss) income, net of tax(1,327)(773)(10,284)14,830 
Repurchase of common stock(20,641)(7)(21,398)(19,105)
Other966 848 2,762 2,816 
Balance, end of period$848,404 $803,129 $848,404 $803,129 
(1) Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses.
The Company repurchased 841,088 and 797,700 shares under the Company's stock repurchase plans during the nine months ended September 30, 2021 and 2020, respectively. In addition to the stock repurchases under a plan, the Company repurchased shares to pay withholding taxes on the vesting of restricted stock awards and units.
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 October 20, 2021, the Company’s Board of Directors declared a regular quarterly dividend of $0.21 per common share which is payable on November 17, 2021 to shareholders of record on November 3, 2021.
The Company is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Heritage Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Condensed Consolidated Financial Statements. Management believes that as of September 30, 2021, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of September 30, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that
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notification that management believes have changed the Bank's categories. The following table represents the minimum required ratios of the Company and the Bank and the actual capital ratios at the periods indicated:
 Minimum RequirementsWell-Capitalized RequirementsActual
 (Dollars in thousands)
As of September 30, 2021:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets$199,287 4.5 %N/AN/A$590,146 13.3 %
Tier 1 leverage capital to average assets277,963 4.0 N/AN/A611,253 8.8 
Tier 1 capital to risk-weighted assets265,716 6.0 N/AN/A611,253 13.8 
Total capital to risk-weighted assets354,289 8.0 N/AN/A654,014 14.8 
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets199,130 4.5 $287,632 6.5 %598,297 13.5 
Tier 1 leverage capital to average assets277,867 4.0 347,334 5.0 598,297 8.6 
Tier 1 capital to risk-weighted assets265,507 6.0 354,009 8.0 598,297 13.5 
Total capital to risk-weighted assets354,009 8.0 442,512 10.0 641,058 14.5 
As of December 31, 2020:
The Company consolidated
Common equity Tier 1 capital to risk-weighted assets$203,314 4.5 %N/AN/A$555,644 12.3 %
Tier 1 leverage capital to average assets256,216 4.0 N/AN/A576,531 9.0 
Tier 1 capital to risk-weighted assets271,086 6.0 N/AN/A576,531 12.8 
Total capital to risk-weighted assets361,448 8.0 N/AN/A633,061 14.0 
Heritage Bank
Common equity Tier 1 capital to risk-weighted assets203,112 4.5 $293,383 6.5 %563,630 12.5 
Tier 1 leverage capital to average assets256,051 4.0 320,064 5.0 563,630 8.8 
Tier 1 capital to risk-weighted assets270,815 6.0 361,087 8.0 563,630 12.5 
Total capital to risk-weighted assets361,087 8.0 451,359 10.0 620,124 13.7 
As of both September 30, 2021 and December 31, 2020, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allow the Bank the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.
Under applicable capital requirements both 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. At September 30, 2021, the capital conservation buffer was 6.8% and 6.5% for the Company and the Bank, respectively.

Reconciliations of Non-GAAP Measures
This Form 10-Q contains certain financial measures not presented in accordance with GAAP in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this Form 10-Q because it believes that they provide useful and comparative information to assess trends in the Company’s performance and asset quality reflected in the current quarter and comparable period results and facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.
The Company believes presenting loan yield, excluding the effect of discount accretion on purchased loans, is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off our balance sheet. Similarly, presenting loan yield, excluding the effect of SBA PPP loans, is
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useful in assessing the impact of these special program loans that are anticipated to substantially decrease upon forgiveness by the SBA within a short time frame.
Three Months Ended
September 30,		Nine Months Ended
September 30,
 2021202020212020
(Dollars in thousands)
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized:
Interest and fees on loans (GAAP)$46,863 $47,647 $147,137 $142,328 
Exclude SBA PPP loan interest and fees(8,042)(5,810)(27,180)(10,733)
Exclude incremental accretion on purchased loans(681)(944)(2,250)(2,651)
Adjusted interest and fees on loans (non-GAAP)$38,140 $40,893 $117,707 $128,944 
Average loans receivable, net (GAAP)$4,005,585 $4,605,389 $4,297,875 $4,266,598 
Exclude average SBA PPP loans(392,570)(863,127)(665,681)(511,461)
Adjusted average loans receivable, net (non-GAAP)$3,613,015 $3,742,262 $3,632,194 $3,755,137 
Loan yield, annualized (GAAP)4.64 %4.12 %4.58 %4.46 %
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP)4.19 %4.35 %4.33 %4.59 %

The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans is significant to the loan portfolio, and since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for SBA PPP loans.
September 30,
2021		December 31,
2020
(Dollars in thousands)
ACL on loans to loans receivable, excluding SBA PPP loans:
Allowance for credit losses on loans (GAAP)$48,317 $70,185 
Loans receivable (GAAP)$3,953,884 $4,468,647 
Exclude SBA PPP loans266,896 715,121 
Loans receivable, excluding SBA PPP (non-GAAP)$3,686,988 $3,753,526 
ACL on loans to loans receivable (GAAP)1.22 %1.57 %
ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 1.31 %1.87 %


ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk through our lending and deposit gathering activities. Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2020 Annual Form 10-K.
Neither the Company nor the Bank maintains a trading account for any class of financial instrument or engages in hedging activities or purchases high risk derivative instruments. Moreover, neither the Company nor the Bank is subject to foreign currency exchange rate risk or commodity price risk.

ITEM 4.     CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Company’s
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Chief Executive Officer, Chief Financial Officer and the Company’s Disclosure Committee as of the end of the period covered by this quarterly report. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2021 are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the three months ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.    OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material pending legal proceedings other than ordinary routine litigation incidental to the business of the Bank.

ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s 2020 Annual Form 10-K.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Repurchase Plans
The following table provides information about repurchases of common stock by the Company during the three months ended September 30, 2021:
Period
Total Number 
of Shares 
Purchased (1)
Average Price
Paid Per 
Share (1)
Total number of shares purchased as part of publicly announced plans or programs
Maximum number of shares that may yet be purchased under the plans or programs (2)
July 1, 2021— July 31, 202195,631 $23.39 9,077,432 1,547,645 
August 1, 2021— August 31, 2021453,319 24.71 9,530,751 1,094,326 
September 1, 2021— September 30, 2021292,358 24.64 9,822,889 802,188 
Total841,308 $24.54 
(1)Of the common shares repurchased by the Company between July 1, 2021 and September 30, 2021, 220 of the 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
Exhibit No.
Description of ExhibitFormExhibitFiling Date/Period End Date
10.29*8-K10.107/06/2021
10.34*10-Q10.3405/05/2021
31.1
31.2
32.1
101.INS 
XBRL Instance Document (1)
101.SCH
XBRL Taxonomy Extension Schema Document (1)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)
*Indicates management contract or compensatory plan or arrangement.
(1) Filed herewith.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HERITAGE FINANCIAL CORPORATION
Date:
November 8, 2021/S/ JEFFREY J. DEUEL
Jeffrey J. Deuel
President and Chief Executive Officer
Date:
November 8, 2021/S/ DONALD J. HINSON
Donald J. Hinson
Executive Vice President and Chief Financial Officer
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