HERITAGE FINANCIAL CORP /WA/ [HFWA] Filings

10-Q 1 hfwa-20230331.htm 10-Q hfwa-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2023 or

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

For the transition period from __________ to __________

Commission File Number 000-29480

HERITAGE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-1857900

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

201 Fifth Avenue SW,

Olympia

98501

(Address of principal executive offices)

(Zip Code)

(360) 943-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	HFWA	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of April 26, 2023, there were 35,061,897 shares of the registrant's common stock, no par value per share, outstanding.

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

March 31, 2023

TABLE OF CONTENTS


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

PART I.	FINANCIAL INFORMATION		5
ITEM 1.	FINANCIAL STATEMENTS		5
	CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF MARCH 31, 2023 AND DECEMBER 31, 2022		5
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022		6
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022		7
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022		8
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022		9
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		11
	NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	11
	NOTE 2.	INVESTMENT SECURITIES	12
	NOTE 3.	LOANS RECEIVABLE	15
	NOTE 4.	ALLOWANCE FOR CREDIT LOSSES ON LOANS	23

	NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	24
	NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	24
	NOTE 7.	STOCKHOLDERS’ EQUITY	25
	NOTE 8.	FAIR VALUE MEASUREMENTS	27
	NOTE 9.	CASH RESTRICTION	30
	NOTE 10.	COMMITMENTS AND CONTINGENCIES	30

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		31
	OVERVIEW		31
	RESULTS OF OPERATIONS		33
		AVERAGE BALANCES, YIELDS AND RATES PAID	33
		NET INTEREST INCOME AND MARGIN OVERVIEW	34
		PROVISION FOR CREDIT LOSSES OVERVIEW	35
		NONINTEREST INCOME OVERVIEW	36
		NONINTEREST EXPENSE OVERVIEW	36
		INCOME TAX EXPENSE OVERVIEW	37
	FINANCIAL CONDITION OVERVIEW		37
		INVESTMENT ACTIVITIES OVERVIEW	38
		LOAN PORTFOLIO OVERVIEW	38
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	40
		DEPOSITS OVERVIEW	41
		STOCKHOLDERS' EQUITY OVERVIEW	41
	REGULATORY REQUIREMENTS OVERVIEW		42
	LIQUIDITY AND CAPITAL RESOURCES		42
	CRITICAL ACCOUNTING POLICIES		43
	RECONCILIATIONS OF NON-GAAP MEASURES		43
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		44
ITEM 4.	CONTROLS AND PROCEDURES		45

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PART II.	OTHER INFORMATION	45
ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	45
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4.	MINE SAFETY DISCLOSURES	46
ITEM 5.	OTHER INFORMATION	46
ITEM 6.	EXHIBITS	46
	SIGNATURES	47

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.


2022 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, 2022
ACL			Allowance for credit losses
AOCI			Accumulated other comprehensive income (loss), net

ASU			Accounting Standards Update
Bank			Heritage Bank
CECL			Current Expected Credit Loss
CMO			Collateralized Mortgage Obligation
Company			Heritage Financial Corporation
COVID-19 Pandemic			Coronavirus Disease of 2019 pandemic
CRE			Commercial real estate
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
Federal Reserve			Board of Governors of the Federal Reserve System
Federal Reserve Bank			Federal Reserve Bank of San Francisco

GAAP			U.S. Generally Accepted Accounting Principles
LIBOR			London Interbank Offering Rate
LIHTC			Low-Income Housing Tax Credit
MBS			Mortgage-backed security
PPP			Paycheck Protection Program
SBA			Small Business Administration
SEC			Securities and Exchange Commission
SM			Special Mention
SS			Substandard
TDR			Troubled debt restructured

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and 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.” These statements relate to our financial condition, results of operations, beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance or business. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements whether as a result of new information, future events or otherwise. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual

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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. These risks include, but are not limited to:

•potential adverse impacts to economic conditions nationally or in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to new COVID-19 variants;

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our ACL on loans and provision for credit losses on loans that may be affected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;

•the uncertain impacts of quantitative tightening and current and future monetary policies of the Federal Reserve;

•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;

•the transition away from LIBOR toward new interest rate benchmarks;

•the impact of repricing and competitors' pricing initiatives on loan and deposit products;

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

•secondary market conditions for loans and our ability to sell loans in the secondary market;

•results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;

•legislative or regulatory changes that adversely affect our business, including changes in banking, securities, and tax law, regulatory policies and principles, or the interpretation of regulatory capital or other rules;

•our ability to attract and retain deposits;

•liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;

•our ability to control operating costs and expenses;

•effects of critical accounting policies and judgments, including 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;

•the effectiveness of our risk management framework;

•difficulties in reducing risk associated with our loans;

•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

•our ability to retain key members of our senior management team;

•costs and effects of litigation, including settlements and judgments;

•our ability to implement our business strategies and manage our growth;

•future goodwill impairment due to changes in our business, market conditions, or other factors;

•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;

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

•increased competitive pressures among financial service companies;

•changes in consumer spending, borrowing and savings habits;

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

•our ability to pay dividends on our common stock;

•the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets, including market liquidity;

•inability of key third-party providers to perform their obligations to us;

•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

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

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and

•other risks detailed from time to time in our filings with the SEC including our 2022 Annual Form 10-K.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(In thousands, except shares)


	March 31, 2023		December 31, 2022
ASSETS
Cash on hand and in banks	$	68,969	$	74,295
Interest earning deposits	232,512		29,295
Cash and cash equivalents	301,481		103,590
Investment securities available for sale, at fair value, net (amortized cost of $1,424,969 and $1,460,033, respectively)	1,318,072		1,331,443
Investment securities held to maturity, at amortized cost, net (fair value of $684,647 and $673,434, respectively)	760,163		766,396
Total investment securities	2,078,235		2,097,839

Loans receivable	4,127,472		4,050,858
Allowance for credit losses on loans	(44,469)		(42,986)
Loans receivable, net	4,083,003		4,007,872

Premises and equipment, net	80,094		76,930
Federal Home Loan Bank stock, at cost	23,697		8,916
Bank owned life insurance	122,767		122,059
Accrued interest receivable	18,548		18,547
Prepaid expenses and other assets	281,438		296,181
Other intangible assets, net	6,604		7,227
Goodwill	240,939		240,939
Total assets	$	7,236,806	$	6,980,100
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	$	5,771,787	$	5,907,420
Deposits held for sale	17,235		17,420
Total deposits	5,789,022		5,924,840
Federal Home Loan Bank advances	383,100		—
Junior subordinated debentures	21,546		21,473
Securities sold under agreement to repurchase	39,161		46,597
Accrued expenses and other liabilities	177,895		189,297
Total liabilities	6,410,724		6,182,207
Commitments and contingencies (Note 10)
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; 35,108,120 and 35,106,697 shares issued and outstanding, respectively	550,869		552,397
Retained earnings	358,010		345,346
Accumulated other comprehensive loss, net	(82,797)		(99,850)
Total stockholders’ equity	826,082		797,893
Total liabilities and stockholders’ equity	$	7,236,806	$	6,980,100

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except shares and per share amounts)


	Three Months Ended March 31,
	2023		2022
INTEREST INCOME:
Interest and fees on loans	$	50,450	$	41,025
Taxable interest on investment securities	14,657		6,003
Nontaxable interest on investment securities	586		860
Interest on interest earning deposits	972		706
Total interest income	66,665		48,594
INTEREST EXPENSE:
Deposits	4,528		1,424
Junior subordinated debentures	482		194
Other borrowings	1,813		32
Total interest expense	6,823		1,650
Net interest income	59,842		46,944
Provision for (reversal of) credit losses	1,825		(3,577)
Net interest income after provision for (reversal of) credit losses	58,017		50,521
NONINTEREST INCOME:
Service charges and other fees	2,624		2,474
Card revenue	2,000		2,263
Loss on sale of investment securities, net	(286)		—
Gain on sale of loans, net	49		241
Interest rate swap fees	53		279
Bank owned life insurance income	709		1,695
Gain on sale of other assets, net	2		204
Other income	3,107		1,382
Total noninterest income	8,258		8,538
NONINTEREST EXPENSE:
Compensation and employee benefits	25,536		21,252
Occupancy and equipment	4,892		4,331
Data processing	4,342		4,061
Marketing	402		266
Professional services	628		699
State/municipal business and use taxes	1,008		796
Federal deposit insurance premium	850		600

Amortization of intangible assets	623		704
Other expense	3,324		3,011
Total noninterest expense	41,605		35,720
Income before income taxes	24,670		23,339
Income tax expense	4,213		3,582
Net income	$	20,457	$	19,757
Basic earnings per share	$	0.58	$	0.56
Diluted earnings per share	$	0.58	$	0.56
Dividends declared per share	$	0.22	$	0.21
Average number of basic shares outstanding	35,108,390		35,094,725
Average number of diluted shares outstanding	35,445,340		35,412,098

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

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

(In thousands)


	Three Months Ended March 31,
	2023		2022
Net Income	$	20,457	$	19,757
Change in fair value of investment securities available for sale, net of tax of $4,517 and $(12,113), respectively	16,890		(43,482)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(15) and $(39), respectively	(60)		(142)
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax of $63 and $0, respectively	223		—
Other comprehensive income (loss)	17,053		(43,624)
Comprehensive income (loss)	$	37,510	$	(23,867)

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(In thousands, except shares and per share amounts)


	Three Months Ended March 31, 2023
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2022	35,106,697	$	552,397	$	345,346	$	(99,850)	$	797,893

Restricted stock units vested	116,502	—		—		—		—
Stock-based compensation expense	—	1,099		—		—		1,099
Common stock repurchased	(115,079)	(2,627)		—		—		(2,627)
Net income	—	—		20,457		—		20,457
Other comprehensive income, net of tax	—	—		—		17,053		17,053

Cash dividends declared on common stock ($0.22 per share)	—	—		(7,793)		—		(7,793)
Balance at March 31, 2023	35,108,120	$	550,869	$	358,010	$	(82,797)	$	826,082


	Three Months Ended March 31, 2022
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2021	35,105,779	$	551,798	$	293,238	$	9,396	$	854,432

Restricted stock units vested	101,683	—		—		—		—
Stock-based compensation expense	—	950		—		—		950
Common stock repurchased	(105,090)	(2,652)		—		—		(2,652)
Net income	—	—		19,757		—		19,757
Other comprehensive loss, net of tax	—	—		—		(43,624)		(43,624)

Cash dividends declared on common stock ($0.21 per share)	—	—		(7,414)		—		(7,414)
Balance at March 31, 2022	35,102,372	$	550,096	$	305,581	$	(34,228)	$	821,449

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	20,457	$	19,757
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	807		(1,572)
Provision for (reversal of) credit losses	1,825		(3,577)
Stock-based compensation expense	1,099		950
Amortization of intangible assets	623		704
Origination of mortgage loans held for sale	(1,351)		(5,833)
Proceeds from sale of mortgage loans held for sale	1,400		6,408
Bank owned life insurance income	(709)		(1,695)

Valuation adjustment on interest rate swaps	—		(53)
Gain on sale of mortgage loans held for sale, net	(49)		(241)
Loss on sale of investment securities available for sale, net	286		—

Gain on sale of assets held for sale	—		(204)
Other	(991)		(3,716)
Net cash provided by operating activities	23,397		10,928
Cash flows from investing activities:
Loan originations and purchases, net of payments	(75,839)		(988)
Maturities and repayments of investment securities available for sale	26,949		42,327
Maturities and repayments of investment securities held to maturity	5,995		6,644
Purchase of investment securities available for sale	(14,994)		(244,409)
Purchase of investment securities held to maturity	—		(45,849)
Purchase of premises and equipment	(4,653)		(724)
Purchase of bank owned life insurance	—		(105)

Purchases of Federal Home Loan Bank stock	(28,604)		(983)


Proceeds from sales of investment securities available for sale	22,688		—
Proceeds from redemption of Federal Home Loan Bank stock	13,823		—

Proceeds from sales of premises and equipment	2		1,173
Capital contributions to low-income housing tax credit partnerships	(369)		—


Net cash provided by investing activities	(55,002)		(242,914)
Cash flows from financing activities:
Net (decrease) increase in deposits	(135,818)		97,210
Federal Home Loan Bank advances	715,100		—
Repayment of Federal Home Loan Bank advances	(332,000)		—


Common stock cash dividends paid	(7,723)		(7,372)
Net decrease in securities sold under agreement to repurchase	(7,436)		(1,770)
Repurchase of common stock	(2,627)		(2,652)
Net cash provided by financing activities	229,496		85,416
Net increase (decrease) in cash and cash equivalents	197,891		(146,570)
Cash and cash equivalents at beginning of period	103,590		1,723,292
Cash and cash equivalents at end of period	$	301,481	$	1,576,722

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	March 31,
	2023		2022
Supplemental disclosures of cash flow information:
Cash paid for interest	$	6,501	$	1,555


Supplemental non-cash disclosures of cash flow information:


Investment in LIHTC partnership and related funding commitment	12		670
Right of use assets obtained in exchange for new operating lease liabilities	1,296		55

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

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

(a) Description of Business

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 51 branch offices located throughout Washington State, the greater Portland, Oregon area, Eugene, Oregon and Boise, Idaho. 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 subject to limitations.

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2022 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

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

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

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

The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the 2022 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the 2022 Annual Form 10-K during the three months ended March 31, 2023.

(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, and ASU 2022-06 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. In December 2022, FASB amended this ASU and deferred the sunset date of Topic 848 from December 31, 2022, to December 31, 2024. 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 the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

FASB ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, was issued in March 2022. The ASU eliminates the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, the entity will apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or continuation of an existing loan. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. These amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, since the Company previously adopted the amendments in ASU 2016-13. Early adoption is permitted in any interim period if an entity has adopted ASU 2016-13 and

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such election may be made individually to adopt the guidance related to TDRs, including related disclosures, and the presentation of gross write-offs in the vintage disclosure. This update requires prospective transition for the disclosures related to loan restructurings for borrowers experiencing financial difficulty and the presentation of gross write-offs in the vintage disclosures. The guidance related to the recognition and measurement of TDRs may be adopted on a prospective or modified retrospective transition method.

The Company adopted ASU 2022-02 on a prospective basis January 1, 2023. The Company elected at the date of adoption to account for existing TDR loans as of December 31, 2022 under the Company's TDR accounting policy which is disclosed in the 2022 Annual Form 10-K. All loan modifications post adoption are accounted for under the loan modification guidance in ASC 310-20. The adoption of this ASU did not have a material impact on business operations or the Consolidated Statements of Financial Condition.

(2)Investment Securities

The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.

There were no investment securities classified as trading at March 31, 2023 or December 31, 2022.

(a) Investment Securities by Classification, Type and Maturity

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


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Investment securities available for sale:
U.S. government and agency securities	$	68,514	$	—	$	(3,964)	$	64,550
Municipal securities	146,525		218		(14,246)		132,497
Residential CMO and MBS	481,380		—		(47,668)		433,712
Commercial CMO and MBS	704,156		47		(40,706)		663,497
Corporate obligations	4,000		—		(183)		3,817
Other asset-backed securities	20,394		—		(395)		19,999
Total	$	1,424,969	$	265	$	(107,162)	$	1,318,072


	March 31, 2023
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	150,969	$	—	$	(28,298)	$	122,671

Residential CMO and MBS	285,337		12		(12,315)		273,034
Commercial CMO and MBS	323,857		—		(34,915)		288,942


Total	$	760,163	$	12	$	(75,528)	$	684,647


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Investment securities available for sale:
U.S. government and agency securities	$	68,912	$	—	$	(5,053)	$	63,859
Municipal securities	171,087		172		(18,233)		153,026
Residential CMO and MBS	479,473		—		(55,087)		424,386
Commercial CMO and MBS	714,136		19		(49,734)		664,421

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	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Corporate obligations	4,000		—		(166)		3,834
Other asset-backed securities	22,425		14		(522)		21,917
Total	$	1,460,033	$	205	$	(128,795)	$	1,331,443


	December 31, 2022
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	150,936	$	—	$	(33,585)	$	117,351

Residential CMO and MBS	290,318		—		(17,440)		272,878
Commercial CMO and MBS	325,142		—		(41,937)		283,205


Total	$	766,396	$	—	$	(92,962)	$	673,434

The following table presents the amortized cost and fair value of investment securities by contractual maturity at the date indicated. 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.


	March 31, 2023
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	29,254	$	28,962	$	—	$	—
Due after one year through five years	38,323		36,884		—		—
Due after five years through ten years	43,983		41,429		83,235		70,107
Due after ten years	107,479		93,589		67,734		52,564
Total investment securities due at a single maturity date	219,039		200,864		150,969		122,671
Mortgage-backed securities (1)	1,205,930		1,117,208		609,194		561,976
Total investment securities	$	1,424,969	$	1,318,072	$	760,163	$	684,647

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

There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at March 31, 2023 and December 31, 2022.

(b) Unrealized Losses on Investment Securities Available for Sale

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


	March 31, 2023
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. government and agency securities	$	—	$	—	$	64,550	$	(3,964)	$	64,550	$	(3,964)
Municipal securities	5,677		(37)		92,518		(14,209)		98,195		(14,246)
Residential CMO and MBS(1)	142,665		(3,401)		291,047		(44,267)		433,712		(47,668)
Commercial CMO and MBS(1)	350,217		(7,332)		289,192		(33,374)		639,409		(40,706)

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March 31, 2023

Less than 12 Months